[House Hearing, 116 Congress] [From the U.S. Government Publishing Office] REVIEW OF THE SBA'S 504/CDC LOAN PROGRAM ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT, AND REGULATIONS OF THE COMMITTEE ON SMALL BUSINESS UNITED STATES HOUSE OF REPRESENTATIVES ONE HUNDRED SIXTEENTH CONGRESS FIRST SESSION __________ HEARING HELD DECEMBER 10, 2019 __________ [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] Small Business Committee Document Number 116-065 Available via the GPO Website: www.govinfo.gov __________ U.S. GOVERNMENT PUBLISHING OFFICE 38-823 WASHINGTON : 2020 -------------------------------------------------------------------------------------- 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 TROY BALDERSON, Ohio KEVIN HERN, Oklahoma JIM HAGEDORN, Minnesota PETE STAUBER, Minnesota TIM BURCHETT, Tennessee ROSS SPANO, Florida JOHN JOYCE, Pennsylvania DAN BISHOP, North Carolina Melissa Jung, Majority Staff Director Justin Pelletier, Majority Deputy Staff Director Kevin Fitzpatrick, Staff Director C O N T E N T S OPENING STATEMENTS Page Hon. Judy Chu.................................................... 1 Hon. Ross Spano.................................................. 2 WITNESSES Ms. Mary Mansfield, President and Chief Executive Officer, Bay Colony Development Corporation, Waltham, MA.................... 5 Mr. Wayne Williams, Senior Vice President, Business Finance Group Inc., Fairfax, VA.............................................. 6 Ms. Elaine Fairman, Executive Director, Business Expansion Funding Corporation (BEFCor), Charlotte, NC.................... 8 Ms. Brooke Mirenda, President and Chief Executive Officer, Sunshine State Economic Development Corporation, Clearwater, FL 9 APPENDIX Prepared Statements: Ms. Mary Mansfield, President and Chief Executive Officer, Bay Colony Development Corporation, Waltham, MA............ 21 Mr. Wayne Williams, Senior Vice President, Business Finance Group Inc., Fairfax, VA.................................... 29 Ms. Elaine Fairman, Executive Director, Business Expansion Funding Corporation (BEFCor), Charlotte, NC................ 42 Ms. Brooke Mirenda, President and Chief Executive Officer, Sunshine State Economic Development Corporation, Clearwater, FL............................................. 51 Questions for the Record: None. Answers for the Record: None. Additional Material for the Record: Self-Help Ventures Funds..................................... 56 REVIEW OF THE SMALL BUSINESS ADMINISTRATION'S 504/CDC LOAN PROGRAM ---------- TUESDAY, DECEMBER 10, 2019 House of Representatives, Committee on Small Business, Subcommittee on Investigations, Oversight, and Regulations, Washington, DC. The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 2360, Rayburn House Office Building, Hon. Judy Chu [chairwoman of the Subcommittee] presiding. Present: Representatives Chu, Burchett, and Spano. Also Present: Representative Chabot. Chairwoman CHU. I shall call this Subcommittee to order, and I thank everybody for joining us this morning. I especially want to thank the witnesses who have traveled from across the country to be here with us today. On this Committee, we are focused on making sure that small businesses, whether in my district of California or in Ranking Member Spano's district in Florida and in every district across the America, 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: strengthen our communities, create jobs, and fuel our economy. This is something I have witnessed firsthand in my home State of California, where 4 million small businesses make up 99.8 percent of the businesses in our State and employ almost half of our workers. California is the fifth-largest economy in the world, and small businesses are the backbone of our thriving economy. But accessing capital is one of the biggest challenges facing these small-business owners, and it can be even more difficult if that capital is needed to purchase or improve major fixed assets such as real estate, buildings, equipment, and heavy machinery. Recognizing the additional barriers to capital faced by small businesses at this stage of growth, Congress enacted the 504 loan guarantee program to meet the long-term, fixed-rate financing needs of small businesses who need an injection to reach the next level. The 504 program is a public-private partnership between the Small Business Administration; nonprofit certified development companies, also known as CDCs; and private-sector lenders, typically banks and credit unions that offer a unique financing structure for a small business. For most 504 loans, the structure works as follows. The private-sector lender provides 50 percent of the cost of the project, the CDC provides 40 percent, and the small-business borrower provides 10 percent. One of the primary purposes of the 504 loan program is job creation, and, to participate in the program, small businesses must meet certain job creation or retention requirements. If the small business is unable to meet these requirements, it can still qualify for the program if it meets one of several community development or public policy goals outlined in the Small Business Investment Act of 1958, such as expanding minority- or woman-owned business development, reducing energy consumption, or expanding exports. The 504 program can be a powerful tool in helping small businesses achieve relief from high-interest