[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
SBA 7(A) BUDGET PROPOSAL AND THE IMPACT OF FEE STRUCTURE CHANGES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON ECONOMIC GROWTH, TAX, AND CAPITAL ACCESS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
APRIL 10, 2019
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
35-910 WASHINGTON : 2019
--------------------------------------------------------------------------------------
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, [email protected].
Small Business Committee Document Number 116-015
Available via the GPO Website: www.govinfo.gov
HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA VELAZQUEZ, New York, Chairwoman
ABBY FINKENAUER, Iowa
JARED GOLDEN, Maine
ANDY KIM, New Jersey
JASON CROW, Colorado
SHARICE DAVIDS, Kansas
JUDY CHU, California
MARC VEASEY, Texas
DWIGHT EVANS, Pennsylvania
BRAD SCHNEIDER, Illinois
ADRIANO ESPAILLAT, New York
ANTONIO DELGADO, New York
CHRISSY HOULAHAN, Pennsylvania
ANGIE CRAIG, Minnesota
STEVE CHABOT, Ohio, Ranking Member
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa, Vice Ranking Member
TRENT KELLY, Mississippi
TROY BALDERSON, Ohio
KEVIN HERN, Oklahoma
JIM HAGEDORN, Minnesota
PETE STAUBER, Minnesota
TIM BURCHETT, Tennessee
ROSS SPANO, Florida
JOHN JOYCE, Pennsylvania
Adam Minehardt, Majority Staff Director
Melissa Jung, Majority Deputy Staff Director and Chief Counsel
Kevin Fitzpatrick, Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Andy Kim.................................................... 1
Hon. Kevin Hern.................................................. 2
WITNESSES
Mr. Tim Gribben, Chief Financial Officer and Association
Administrator for Performance Management, U.S. Small Business
Administration, Washington, DC................................. 4
Mr. Tony Wilkinson, President & CEO, National Association of
Government Guaranteed Lenders, Stillwater, OK.................. 13
Ms. Lynn G. Ozer, President, SBA Lending, Fulton Bank, Pottstown,
PA............................................................. 14
Ms. Gail Jansen, Vice President of Business Services and
Operations, Kinecta Federal Credit Union, Manhattan Beach, CA,
testifying on behalf of the National Association of Federally-
Insured Credit Unions.......................................... 16
Mr. Gordon Gray, Director of Fiscal Policy, American Action
Forum, Washington, DC.......................................... 18
APPENDIX
Prepared Statements:
Mr. Tim Gribben, Chief Financial Officer and Association
Administrator for Performance Management, U.S. Small
Business Administration, Washington, DC.................... 27
Mr. Tony Wilkinson, President & CEO, National Association of
Government Guaranteed Lenders, Stillwater, OK.............. 30
Ms. Lynn G. Ozer, President, SBA Lending, Fulton Bank,
Pottstown, PA.............................................. 37
Ms. Gail Jansen, Vice President of Business Services and
Operations, Kinecta Federal Credit Union, Manhattan Beach,
CA, testifying on behalf of the National Association of
Federally-Insured Credit Unions............................ 47
Mr. Gordon Gray, Director of Fiscal Policy, American Action
Forum, Washington, DC...................................... 55
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
CBA - Consumer Bankers Association........................... 61
CUNA - Credit Union National Association..................... 63
SBA 7(A) BUDGET PROPOSAL AND THE IMPACT OF FEE STRUCTURE CHANGES
----------
WEDNESDAY, APRIL 10, 2019
House of Representatives,
Committee on Small Business,
Subcommittee on Economic Growth,
Tax, and Capital Access,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:04 a.m., in
Room 2360, Rayburn House Office Building, Hon. Andy Kim
[chairman of the Subcommittee] presiding.
Present: Representatives Velazquez, Kim, Davids, Delgado,
Crow, Hern, and Stauber.
Chairman KIM. Good morning. The Subcommittee will come to
order.
I want to thank everyone for joining us this morning, and I
want to especially thank the witness--witnesses who have
traveled from across the country to be here today.
Just before we jump into things, I do want to just remark
that we will have votes coming up shortly. We are going to try
to see if we can get through some of our opening remarks before
we are able to--before we are called over to go and vote. So I
am just going to just jump straight in here.
On this Subcommittee, we are focused on making sure that
small businesses, whether in my district or in Ranking Member
Hern's district in Oklahoma, and every district across this
country, can access the capital that they need to start, grow,
and create new jobs. And we know that when capital is
affordable and accessible, small businesses can do what they do
best, which is strengthen our communities and fuel our economy.
This is certainly something that I have witnessed firsthand
in my own home State in New Jersey, where we have more than
850,000 small businesses, making up 99 percent of our State's
businesses, employ over half of our workers.
Recognizing that access to capital is a challenge for many
entrepreneurs, SBA offers a variety of loan programs designed
to help borrowers who may have a difficult time securing
financing through other conventional lending markets, which
brings me to the reason that we are here today, and that is to
ensure that SBA's flagship 7(a) loan guaranty program is
functioning to best serve our small businesses and taxpayers.
This critical program has been a vital source of capital
access for thousands of small businesses in my home district
since 2008. In 2018 alone, the 7(a) program has supported 204
businesses in my district, totaling over $58 million in loans.
Additionally, the program has served businesses in an
incredibly wide range of industries ranging from catering
companies to nurseries.
Under the 7(a) program, SBA partners with banks and nonbank
lending institutions who make up loans to small businesses,
with SBA reimbursing a portion of the loan in the event the
borrower defaults, also known as the guarantee. This guarantee
minimizes the lender's risk in making the loan to the small
businesses. And generally, SBA guarantees from 50 to 90 percent
of each 7(a) loan made, depending on the loan characteristics.
Now, to offset that cost of issuing these guarantees, SBA
charges an upfront, one-time guarantee fee and an annual
ongoing service fee for each 7(a) loan approved and dispersed.
Now, traditionally, one of SBA's goal is to achieve a zero
subsidy rate for its loan guaranty programs, including for the
7(a) loan. This occurs when the programs are projected to
generate enough revenue through fees and recoveries of
collateral to issue that year's guarantee without requiring
congressional appropriation.
Now, to calculate that subsidy rate, SBA and the Office of
Management and Budget use an econometric model that takes into
account numerous macroeconomic and SBA-specific assumptions,
and if they predict a shortfall, SBA requests an appropriation
from Congress to address it.
Now, excluding the period from 2010 to 2013, when our
Nation was recovering from the Great Recession, SBA has
operated at zero subsidy since 2005. However, in its
congressional budget justification for fiscal year 2020, SBA
predicts that without modifications to the current law, it
cannot achieve a zero subsidy rate for the 7(a) program.
I look forward to hearing from Mr. Gribben about what goes
into the calculation and understanding of why cash outflows
exceed inflows resulting in a positive subsidy in the 7(a)
program for fiscal year 2020.
In response to the positive subsidy, SBA proposed numerous
and considerable fee increases on both borrowers and lenders,
and this caused a great deal of anxiety among small businesses,
small business borrowers, and the lending institutions that
participate in the 7(a) program. Any increases in fees like
those SBA has suggested to cover this shortfall could result in
fewer small businesses applying for and getting access to
capital, and that is why today's hearing is so timely and
important.
And I look forward to hearing from our witnesses on
potential solutions to this issue. And we can all at least
agree that these programs are incredibly important, and I look
forward to working with my colleagues on both sides of the
aisle to address the challenges facing our small business
owners when it comes to securing capital.
Again, I want to thank all the witnesses for being here. I
now yield to the Ranking Member, Mr. Hern, for his opening
remarks.
Mr. HERN. Thank you, Mr. Chairman.
Mr. Gribben, thank you for being here.
Despite ongoing positive economic news, the Nation's
smallest firms continue to face challenges when it comes to
regulations, saving for retirement, access to capital. I know
these challenges personally and professionally. I have been a
small business owner for over 34 years. Additionally, I have
served 17 years on bank executive boards; 13 years on
McDonald's leadership team, which represents over 3,500
franchises; 8 of those years as ombudsman; 5 years as Chairman
of the Systems Economic Team; 5 years on the McDonald's Tax
Policy Team; and 8 years on the McDonald's Insurance
Corporation Board. I know these issues facing our Nation's
smallest firms firsthand.
In order to help fill the gap that exists for small
businesses when it comes to access to capital, the Small
Business Administration offers numerous financing and lending
options. The flagship and largest program is the 7(a) loan
program that does not provide direct loans to small businesses
but provides guarantees on the loans made by partnering
financial institutions to eligible small firms.
The program has grown rapidly in recent years with the
program's authorization cap going from $18.75 billion fiscal
year 2015 to fiscal year 2020 budget request of $30 billion.
Additionally, the 7(a) loan program has built-in fees to
help offset the cost of any losses in the program per the
Federal Credit Reform Act of 1990. Because fees have been
sufficient over the last half dozen years, the program has been
running on zero cost to the American taxpayer.
Within the fiscal year 2020 budget submission, the model
that calculates the cost of the program indicates that the 7(a)
loan program will no longer be at a zero subsidy. Rather, the
program may require $99 million appropriation for and by
American taxpayers or an adjustment to the fee structure that
hits program participants.
According to CRS, the average loan size in the SA loan--
7(a) loan program is approximately $420,000. That is a total of
$25.4 billion in loans last year, over 60,000 total loans. A
bill is important to run this average to the SBA's legislative
proposal that would bring the program to zero subsidy.
While I acknowledge there are nuances to the fee structure,
the average loan size of $420,000 does not seem to be impacted
by the fee proposal if the maturity of the loan is more than 12
months.
The upfront fee that goes to borrowers on the small
business owner for loans of $500,000 or less seems to remain at
3 percent. Additionally, that fee that lenders have to pay, the
ongoing fee, also does not appear to change for loans under
$500,000.
However, before we entertain the legislative options of
either appropriation or fee change to close this potential $99
million gap, we must explore the reasons behind the shortfall
and gain a better understanding of the model used to calculate
the cost.
What variables or assumptions are used in a model and has
the model changed over the years? I look forward to both panels
that will explore these questions and more.
And, Mr. Chairman, I ask unanimous consent to enter this
letter from the Credit Union National Association, that is
addressed to you and I, and it is challenging us to find an
amiable solution to keep this program viable.
Chairman KIM. So ordered.
Mr. HERN. And, Mr. Chairman, I yield back.
Chairman KIM. Thank you.
We certainly are very blessed to have the extraordinary
experience that the Ranking Member brings to the Small Business
Committee, and he and I are committed to be able to work on
this in a bipartisan way. Hopefully before votes, we will be
able to finish on up, so I just wanted to have a chance to be
able to introduce our first witness here.
Our first witness is Mr. Tim Gribben. Mr. Gribben is the
chief financial officer and associate administrator for
performance management at the U.S. Small Business
Administration. And in this role, he has the responsibility of
all aspects of SBA's financial management, internal controls,
and acquisition. He has been with the SBA since 2009, when he
started as a director of performance management and deputy
performance improvement officer.
Mr. Gribben, why don't we just jump right in. You are
recognized for 5 minutes.
STATEMENT OF TIM GRIBBEN, CHIEF FINANCIAL OFFICER AND
ASSOCIATION ADMINISTRATOR FOR PERFORMANCE MANAGEMENT, U.S.
SMALL BUSINESS ADMINISTRATION
Mr. GRIBBEN. Thank you, Chairman Kim, Ranking Member Hern,
and members of the Committee. Thank you for inviting me to
discuss SBA 7(a) loan program and our fiscal 2020 budget
proposal.
I have served as the chief financial officer or the deputy
CFO for nearly 7 years, and every year, with respect to our
7(a) loan program, my office engages in a process to evaluate
and project loan performance. This process occurs annually,
notwithstanding administration, and is a routine executive
branch function.
My written testimony provides greater overall detail on
that process, so let me provide some general context and walk
you through the basic steps we take every year. First, we model
for future loan performance. Next, we determine what fee
structure to achieve zero subsidy, and then we review what the
agency might be able to offer for fee relief if that fee--if it
shows that the fees could be set to achieve fee relief.
Every year, my office looks closely at the elements that go
into our model, and we make refinements to more accurately
capture and reflect the future loan performance. The goal is to
determine the true cost of the program and then to set our fees
accordingly. The model is thoroughly reviewed by the agency, by
a third-party contractor, by the Office of Management and
Budget, and also by our external auditor every year.
Looking back at trends over the last couple of years, we
have been near or at the ceiling for our statutory fee
structure, and as a result, we have not been able to offer the
same fee relief each year. These recent trends bring us to this
year's budget discussion and the projection of a positive
subsidy rate for the fiscal year 2020 program under current
law.
In order to operate our 7(a) program in fiscal year 2020,
SBA will either need an appropriation of Federal dollars or an
adjustment to the fee rates. In our annual budget submission
and in our briefings that we did to the different Committee
staffers over the last few weeks, the agency presented options
for Congress so as to support an annual level of $30 billion in
7(a) loans.
The fee--the first option would involve a subsidy
appropriation of $99 million; the second option involves
statutory changes to the fee structure in order to maintain
zero subsidy; and the third option involves a combination of
statutory changes to the fee structure and an offset to the
agency's business loan administration cost also to maintain
zero subsidy.
Our annual budget and my written testimony also prevents--
presents details on the proposed fee structure. We attempt
within that fee structure to maintain the ability to
incentivize small dollar loans and lending in underserved
communities.
In closing, Mr. Chairman, the agency's annual modeling and
performance projects a positive subsidy rate for fiscal year
2020. And it is important to note that even absent refinements
that my office makes to performance assessments, the program
still projected a positive subsidy for the next fiscal year,
and the Committee and Congress will need to consider options
for the agency's 7(a) loan program.
Thank you again, Mr. Chairman, for inviting me to testify
today, and I look forward to answering any questions that you
may have.
Chairman KIM. Okay. Great. Thank you for your testimony
here. I am going to start off with a couple questions of my
own, and it looks like we have a little bit more time to go, so
we will get through as much as we can.
Well, the reason we are here today is to examine the
proposed changes to the 7(a) program and to ensure that any of
these proposed changes would not further strain capital access
for small businesses.
Now, to that effect, the goal of the 7(a) program is to
operate at zero subsidy, meaning that fees and collections
cover the cost of running the program. And as we heard from
your testimony, we are aware you are now predicting the program
to generate sufficient revenue in fiscal year 2020, meaning
that the program will be operating positive subsidy.
I wanted to ask, will the 7(a) program have to shut down if
the program remains in positive subsidy?
Mr. GRIBBEN. Absent an appropriation for dollars, it would
have to shut down, yes.
Chairman KIM. So if Congress does not appropriate the money
or the raised fees as you proposed, it would have to shut down?
Mr. GRIBBEN. That is correct.
Chairman KIM. So the program is not historically funded by
appropriations, so I would like to take a deeper dive into the
calculations that projected the need for additional funds to
keep the program going.
SBA's economic modeling and OMB's economic assumptions are
leading to a bleak outlook for fiscal year 2020 performance--
program performance. And right now, it is still unclear to me
what factors went into that model and the weight each of them
carried when the model was calculated.
You know, for example, the Small Business Act's
requirements do not factor in good and bad economic times, so
why would it make sense to propose a scenario where assumptions
are tied to adverse economic trends if the Small Business Act
itself doesn't contain such assumptions?
Mr. GRIBBEN. Prior to 2014, the--our subsidy model was not
as--did not take into account the macroeconomic assumptions,
and as a result, it was leading to large upward subsidy
reestimates. That is--that is the reestimate process that we do
every year to see the assumptions that we made in prior years,
is that meeting the actual performance projections, and the
answer is that it was not.
So we made a modification to the model in twenty--that we
introduced in 2014 to take the long-term macroeconomic
assumptions into account. When a loan is made in times when the
economy is good and if the projections are a change in the
assumptions over the long term, those loans have a tendency to
default at a higher rate than when loans that are made when the
economy is bad and the projections are assuming that the
economy will improve over time.
That is why, as part of the Federal Credit Reform Act, we
are supposed to take things like that into account to bring the
cost of the program into today, rather than having it borne by
future reassessments being paid by the taxpayers that way.
Chairman KIM. Well, I just want to dive into, you know, one
of these particular issues that I am having trouble
understanding through. Now, the programs--when we look at the
5-year average recovery rate on the defaulted loans as reported
to Congress last December was about 50 percent. But that seems
to stand in contrast to the fiscal year 2020 budget, which
assumes a projected recovery rate of only 37.29. So I just
wanted to get a sense from you how that is being generated and
why there is a discrepancy there.
Mr. GRIBBEN. There is--it is two different ways at looking
at the performance measures. So the 50 percent number that you
are mentioning is looking at all the purchases that were made
in a 5-year period of time, all the recoveries on those
purchases made over a 5-year period of time, regardless of the
year that those loans were approved. And in June of 2018, that
was 50 percent, according to a 5-year rolling average. That
number has also changed. It has decreased since that time.