commercial loans. Eligible businesses can refinance their loans through the 504 program and take advantage of lower interest rates, allowing them to reinvest more capital into keeping their businesses afloat. I was proud to author the Commercial Real Estate and Economic Development, or what we call the CREED Act, which was enacted into law in 2015 and revitalized the ability for SBA to offer refinancing for those who had loans. And this is after this popular program had expired in 2012. According to SBA, in 2018, the number of jobs supported by 504 was down slightly over previous years, which has raised questions regarding the program's performance and whether we need to modify and make improvements to the program. As part of our congressional oversight of the program, today we will hear from various CDCs across the country about their views on the 504 program. The Committee would like to know what is working, what is not, and what we can do to improve the program. I look forward to hearing from the witnesses today and working with my colleagues on both sides of the aisle to minimize the barriers facing our small-business owners when it comes to securing affordable capital. Again, I want to thank the witnesses for being here, and I now yield to the Ranking Member, Mr. Spano, for his opening statement. Mr. SPANO. Thank you, Madam Chairwoman. And thank you for holding this very important hearing today. The Small Business Administration's 504/CDC loan program is one of the most important and unique access-to-capital tools available to small businesses. This public-private partnership involves a financial institution, a small business, and the CDC, also known as a certified development company. The program is a key tool for long-term financing of real estate transactions and small-business equipment purchases. Going beyond just access to capital, economic development is one of the real drivers of the program. With job creation and job retention requirements, along with community development and public policy requirements, this program is transforming neighborhoods and communities from my home State of Florida, to Tennessee, and to Ohio. In fiscal year 2019, the SBA approved 5,933 loans, for a total of $4.9 billion. From a job perspective, the program has supported approximately 60,000 jobs over the last few years. The program has many features, including a fairly new 25- year debenture. CDCs also have the ability to utilize SBA's Community Advantage Loan Program, which this Subcommittee held a hearing on this past May. From a cost perspective, the 504/CDC loan program runs on fees built into the program. And because the fees have been sufficient over the last few years, the program enjoys zero subsidy from taxpayers, which is something I really like. I hope this trend continues. Today, we will be examining the program's performance as well as its successes. We will also discuss how Congress can address challenges and how we can look to improve and strengthen the program, as Madam Chairwoman mentioned. I am happy to have our witnesses joining us today. Thank you for being here and taking the time out of your busy schedules. I look forward to hearing your thoughts on many of the 504/CDC loan program features. As with any government loan program, comprehensive and continuous oversight is required to ensure that the program runs effectively and efficiently, all while safeguarding taxpayer dollars. Within my congressional district in Florida, which is just outside of Tampa, we have 12,000 small businesses that employ over 100,000 Floridians. And programs like the 504/CDC loan program are instrumental to growing and expanding operations and creating jobs all over the country, in California and in my home State of Florida. Again, I thank all the witnesses. Thank you for being here, taking time away from your businesses and your families. Madam Chairwoman, I yield back. Thank you. Chairwoman CHU. Thank you, Mr. Spano. The gentleman yields back. And if Committee members have an opening statement, we would ask that they be submitted for the record. I would like to take a minute to explain the timing rules. Each witness gets 5 minutes to testify, and members get 5 minutes for questioning. There is a lighting system to assist you. The green light comes on when you begin, and the yellow light means that there is 1 minute remaining. The red light comes on when you are out of time, and we ask that you stay within that timeframe to the best of your ability. I would now like to introduce our witnesses. Our first witness is Ms. Mary Mansfield. Ms. Mansfield has been with the Bay Colony Development Corporation since 1985 and has served as president and CEO since 2016. Mary oversees day- to-day operations of the 504 and microloan programs for Bay Colony. Prior to that, she was closing manager and portfolio manager. In addition to her responsibilities at Bay Colony, she served as Chair of the Board of the National Association of Development Companies, or NADCO, where she taught the introduction to 504 and the loan closing courses, both of which are required for all CDC attorneys closing 504 loans. Welcome, Ms. Mansfield. Our second witness is Mr. Wayne Williams. Mr. Williams has over 32 years of experience in commercial banking and small- business lending, including extensive expertise in SBA's programs. His company, Business Finance Group, is