But in the model, we have to look at it from the aspects of
that--what will happen with the cohort that--the loans that are
made and approved in that year over the lifetime of those
loans. That is a different way of looking at it. It is not
looking at it from a portfolio perspective, which is what the
Office of Credit Risk Management uses, it looks at it as what
is this loan cohort going to look like over the future of the
loans. And in that case, the--when you look at it from that
perspective, that is where we calculate the 37 percent. That is
what history is showing us.
Chairman KIM. So I think the main thing that you are likely
to hear from all of us today is just that, obviously, this is
an incredibly important program, and a lot of small businesses
depend on this type of access to capital. And when we are
experiencing right now is something that really stands at a
fundamental moment of what are we going to do with this going
forward.
So what we need from you is just an assurance that you are
going to be able to provide us with the details that we need,
the documentation that we need to understand what went into
your calculations and why it is that we face this decision
before us here in Congress right now.
So I just want to have your assurances there that we are
going to be able to get those documents and be able to work
with you on an expedited timeline so that we can understand
what went into this and we can understand the decisions that
are placed before us that didn't have to come before us in any
other previous year.
Mr. GRIBBEN. We can provide more information. As an
example, the briefings that I have been providing more details
into the model. The models are very complex. They do use some
information that are agency projections and projections from
the Office of Management and Budget.
And the models are thoroughly reviewed. The documentation
on the assumptions of what changed from the prior year, the
inputs into that model, those are all reviewed by external
parties to determine that the agency is doing the best job it
can to forecast future performance to make sure that we are
accurately reflecting the cost of those programs today over the
lifetime of the loans that are being--that the loans will be
serviced.
Chairman KIM. No, that is--I appreciate that insight. And I
look forward to working with you on this more, because, you
know, as we are being asked to consider, you know, $99 million
in taxpayer money, we just need to make sure that we are doing
our due diligence and thoroughly analyzing whether or not that
is a good use of the taxpayer dollars and if every other effort
has been made to try to avoid that from happening. And I think
right now, we just want to think of this as a factfinding
operation, be able to get everything that we need for us to be
able to make those considerations.
One last question for you. As we are going through this,
based on what you know and the processes that you were running
there, do you think that we need to be able to speak with OMB
to be able to have a full picture of what is going on here?
Mr. GRIBBEN. I personally don't believe that is necessary.
Chairman KIM. Okay. Well, I am going to turn it over to the
Ranking Member here for a couple questions.
Mr. HERN. Thank you, Mr. Chairman.
Mr. Gibben--Gribben, I am sorry--as mentioned in the
opening statement, the 7(a) loan program has been growing
rapidly over the last couple years, $18.75 billion, 2015, to
$30 billion in 2020. And the congressional budget indicates the
number will be $99 million that you need for the $30 billion
program.
In your testimony, you state there are three main inputs
into the model: performance assumption, cohort composite
assumptions, and macroeconomic assumption. Are these variables
weighed the same?
Mr. GRIBBEN. They are treated differently. The--but they
all go into factoring what the cost of the program might be.
The model looks at the actual performance of the portfolio over
26 years. That has the bigger impact on the model than anything
else, that and the projections for--when we--I said we--in
2014, when we introduced the changes to the model to put
greater weight on some of the macroeconomic assumptions, it was
on long-term unemployment. So the history of unemployment and
the projections of unemployment in the future have the biggest
impact on the model than most of the other factors.
Mr. HERN. Yeah. So I have a lot of questions around it. But
in fiscal 2020, the congressional budget justification, you
stated that you altered how your estimate--estimate purchase
amounts. Can you describe in detail the old method versus the
new method?
Mr. GRIBBEN. The old method was taking a simpler approach
to--what we have to try to figure out is, in the future, what
percentage of the loans that are approved in that fiscal year
are going to default and at what amount we would have to
purchase them. The old model was assuming there was a period of
time from the time that a loan went into default until it was
actually purchased.
When we look at the actual history, the time length between
when a loan defaults and when it is actually purchased was
longer than the model had been assuming. So taking that into
account, what that means is the purchase amounts on average
over this span of 20 years was about 8 percent higher than the
model had been forecasting.
So we changed the--we changed the way that we looked at
the--that time to calculate what is an average default to
purchase event and to be able to calculate what a purchase
amount would have been. That was the refinement that we made
for this 2020 model.
Mr. HERN. You also state that you annually test the
predictive ability of the existing assumptions and adjust the
methodology as necessary. I think that is what you were just
referencing.
So I have got a couple questions. Since you also have a
program, SBDC, where you are out helping folks understand their
business models before they ever get a loan or go to a lending
institution as a service to small businessmen and women in
America, based on what you have seen with failure rates, have
you adjusted that coaching model that you have out there to
maybe look a little more stringent at business plans to make
sure they are more long-term viable as opposed to what is
causing the failures now? Or would you say it is a naturally
not predictable failure rates that are going on?
Mr. GRIBBEN. I am struggling to answer that question just
because I am not sure exactly what the Small Business
Development Centers, when they talk to the small businesses
about potential lending, what they might be discussing with
them.
Mr. HERN. Well, it just seems that if you have got
businesses that are failing and you are responsible, you are
going to come back and ask the American taxpayers for $100
million or ask small businessmen and women to pay--I am just
running some numbers--anywhere from 23 cents a day to 46 cents
a day over a life of a loan because there is a higher failure
rate than you originally had predicted, that we would somehow,
in that same guise of helping people actually get to these
loans, that you would help them maybe not make the same
mistakes as their predecessor.
I mean, you just referenced that you have taken 26 years of
history and using that to formulate and sort of benchmark your
model going forward, it seems like we would also take some of
those failures maybe where you are advising some potential
businessmen and women to not make those same mistakes again.
Mr. GRIBBEN. Which is exactly what happens in the micro
loan program. That micro loan program where the technical
assistance is directly tied to the loans that are made, those--
that is the counseling and training that they get that are
really focused on their business plans and their ability to
repay the loans over time.
And in terms of what I was referring to when we look at the
assumptions that we make in the model to project future
purchase events, the cash flows that are going to occur over
the next 20 to 30 years of the lifetime of the loan, there are
a number of different factors why a business might not be able
to repay back a loan.
And we are trying to determine from--and there is a lot of
factors that go into it, from geography to industry to loan
sizes, the different sub programs that comprise the 7(a)
category. There are a number of different factors why a small
business might fail.
Mr. HERN. Sure. Well, I think that would help us
understand, as the Chairman said, because as we are looking at
failure rates that are beyond--or earlier than you originally
projected that is causing the problem you are saying.
One last thing and then I will yield back. Since the 7(a)
loans are sort of lender of last resort because banks say they
can't take them, then you are obviously looking at something
that may be a little riskier than a traditional commercial
bank, that there has been a little bit less take rate in 2018,
which would probably indicate that commercial banks are a
little more willing to take more risk now, marginally more
risk.
The failure rate, the predictability of the failure rate,
also realizing that a traditional bank is not going to give you
a 20-year fixed rate, so that is a unique thing, are you
looking to see if banks have changed their model of evaluating
the loans? I mean, it is a big portfolio. But I am just curious
as the relationship of the bank and how they are looking at
these business models.
Chairman KIM. If you can just be brief in your remarks
here.
Mr. GRIBBEN. Okay. We do not look at it from that aspect.
We look at it as the 7(a) portfolio. We look at the early
indicators of default rates and use that to make projections
for the 7(a) program itself.
Mr. HERN. Mr. Chairman, thank you.
Chairman KIM. I just wanted to recognize Representative
Davids to be able to ask questions. You are recognized for 5
minutes.
Ms. DAVIDS. Thank you, Mr. Chairman.
Well, I appreciate the testimony that you have provided
today. And I would actually love to follow up on the Ranking
Member's line of questioning, because I think there has been
maybe a view that we don't have a holistic approach to how the
lending is happening and how the fee structure is working and
the modeling that is being put out.
And I am not positive if that is where he was going, but it
does seem as though with the--that there are maybe some missing
links here for some of us. When we look at an unemployment rate
that in the modeling is like optimistic maybe, and then we look
at the projection of a--like a deteriorating or higher failure
rate, I think the question is how--why do you think that is
happening based on the modeling that you have got?
And then I suppose a follow-up question is, do you think it
would be helpful for your program to start working with other
programs within the SBA that is providing service--I see the
votes just got called--but providing services to folks who are
seeking to use the SBA 7(a) program?
Mr. GRIBBEN. So in answer to your first question, if you
look at the history of the fee structure, where the fees have
been set, and our ability to offer fee relief, the pattern is
clear that over the last few years, we are not able--we were
not able to offer the fee relief that we were able to offer in
the prior year, because we were coming closer and closer to
that point where the fees were not going to cover the expected
future defaults.
So that is where--when you look at that trend over time and
you look at 2020, that is where the tipping point happened. And
so there--and it is, I admit, it is an extremely complicated
model. There are a number of things that go in to try to
predict and project what might happen in the future, and there
are a lot of assumptions that we have to make, which is why we
have 26 years of data now to help us.
In the very beginning of credit modeling, it was more
difficult when we switched to the Federal Credit Reform Act way
of calculating these future costs. This is also something--when
you mentioned the banks, this is something that they are going
to be faced with the new accounting rules of how they are going
to have to calculate their loan loss reserves.
But in terms of the subsequent question about the feeding--
the--and correct me if I am misstating, but it is how we
partner with other loan program--the other programs within the
SBA in regards to the 7(a) loan program. And under my office is
also the Office of Performance Management, so we closely tie
all the strategies, the priorities of the agency, and as that
relates across the different program offices, whether it is
capital access or the Office of Entrepreneurial Development, in
order to make all of the programs successful, whether it is
7(a), whether it is the 8(a) contracting loan program, in order
to be able to achieve the mission of the agency to be able to
support small businesses to be able to help them grow and
achieve their goals.
Ms. DAVIDS. Thank you. I yield back.
Chairman KIM. Okay. We are going to try to do two more
before we have to run for votes. So I just want to recognize
Representative Stauber for questions here for 5 minutes.
Mr. STAUBER. Thank you, Mr. Chair. I just have one
question.
Mr. Gribben, in your testimony, you state that performance
assumptions you use over 25 years of historical 7(a) program
and the macroeconomic data. But for the cohort composition
assumptions you use characteristics, quote, from recent years.
Please describe to the Committee why you use two different data
sets.
Mr. GRIBBEN. We use the historical data in order to be able
to understand the performance of the loan based on conditions
of, let's say, what unemployment GDP might have been at that
time. And we use assumptions for the future to be able to
better predict performance of the loans over the future period.
So we use past assumptions to help better inform our
predictions for the future.
Mr. STAUBER. Thank you. That is my only question. I yield
back.
Chairman KIM. I just wanted to recognize Congressman Crow
quickly here before votes.
Mr. CROW. Thanks, Mr. Chairman. I will yield to my
colleague from New York.
Ms. VELAZQUEZ. Let me thank the gentleman for yielding.
Mr. Gribben, based on looking at the reestimate data, it
appears that SBA's model has been somewhat inaccurate. There
have been downward reestimates every year since 2010. Isn't
that correct? Yes or no.
Mr. GRIBBEN. Yes.
Ms. VELAZQUEZ. Okay. So given this, how can you defend
raising fees again? Everyone in this room knows that you are
going to end with a surplus, just like every year since 2010.
Why do we have to play this game, sir? Whose idea is this?
Mr. GRIBBEN. This was----
Ms. VELAZQUEZ. Is this your idea or is this OMB?
Mr. GRIBBEN. Oh, no, this is completely under the agency.
Ms. VELAZQUEZ. Okay.
Mr. GRIBBEN. So prior--but if you looked at--prior to when
I mentioned that the model changed in 2014, prior to that time,
there were large upward reestimates. It was when we changed to
take the macroeconomic factors into account that you see the
downward reestimates in 2010, 2011, 2012, 2013. They didn't
exist before.
Then if you look at it from the history since 2014, 2014,
2015 had higher reestimates than you see now, because once we
made that change to the model, we also fine tuned it. We look
at--and we have to look at each----
Ms. VELAZQUEZ. Let me just say, I want every piece of
document, every piece of document submitted to the Committee
that will justify raising the fees. I will not do anything, no
legislation until we are convinced that that is the way to move
forward.
Let me say this to you, the mission of SBA is to provide
resources and lending access to capital, affordable capital to
those who cannot get it through traditional means. So the
mission of the SBA is not going to be to make profit on the
back of small businesses, and that must be clear.
I yield back to the gentleman here. Thank you.
Mr. CROW. One quick question, and it is regarding the
Veteran Entrepreneurs Act program. And I know in the fiscal
year 2020 budget request, the SBA says that it intends to offer
the fee waivers for the veterans program, but in light of the
clear direction that the SBA can implement these or the--the
President's budget submission to Congress outlines the positive
subsidy, obviously, which is what we are talking about here
today for the 7(a) program. How do you think SBA can still
offer those waivers under the veterans program?
Mr. GRIBBEN. Because we provided the option to achieve zero
subsidy. Under the zero-subsidy scenario we can offer the
veterans fee waiver.
Mr. CROW. So--but the entire budget--obviously, the entire
request or the entire hearing today is about the fact that
there is a positive subsidy, correct?
Mr. GRIBBEN. It is about the options that Congress has in
order to achieve zero subsidy or to appropriate money. I view
the hearing about the options.
Mr. CROW. All right. Mr. Chairman, I yield back.
Chairman KIM. Okay. Thank you.
Well, one thing is we are looking at these options because
of, you know--because of, you know, what we are hearing from
your particular administration. So, you know, this is something
that we are going to have to look into very carefully.
I do want to recess right now for votes. We will come back
afterwards, if you don't mind sticking around a little bit
longer, as we do have a few other members that look like they
might want to ask questions. I just want to make sure they have
that. So we will come back in just a little bit.
[Recess.]
[11:44 a.m.]
Chairman KIM. Hi. Good morning. Thank you for your patience
and sticking around with us as we wrangled our votes together
down there on the House floor. Why don't we just jump right
back in and just be able to get started here. I am just going
to just briefly introduce the witnesses and then we can start
with your remarks there.
So our first witness today is Mr. Tony Wilkinson. Mr.
Wilkinson is president and CEO of NAGGL, the only national
trade association representing the SBA 7(a) lending industry.
He has served in this role for more than 25 years and is
responsible for working closely with agency executives and the
Small Business Committee and ensuring the continued stability
and availability of the 7(a) program.
Our second witness is Ms. Lynn Ozer. She is the president
of the SBA Lending Department at Fulton Bank headquartered in
Lancaster, Pennsylvania. She also manages all the SBA lending,
which covers my home State of New Jersey, Pennsylvania,
Maryland, Delaware, Virginia, Washington, D.C., and 249 office
locations.
Also, our next witness is Ms. Gail Jansen. She is the vice
president of business services and operations at Kinecta
Federal Credit Union, where she is currently responsible for
all areas of loan origination within business services, has
over 25 years in commercial lending experience.
And I would like to now yield to our Ranking Member, Mr.
Hern, to introduce our final witness.
Mr. HERN. Thank you, Mr. Chairman.
Our next witness is Gordon Gray. Mr. Gray is the director
of fiscal policy at the American Action Forum, which is the
leader in pro-growth fiscal policies in Washington, D.C., and
across the country. Mr. Gray is an expert on budget matters and
has previously testified before the House Budget Committee.
Prior to this current role, Mr. Gray held senior staff
positions in the U.S. Senate, has spent time with the AEI, the
American Enterprise Institute.
Mr. Gray, we are pleased to have you testify, and we
welcome your participation.
Chairman KIM. Great. Thank you.
Mr. Wilkinson, why don't we start off with you. You are
recognized for 5 minutes.
STATEMENTS OF TONY WILKINSON, PRESIDENT AND CEO, NATIONAL
ASSOCIATION OF GOVERNMENT GUARANTEED LENDERS; LYNN G. OZER,
PRESIDENT, SBA LENDING, FULTON BANK; GAIL JANSEN, VICE
PRESIDENT OF BUSINESS SERVICES AND OPERATIONS, KINECTA FEDERAL
CREDIT UNION; AND GORDON GRAY, DIRECTOR OF FISCAL POLICY,
AMERICAN ACTION FORUM
STATEMENT OF TONY WILKINSON
Mr. WILKINSON. Thank you, Chairman Kim, Ranking Member
Hern. My name is Tony Wilkinson, and since 1987, I have served
as the president and CEO of NAGGL, a national trade association
representing lenders and other entities that participate in the
SBA 7(a) loan program. Prior to this job, I was an SBA lender
for a community bank based in Stillwater, Oklahoma.
The President's fiscal year 2020 budget request included
what we believe is an unnecessary positive subsidy of $99
million for the 7(a) program. This is a major shift from the
program's track record of operating at zero credit subsidy
since fiscal year 2005, except during the years covered by the
Recovery Act.
This subsidy calculation is not a proposal like the rest of
the budget request. Congress must react to this calculation.
Congress will have to appropriate $99 million or amend the
Small Business Act to raise the current fee caps on borrowers
and lenders to cover the cost of the program.
The President will need to sign into law one of these paths
forward by September 30 or the popular 7(a) program will shut
down on October 1. But first, we must collectively question the
positive subsidy calculation. My plea is that you challenge
both OMB and SBA to explain this subsidy estimate in detail.
The fiscal year 2020 budget documents provide insufficient
justification for an increase in estimated program costs. The
proposed subsidy increase does not track with performance data,
and the subsidy calculation lacks transparency as neither SBA
nor OMB has disclosed the details of their calculation.
We say this for three reasons. First, SBA has overestimated
the cost of the portfolio year after year for nearly a decade.
In the fiscal year 2020 budget, SBA reported for last year a
$757 million excess subsidy reserve, meaning the program took
money out of borrower and lender pockets and sent that money to
the Treasury. Doesn't that sound like a tax, an unauthorized
tax?
For all programs at the SBA, the overestimation of cost
recognized last year totaled almost $1.5 billion, that is with
a B, billion dollars. This is not an isolated incident. Since
fiscal year 2010, the SBA 7(a) model has overestimated the cost
of the program by almost $3.2 billion. This is a staggering
amount of money that means nearly a decade of unnecessary fees
on small business borrowers and lenders.
In fact, Congress has also been overcharged. In the few
years when there were congressional appropriations, the fiscal
year 2020 budget documents also show significant downward
reestimates for those years, meaning that the--many of the
appropriation dollars were not necessary.
In a series of GAO--in a series of reports, GAO describes a
pattern of discrepancies between actual performance and SBA's
projected performance, resulting in repeatedly overestimating
the cost of the program. One GAO report documents that SBA
hired Pricewaterhouse to conduct a study which found the
subsidy rate calculation is perceived by SBA to be a tool for
gaming the congressional appropriations process.
Another GAO report stated they could not determine whether
a bias existed in the model by systematically excluding
variables to influence the subsidy rate in a particular
direction, and SBA could not provide adequate documentation to
demonstrate the rationale for the model. These are alarming
conclusions.
Actual portfolio--actual performance of the portfolio is
starkly different than the projected portfolio. For instance,
the program's 5-year average recovery rate on defaulted loans,
as reported to Congress last December, was 50 percent. In sharp
contrast, the fiscal year 2020 budget assumes a projected
recovery rate of only 37.29 percent.
Why has the subsidy modeling ignored this established trend
of steadily increasing recovery rates? Also, in fiscal year
2018, SBA reported a chargeoff rate of 0.51 percent, a historic
low. We simply cannot see that there has been a negative shift
in the performance of the portfolio.
Lastly, we are concerned that the model fails to take into
account appropriate assumptions such as recent significant
programmatic changes that have improved the performance of the
portfolio. There is a troubling pattern in how SBA and OMB
model the subsidy cost which GAO has highlighted over multiple
administrations for the last 22 years.
SBA's preferred method to cover the unnecessary positive
subsidy is to raise fees on borrowers and lenders. But without
justification, how can we simply accept this projection? Based
on the data we can see, there surely must be an error in the
fiscal 2020 calculation.
Yes, Congress gave the executive branch authority to
calculate subsidy cost, but Congress did not give unfettered
authority for cost to be calculated without transparency or
outside of congressional oversight. I urge you to challenge
both SBA and OMB to explain the fiscal year 2020 subsidy model
or this program and small business borrowers will suffer the
consequences.
Congress created the SBA in 1953 to aid, counsel, assist,
and protect the interest of small business concerns. Levying an
unauthorized tax does not comply with this mission.
Thanks for inviting me here today, and I look forward to
answering any questions.
Chairman KIM. Thank you, Mr. Wilkinson.
Ms. Ozer, over to you. You are recognized for 5 minutes.
STATEMENT OF LYNN G. OZER
Ms. OZER. Thank you, Chairman Kim, Ranking Member Hern, and
members of the Subcommittee. I appreciate this opportunity. My
name is Lynn Ozer, and I am currently the president of Fulton
Bank's SBA Lending Department, where I oversee all aspects of
SBA lending in the mid-Atlantic region in the five States that
our bank is located.
I have believed and trusted in SBA's mission to aid and
protect these borrowers for the entirety of my career. However,
it is disheartening to see a fiscal year 2020 budget request
from the SBA that takes advantage of these small business
borrowers. The budget states positive subsidy calculation for
the 7(a) program for fiscal year 2020 of $99 million, a marked
shift from the program's track record operating at zero subsidy
and no cost to the taxpayer.
SBA has essentially told Congress that it has a choice, to
either appropriate $99 million or hike up fees on borrowers and
lenders or the program shuts down on October 1. My first
thought as a seasoned lender is to question whether or not
there have been any performance issues in the portfolio.
Purchase rates are at a near all-time low. Recovery rates are
at an all-time high. SBA reports a record low chargeoff rate in
2018. When we see a positive subsidy, you would think that the
portfolio would show some signs of worsening, but it does not.
SBA has also overestimated the cost of every cohort of
loans made for the past 9 fiscal years, which means SBA could
have asked for much less from the borrowers and the lenders and
still have covered the cost of the program at a zero subsidy.
This tells me the current subsidy model used is not working as
it should.
I urge this Subcommittee to work with OMB and SBA to obtain
the details of this subsidy calculation. The subsidy model has
always been shrouded in mystery. Lenders are the stewards of
this program, and Congress gives the program its authority to
exist. Does it make sense that none of us know how the cost of
this program is calculated?
SBA has made it clear their preferred solution to cover the
unnecessary positive subsidy is to hike fees on the borrowers
and lenders. This is a tax on small business. Under SBA's
proposal, some of my borrowers would have seen a 7 percent
increase in fees, others a 16 percent increase, and some
borrowers' fees would have doubled. This would mean shrinking
access to capital.
And the impact to lenders, under the SBA's proposal, the
cost of my SBA department would increase by roughly 25 percent
just on new loan originations in fiscal year 2020, with that
number multiplying itself year over year into the future since
these fees are charged on an ongoing basis annually for the
rest of the life of the loan.
When the costs increase on the lenders, that creates a
domino effect, the results of which hurt the small business
borrower in the end. The goal is to increase opportunities for
small business. The budget request would do just the opposite.
It would shrink access to capital, closing the door on many
small borrowers and lenders.
I also want to take a moment to respond to Mr. Gribben's
comment about the portfolio doing worse in good times and his
admission that his model does not take lender behavior into
account. I am a lender. Lenders administer this loan program.
When times are good and when times are bad, my credit
policy does not change. This inverse relationship we have with
the conventional market speaks to loan volume. When times are
good, borrowers have options and our volume may plateau. When
times are bad, borrowers have less options and our volume
increases. But we are not talking about volume. We are talking
about cost. When times are good, my credit committee is not
going to allow us to approve riskier loans just to make up
volume. Why?
We still need to have a portfolio that meets safety and
soundness standards for our regulators. SBA lending has certain
rules that govern prudence regardless of economic swings, like
always requiring a personal guarantee from the borrower,
requiring borrowers to have skin in the game, prescribing debt
service coverage ratios and collateral requirements.
And there is just only so much risk a lender can take.
Actual performance does not support their assumption that we
make riskier loans in good times. The emphasis on macroeconomic
trends seems inappropriate for this highly regulated loan
program.
Do not simply take these projections at face value, and I
ask that you seriously challenge the subsidy rate. Small
business borrowers, lenders, and the ability of the 7(a) loan
program to serve access to capital needs are dependent on how
you respond to this surprising calculation.
Thank you.
Chairman KIM. Thank you.
Let's see, Ms. Jansen, over to you for 5 minutes.
STATEMENT OF GAIL JANSEN
Ms. JANSEN. Good afternoon, Chairman Kim, Ranking Member
Hern, and members of the Subcommittee. My name is Gail Jansen.
I am testifying today on behalf of NAFCU.
Thank you for the opportunity to share with you our
perspective on SBA 7(a) loan program and the potential impacts
of the proposed fee structure changes for fiscal year 2020.
As the vice president of business services and operations
at Kinecta Federal Credit Union, I am responsible for a
portfolio of nearly $1 billion in member business loans, which
includes nearly $35 million in SBA loans. Business lending is
an important aspect of our service to members at Kinecta. A key
part of that is our ability to offer SBA 7(a) loans.
Kinecta started our business program in 2013. We are a
preferred lender with the SBA. We are the number one credit
union SBA lender in all of California. Our SBA loans range from
a low of $50,000 to a high of $5 million, but the average size
of our loans is $250,000. On average, we make about 20 loans a
year, and currently, we have 100 SBA loans in our portfolio.
The kind of companies that turn to us for SBA loans include
small manufacturers, brick-and-mortar retail shops, independent
restaurants, and professional service companies. A business
owner will apply for an SBA loan with the credit union because
they are looking for something different than what the bank can
offer. They are often pleasantly surprised that a credit union
offers small business loans, and as a result, they are willing
to consider us as a viable alternative.
Our ability to offer SBA loans allows us to meet the needs
of our members, like the one who turned to us in July 2018 with
a small, growing residential home remodeling company to
refinance existing business debt and provide working capital to
support new jobs and projects.
At the time of the loan request, the company had only one
full-time employee and one part-time employee. The subject debt
to be refinanced was originated from an online lender that was
charging the business owner an exorbitant interest rate of 44
percent.
After underwriting the loan request, Kinecta approved and
funded the SBA loan in the amount of $110,000 at an interest
rate of 7.75 percent. The refinancing of the business debt
resulted in a significant savings for the business owner. As a
result, the business has since hired two full-time employees
and has begun saving money to purchase commercial real estate.
Small businesses like this one are the backbone of our
economy and an essential source of jobs. The SBA's loan program
serve as an important resource that help credit unions provide
small businesses with the vital capital necessary for growth
and job creation, in many cases to businesses that would
otherwise not be able to obtain financing.
There are positives to SBA's overall fiscal year 2020
budget request, such as the increase in the SBA express loan
limit from $350,000 to $1 million. However, it was troubling to
see the SBA's request to modify its statutory fee structures
and potentially increase its fees because of a refinement to
its economic modeling.
The bottom line is that the fee increases as proposed by
the SBA in this budget submission will impact both our small
business members and the credit union. SBA's proposed fee
structure will make it more expensive for members to get loans
greater than $500,000 by increasing the guarantee fee on those
loans. For loans greater than $1.5 million, the proposal
introduces an even higher new fee rate.
It is important to note that the small business member pays
the guarantee fee one time, usually at funding. The moneys are
often dispersed directly from the loan proceeds so the member
does not have a direct out-of-pocket cost at origination.
However, the lender, Kinecta in this case, pays an ongoing
annual fee for each loan that is originated. This fee is
currently 55 basis points.
Under the SBA's proposal, the fee will be unchanged for
loans up to $1.5 million, but it will increase to 83 basis
points for loans over $1.5 million. The SBA proposal will make
loans more expensive for lenders like Kinecta.
In a high-cost real estate market, such as California and
New Jersey, among others, $1.5 million is not a lot when you
are talking about commercial real estate. Increasing the costs
of these loans to both the small business and the lending
institution will likely make it more difficult to get an SBA
loan for commercial real estate in higher markets.
We urge the SBA and Congress to work together to protect
and strengthen the SBA 7(a) program. This includes examining
all efforts to avoid the proposed fee increases on SBA's small
business loans and the lenders that serve them.
In conclusion, the ability for small businesses to borrow
and have improved access to capital is vital for job creation.
We recognize that maintaining a zero subsidy for the program is
important, but we urge you to examine all potential alternative
solutions to avoid a fee increase.
I thank you for your time and the opportunity to testify
before you here today, and I welcome any questions you may
have.
Chairman KIM. Thank you for your testimony.
Mr. Gray, over to you for 5 minutes.
STATEMENT OF GORDON GRAY
Mr. GRAY. Chairman Kim, Ranking Member Hern, and members of
the Committee, I am honored to be before you today to discuss
the budgetary considerations of the Small Business
Administration's 7(a) loan program.
This is an important program that provides access to small
business entrepreneurs who otherwise have no recourse to
adequate financing in the market, supporting hundreds of
thousands of jobs throughout American communities. As a
taxpayer-funded program, it should be subject to continuous and
rigorous oversight, and I appreciate the Committee's attention
to this program in today's hearing.
In my testimony, I wish to make three basic observations.
Federal Government is a prolific lender, providing guarantees
on and direct loans of $4 trillion as of fiscal year 2018. The
budgetary treatment of credit programs is somewhat unique in
budgeting, adhering to the principles of accrual accounting as
set forth in the Federal Credit Reform Act, FCRA, of 1990.
FCRA accounting addresses the deficiencies of cash
accounting in measuring the cost of credit programs, but
necessarily introduces additional complications, some of which
animate today's discussion. I will briefly discuss these
observations in turn.
The Federal Government currently has a combined $4 trillion
in credit assistance outstanding as of 2018. In general, the
goal of this assistance is to provide credit to borrowers who
otherwise would not receive credit at market terms from
lenders.
The credit assistance takes two forms: direct loans where
the Federal Government is the lender or loan guarantees where
the government commits taxpayer funds to guarantee private
lending. As of fiscal year 2018, the Federal Government has
$1.4 trillion in direct loans outstanding and guarantees on
$2.6 trillion as of last year.
It is loan guarantees that concerns today's hearing,
specifically the 7(a) loan program. The 7(a) program provides
eligible small businesses with private sector financing with a
public guarantee. The program includes several specialized
features, but in general, provides up to 75 percent guarantee
on loans up to $5 million. The program requires lenders to
ensure borrowers demonstrate adequate ability to repay,
management ability in equity, among other considerations.
Credit is also contingent on borrowers demonstrating that
credit is otherwise unavailable at reasonable terms.
According to the SBA, the 7(a) loan program supported over
60,000 loans totaling $25.4 billion in fiscal year 2018. The
budgetary treatment of this program is prescribed in the
Federal Credit Reform Act of 1990 and its amendments.
In general, this reform requires recording credit
assistance programs in the Federal budget on an accrual basis.
Accrual accounting more accurately captures the taxpayer
exposure for a given credit program by recognizing the value of
the upfront outlay by the taxpayer but also the associated
repayment stream, even if it is outside the budget window.
This treatment also captures the value of preferential
credit terms, such as longer loan maturities or interest
deferral. It is important to recognize that this calculation
more accurately reflects the totality of the Federal commitment
for a given credit program. It also necessarily introduces
additional complications.
By nature, FCRA requires projecting all associated cash
flows for a given loan over its duration. This also requires
projecting likely delinquencies, defaults, prepayments,
interest rates, and other factors to determine credit subsidy
rates.
Underpinning a number of these elements are OMB's economic
assumptions, which the agency is required to use as part of the
calculation. The strength of the economy substantially effects
default rates, for example, and a worsening economic outlook,
would all else equal, increase the subsidy cost to the Federal
Government through higher defaults, among other considerations.
The subsidy cost is thus exposed to fluctuations for any of
these factors. Those will always persist, however, and
measurement uncertainty in is not limited to this program or
credit programs generally.
Any time a measurement requires projecting into the future,
some uncertainty, however, is introduced. Annual reestimates of
these programs enhance the estimating process. Since FCRA was
enacted, subsidy costs of the 7(a) program have been on net
underestimated with a net positive lifetime reestimated subsidy
cost. Yet these costs are quite small over the nearly three
decades and relative to the overall size of the loan
disbursements.
It does appear, however, that this net underestimate is
driven largely by the effects of economic downturns.
Accordingly, it is important to understand the factors that
animate these subsidy costs as policymakers consider how to
adequately resource this important policy objective while
safeguarding taxpayer funds.
I believe the Committee's desire to hold this hearing
reflects that intention, and I look forward to answering your
questions.
Chairman KIM. Thank you so much for your testimony.
Thank you again to the four of you for coming out here. I
just have a few questions and then I will turn it over to the
Ranking Member, and we may have some more after that.
But, Mr. Wilkinson, I would like to start with you. You
know, you have now heard--we have all heard from the SBA's CFO
and regarding the data that was used for the subsidy
calculation, and I wanted to ask you about your response to
that. Was there anything that he said that was new to you,
anything that helped shed a little bit more light on their
process there? And what are the questions that you have
lingering from his testimony?
Mr. WILKINSON. Thank you for that question. I have actually
got a lot of comments on his testimony. First of all, he talked
about tweaking the model in 2014 to accurately reflect program
performance. That was his quote. But the reestimates tell a
very different story.
In fiscal year 2014, we started out at a zero subsidy rate.
Now, remember, he said this was the year that they changed
their model to more accurately reflect what was going on. The
2014 subsidy rate has now been estimated to be a negative 2.08.
So they missed by their own calculation so far of about $359
million.
In 2014, if you look at repurchase rates in 2018 versus
2014, our repurchase rate has gone down 35 percent. So the----
Chairman KIM. Between 2014 and----
Mr. WILKINSON. And 2018. So our performance today is much
better today than it was in just 2014. And even with the rates
in 2014, they had a negative subsidy reestimate of $359
million.
In Mr. Gribben's verbal testimony, he did not give one
single detailed reason why the subsidy rate increased. Mr.
Gribben's comments on future repurchases may not be supported
by the SBA's own data risk warehouse. Metrics in projected
purchase rates, they have a very sophisticated model that the
Office of Capital Access manages that will show a very
different number for purchase rates than what is included in
the model.
So there are a lot of questions in here. It appears that
they are ignoring the President's own economic assumptions, and
they continue to factor in another Great Recession or another
9/11 end of the model when the President's economic assumptions
don't forecast that. They forecast strong GDP and a low
unemployment rate.
So we are confused as to how we can have an upward subsidy
cost need when our performance tells us a very different story.
Chairman KIM. Thank you for that.
I wanted to turn to Ms. Jansen. I wanted to ask you, in
your opinion, would a steady unemployment rate have any effect
on the quality of your portfolio, the quality of your
borrowers?
Ms. JANSEN. Unemployment rate won't really factor in, other
than access to capital. That is what we are really looking for
as far as SBA goes.
Speaking from my perspective with the members who walk into
our member service centers and request SBA loans, they want to
grow their own business, and in order to do that, they are
going to have to have access to capital.
Chairman KIM. I appreciate that.
Ms. Ozer, I wanted to ask you a similar question to Mr.
Wilkinson. I wanted to just hear from you just straightforward,
you know, why do you think this subsidy calculation deserves to
be challenged? How do you respond to what the CFO said today?
Ms. OZER. Listening to what he said means that we have to
either go on to appropriations or they have to raise fees. I
have been doing this for longer than I want to admit, and I
have seen this go--this whole program go through being on
appropriations, not being on appropriations, raising fees,
lowering fees. And all the instability in the Small Business
Administration creates problems for borrowers and lenders and
definitely, as Ms. Jansen said, shrinking the access to
capital.
The biggest problem that I see is the effect that it has on
the borrowers, specifically the increase in the cost of fees.
The fees for loans under $500,000, they will be the same. But
for borrowers between $500,000 and $700,000, the fees increase
dramatically. We have a lot of borrowers, in your area
actually, that have felt that.
The effect on the lenders is that the ongoing fees that we
are charged on our loans is going to go up. And whatever
happens to cost more money to the lenders, eventually gets put
back onto the borrowers, and their fees rise.
I have to run a budget and explain to my shareholders, my
board of directors, and all my stakeholders why are the costs
of this program increasing. And if we look at what Mr. Gribben
said, it flies in the face of what our own statistics, given to
us from the SBA about how our portfolio and our peers'
portfolio performed, that I have been reporting to the Credit
Oversight Committee, what they are saying flies in the face of
all the actual facts. So it is going to be very difficult for
me to explain that.
Chairman KIM. Thank you for explaining that to me.
So I am going to turn it over to the Ranking Member here
for some questions.
Mr. HERN. Thank you, Mr. Chairman.
Mr. Wilkinson, welcome from Oklahoma. It is good to see
you.
Ms. Ozer and Ms. Jansen, I will tell you that this whole
Congress needs more people like you testifying from people who
actually experience what is going on with the legislation that
has passed and what actually happens. It is so refreshing to
hear--even though you are with the majority party here as their
witnesses, it is so great to hear you actually talk about what
happens out of Congress, and I just so appreciate it. It is so
refreshing to hear you all. I wish every committee had folks
like you testifying on the realities of what comes out of
Congress.
Mr. Gray, question for you. And by the way, I chaired a
loan committee for 10 years on a bank, so I so appreciate it.
It is music.
Mr. Gray, do you know any of the requirements surrounding
what an agency can and can't use as assumptions for modeling
purposes?
Mr. GRAY. So as I understand it, the 1997 Balanced Budget
Act tried to apply more uniformity to the methodologies that
the agencies have. I am aware of the fact that OMB's economic
projections are one of those factors that they are required to
consider.
Mr. HERN. Are agencies provided guidance on how to select
their assumptions?
Mr. GRAY. Like I said, I believe those--they are given
parameters set in statute by, for example, by FCRA and its
subsequent amendments, like the 1997 Act, and, the previous
witness spoke to some of this, there is some discretion at the
agency level as well.
Mr. HERN. So we will talk about the discretion. Economic
assumptions, are they a major driver for their models?
Mr. GRAY. I think the state of the economy performance of--
or the outlook on credit markets, credit conditions certainly
underpin their assumptions.
Mr. HERN. Because I will tell you, as a member of Budget,
where we get to see all the assumptions from both side----
Mr. GRAY. Right.
Mr. HERN.--both parties, there isn't a doom and gloom from
either party, yet the financial guru from SBA says--appears to
think there is. So I would like to get his thinking. Maybe he
has a crystal ball the rest of us don't have, because I would
be interested.
In your testimony, you touched on the reestimate process.
Can you share with us how that reestimate process impacts a
credit subsidy calculation?
Mr. GRAY. Sure. So every year, on an ongoing basis, the
agencies do revisit their past calculations, what elements of
that may have changed. And so we basically get a performance
exam of all of these programs since they were put on an accrual
basis under FCRA.
In the credit supplement we get, tables 9 and 10, I think,
of past performance, and we can see how these were estimated at
their inception and then over the lifetime of their
performance. And those have been pretty instructive in thinking
about how to think about these programs over time and under
various economic conditions.
Mr. HERN. Thank you, Mr. Gray.
Mr. Wilkinson, in your testimony, you state that the
subsidy calculation was amended in the past. Can you describe
the events in the environment surrounding this amendment?
Mr. WILKINSON. Yes, sir. Back in 1997, a similar discussion
was ongoing. At some point in time, the agency decided that
they had made an error in their calculation and they filed a
formal budget amendment adjusting the subsidy rate.
Mr. HERN. Who was involved in that, do you remember?
Mr. WILKINSON. The Office of Management and Budget and SBA.
I would say that the Senate Small Business Committee under
Senator Kit Bond at that time was a driving force in getting
that done.
Mr. HERN. So what was the outcome of that?
Mr. WILKINSON. At that particular time, we were on an
appropriations so we were able to leverage those appropriation
dollars much farther.
Mr. HERN. Okay. So was it similar to today's conversation
or dissimilar or----
Mr. WILKINSON. It is very similar. GAO has documented this
in a series of reports. We have had multiple former SBA
employees tell us that the way the system works is OMB dictates
to SBA a subsidy rate, and it is SBA's jobs to adjust the
assumptions to get to the rate that they have been told to get
to. And that is why you saw the Pricewaterhouse report come to
the conclusion that the SBA and OMB is gaming the process.
Last week, in a Senate Small Business Committee, Mr. Manger
from the SBA testified that the macroeconomic assumptions come
directly from the Office of Management and Budget and that he
has no knowledge what those are, basically, you know, leaving
that all to the Office of Management and Budget.
So what we have got is a subsidy calculation that is
shrouded in mystery. We can't see the details. We don't know
how in the world they can say all of a sudden we are going to
have a 10 percent spike in our net losses when our performance
trends are going exactly the opposite direction.
Mr. HERN. Before I close, I would just like to say thanks
to each of you again for being here and your honesty. And
certainly, I can see in your--when you are reading your
testimony that you really have a lot of passion. So thank you
so much.
Mr. Chairman, I yield back.
Chairman KIM. Thank you.
I have a few more questions I just want to get into here.
Ms. Ozer, back to you. As you were mentioning, you know, you
have a sizable footprint in New Jersey. And I am trying to
think about this a lot in terms of how it is going to affect
the borrowers, how it is going to have a real impact where the
rubber hits the road.
So I wanted to ask you, how do you think this proposal will
impact the extent to which you were able to reinvest in local
communities like ours, specifically how exactly would increased
fees affect their desire to apply for 7(a) loans and your
ability to provide more loans?
Ms. OZER. Thank you for your question. Specifically, I can
give you an example. We just did a loan to a trucking company
in Robbinsville, New Jersey, right outside of Bordentown. This
business has been growing tremendously. With online businesses,
trucking and delivery is just an exploding industry.
They were renting space to keep all their trucks. They
needed to buy the building they were in because their lease was
up, and they wanted to buy it as well as the adjacent property,
and the cost was over $3 million. They put a substantial amount
of money down, and we made them a loan. Their fees for that
loan of $2.9 million were--let me see. I have that here
actually--$81,000.
The company, under the new fee structure, would be paying
an additional $5,500, $5,578.11 to be exact. That money could
be used for them to buy another truck, hire another driver,
expand their business in many other ways, instead of having to
pay for the subsidy rate or whatever in additional fees.
How that affects us, when we get a loan this big, our cost
to this program would increase by 25 percent on an ongoing
basis. Having that loan on our books, that larger loan, that is
real estate secured, as opposed to some of the very small loans
that aren't real estate secured and may not perform as well
help balance risk. If we can't make these larger loans because
of the cost to the bank and the cost to the borrower, we will
have less capital to invest in other areas in New Jersey.
We have to make a certain amount of money to keep my
department going. And if our infrastructure and our efficiency
ratio goes up, my bank directors and so forth are going to say
to me, what is going on here. You are not making enough money.
And they are going to cut the amount of staff that I have and
my ability to provide ongoing community investment to projects
like this.
The smaller loans in your area that are $300,000, they
don't pay nearly as much fees and their fees won't be affected.
But if we can't balance out our investments with larger loans
and smaller loans, we are going to have to have--there is going
to have to be give somewhere. And who is going to pay for it
but the small business borrowers. They are going to have less
access to capital.
Chairman KIM. A lot of my concerns here. That is very
helpful, because I always want to make sure that we understand,
you know, the tangible impacts, really understand what that is
going to translate to in terms of the borrowers and small
businesses.
And as I have talked to a lot of small business owners,
they talk to me about the importance of having that
predictability for them to be able to do planning, you know,
that they are dealing with razor-thin margins here, and, you
know, of their ability to plan not just 1 year out but 10 years
out in the growth, it really depends on that predictability.
And my concerns here are certainly about what is going to
happen given this, you know, fiscal year 2020 structure. But
the lack of transparency and the lack of understanding of what
is going into this concerns me about if we are going to be
right back at here a year from now or 2 years from now and
just, you know, what is going to be happening going forward.
As we understand that, you know, we are--in many ways, it
looks like, from what you are saying, that we are, you know,
forcing or we will potentially be forcing small businesses and
the borrowers into riskier loan products, and that is something
that is going to be, you know, very damaging going forward.
I wanted to ask, on that front, what are you hearing from
borrowers in terms of their reactions to, you know, what has
been happening here with the 7(a) and these developments? Are
they understanding sort of the magnitude in which this is going
to affect them and, you know, affect their abilities to be able
to have access to capital? Please, anyone.
Ms. JANSEN. Honestly, most of the borrowers that we deal
with at the credit union don't really understand an SBA loan.
When they come in and they ask for a business loan, we have
referred them out to the SBDC to get their financials together
to answer those questions, but there is an education process
for a lot of the smaller people that we deal with, our members.
You know, as a nonprofit, we want to help them build their
business. They come to us and they trust that we are going to
guide them in the right direction. So honestly, most of the
borrowers that we deal with, they don't understand how this
would affect them.
Ms. OZER. As soon as they get here, as soon as they get to
us, though, they quickly understand. When they hear the amount
of the fees that they are paying and the fact that, you know,
let's hurry up and get this in because if this passes on
October 1, this is going to cost you twice as much money as it
would if we do it now.
I mean, then they will understand the urgency. And what
they can do with an additional $5,500, it doesn't sound like a
lot to a lot of people, but for small businesses, that could be
a large part of their cash cycle. They could pay payroll for
another month and it makes a huge difference and it has a huge
impact.
But I agree with Ms. Jansen, you know, they don't
necessarily understand the workings, but they do trust that the
bank is looking out for them and putting them into the proper
product. I mean, we as a commercial lending institution offer
them conventional financing. They only come to my department
when my bank is not going to be able to do it.
So they are already sort of in a difficult spot, and then
you tell them how much it is, and they feel like they are
getting hammered over the head. But the problem for us is
exactly what you said, and it is not just the borrowers who
have to plan; it is banks and their lending institutions that
have to plan.
And we have to budget and we have to know how much this
program is going to cost so we can allocate human resources to
making more of these loans and doing outreach into the
communities that need these loans the most. And we can't afford
to add personnel if we are going to keep paying fees to the
government.
Chairman KIM. That is right. And the same way that the
borrowers turn to you and trust you about this analysis and
understanding what they are going to need to do, they should
also be trusting the SBA. They should be trusting us here in
Congress to do our due diligence, that we recognize that the
mission of the SBA is to help small businesses across this
country, make sure that they can get a leg up, that they have a
fair shot at being able to run a successful business and be
able to grow.
You know, the mission was not to create a revenue stream
for the government on the backs of small businesses. Instead,
everything should be geared towards what it is that we can to
do to be able to help them. And what I assure you and assure
you--this Committee on both sides of the aisle, we are
committed to that. We are committed to ensuring that SBA stays
true to the mission of helping small businesses across this
country, giving them a fair shot, giving them a chance to
really be able to succeed on this front.
I wanted to ask a question, I wanted to ask this panel a
question, a question that I asked the CFO, which is, do you
think it will be the benefit to this Committee and for us here
in Congress to hear from OMB on this?
Mr. WILKINSON. I do. I think that is where the answers are,
based on what we hear from former SBA employees, that is OMB
and their macroeconomic assumptions that are driving the
subsidy calculation. So I think it would be critical that you
hear from OMB. Hopefully, we can get some straight answers.
Chairman KIM. Is that the idea for every--does everyone
else share that conclusion?
Ms. OZER. I agree wholeheartedly.
Chairman KIM. Does anyone disagree?
Mr. GRAY. No.
Chairman KIM. Well, no, thank you for that and your expert
thoughts on this.
I did want to just open up one last time, if there is
anything else that anyone wanted to add for the record before
this Committee before we start to move to conclusions.
Mr. WILKINSON. The performance of the portfolio remains
strong. We have actually had a very good working relationship
with the Office of Capital Access at SBA. Over the last several
years, we have worked hand-in-hand to improve the performance
of portfolio, tightening up program parameters where they
needed to be. I think that is reflected in the performance of
the program.
Unfortunately, we now have a subsidy calculation that does
not reflect reality. There are some ulterior motives that we
don't see, and it is not borne out by the statistics in front
of us. So I beg this Committee to dig deep into the subsidy
calculation and find out what is going on. We need the details.
There has got to be a paper trail somewhere of how these
assumptions are come to and put into the model.
I heard Mr. Gribben talk about all the auditors. From our
understandings, they are checking the spreadsheets. They are
not determining what the inputs are into the model. That is
vastly different. We need to figure out what the inputs are and
how those were derived. So there is a lot of detailed
information that needs to be looked at.
Thank you.
Chairman KIM. Anyone else?
Ms. JANSEN. Yeah. I would definitely like to dovetail on
that and say, you know, we support examining every available
option to avoid the fee increases, not passing them on to the
small businesses, crippling their abilities, and passing them
on to the small lenders, you know, large or small lenders. We
have got to make this capital available to increase small
businesses' opportunities.
Chairman KIM. Great. Thank you.
Well, I appreciate, again, your time to be able to come and
traveling here and be able to inform us and be able to help us
do our jobs and make sure we are looking out for small
businesses here.
We know that the 7(a) program is the economy's main vehicle
for entrepreneurs to be able to access affordable capital on
reasonable and fair terms. It is also an engine of job creation
responsible for supporting over 540,000 jobs in 2018 alone;
therefore, preserving the integrity of 7(a) is a top priority
of this Committee. And any proposals that threaten that
integrity, especially by raising fees on small business
borrowers, will be reviewed with the highest degree of
scrutiny.
And I certainly look forward to working with my colleagues
on both sides of the aisle. And I think you, you know,
certainly heard that the Ranking Member and myself are very
much on the same page in making sure that we are going to get
all the information that we need to be able to make an
assessment about this and understand whether it is fair.
You certainly heard the words from the Chairman of--
Chairwoman of the Committee of the whole that this is something
that certainly has our attention and that we will be very
focused on going forward.
This is just going to be the initial steps. As I mentioned
in the panel one, very much factfinding at this point. We
certainly will be, if you don't mind, calling upon you again, I
am sure, to be able to get your thoughts as we move forward and
get more information about what is best.
So I certainly feel passionate about this. I certainly want
to make sure we are looking out for small businesses and also
understanding on the lenders side, you know, how this is
affecting your work and your ability to plan, your ability to
be successful, which we certainly want to see done. So we are
going to work on both sides of the aisle, find a solution that
will protect small business borrowers and the 7(a) program.
I am going to ask unanimous consent that members have 5
legislative days to submit statements and supporting material
for the record. And without objection, it is so ordered.
And if there is no further business to come before the
Committee, we are adjourned. Thank you.
[Whereupon, at 12:29 p.m., the Subcommittee was adjourned.]
A P P E N D I X
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
[all]