a mission-driven CDC providing financing solution to small businesses. BFG is the number-one SBA 504 lender in the mid-Atlantic and a top CDC nationally. As their senior lending officer, Wayne supports a team of six business development officers who navigate SBA policies and promote the company and its products to clients and referral sources across its mid-Atlantic footprint. Since 2015, he has served on the board of directors of NADCO. Welcome, Mr. Williams. Our third witness today is Ms. Elaine Fairman. Ms. Fairman began her SBA lending career at Catawba Regional Development Corporation in 1987. In 2012, Ms. Fairman became the executive director of Business Expansion Funding Corporation. With offices in Charlotte and Raleigh, BEFCOR was a top producer in North Carolina--and, in fact, still is--for 504 loans. Her extensive expertise with the 504 program spans marketing, underwriting, loan packaging, closing, servicing, board relations, governance, compliance advocacy, and now executive management. Is there anything she has not done? In addition to her management of BEFCOR, Elaine is a board member of NADCO. So we thank all the NADCO participation. But welcome, Ms. Fairman. And now I would like to yield to our Ranking Member, Mr. Spano, to introduce our final witness. Mr. SPANO. Thank you, Madam Chairwoman. Our next witness is Brooke Mirenda. Ms. Mirenda is president and chief executive officer of Sunshine State Economic Development Corporation, which is also known as SEDCO. SEDCO has multiple locations in my home State of Florida. Ms. Mirenda has nearly 20 years of financial services experience. In 2016, she joined SEDCO as senior vice president and was quickly moved into the role of president and CDO. You must have done something right there in that short, brief period of time. Ms. Mirenda, we appreciate you taking the time away from your business and from your community, from your CDC, to talk with us today. Thank you very much, Madam Chair. I yield back. Chairwoman CHU. Thank you very much. Ms. Mansfield, you are now recognized for 5 minutes. STATEMENTS OF MARY MANSFIELD, PRESIDENT AND CHIEF EXECUTIVE OFFICER, BAY COLONY DEVELOPMENT CORPORATION, WALTHAM, MA; WAYNE WILLIAMS, SENIOR VICE PRESIDENT, BUSINESS FINANCE GROUP, INC., FAIRFAX, VA; ELAINE FAIRMAN, EXECUTIVE DIRECTOR, BUSINESS EXPANSION FUNDING CORPORATION, CHARLOTTE, NC; AND BROOKE MIRENDA, PRESIDENT AND CHIEF EXECUTIVE OFFICER, SUNSHINE STATE ECONOMIC DEVELOPMENT CORPORATION, CLEARWATER, FL STATEMENT OF MARY MANSFIELD Ms. MANSFIELD. Subcommittee Chairwoman Chu, Ranking Member Spano, and other distinguished members of this Committee, thank you so much for inviting me to testify here today. Again, my name is Mary Mansfield. I am the president and CEO of Bay Colony Development. We are a certified development company in Waltham, Massachusetts, with offices in New Hampshire, Vermont, and Rhode Island. I started with Bay Colony back in 1985, and I was the company's third employee. I am proud to say that we now employ 15 people at Bay Colony. Bay Colony is a nonprofit, mission lender. We do SBA 504 loans, microloans, and we also provide grants to community revolving loan funds. In 504 lending alone, we have helped over 1,500 borrowers that have created and retained over 13,000 jobs in New England. As you know, the 504 loan program is an economic development tool that provides small businesses with long-term, fixed-rate loans to help them acquire major fixed assets for their expansion. These loans are most frequently used to acquire land, buildings, machinery, and equipment. A 504 loan can be either 10, 20, or now 25 years. The 504's long-term fixed-rate gives a small business lower loan payment stability without the concerns of rising interest rates or balloon payments. A distinguishing feature of the 504 program is jobs. By law, each $75,000 in financing through the 504 loan program must create or retain one job or meet one of several public policy goals. Job creation and retention is the primary metric of the 504 loan program. Not only do we create jobs, the 504 loan program operates at zero subsidy--no cost to the government. The fact that the 504 loan program requires no subsidy from the taxpayer is a point of pride for our CDC community, and we work very hard to ensure that our loan portfolio continues to operate that way each year. Some very famous, nationally known companies started off with 504 loans when their businesses were just getting started: Chobani yogurt, OtterBox, and Life is Good, to name a few. We have helped many small businesses, but there are many more that we could help with modifications to these loan programs. I have listed several recommendations in my written testimony, including changes to occupancy rules, disaster assistance, and other areas. But let me mention one right now. Currently, small businesses find the closing process inconsistent, uncertain, and lengthy. I know this both from my years of working with small businesses in New England and also because for many years I was a CDC instructor for an industry- wide course on 504 loan closings. At least two areas in that process can be streamlined to help small businesses. First, minor changes to a loan that do not increase the risk to the SBA should not have to go through a second round of SBA approvals. Rather, CDCs who have demonstrated reliability and quality when working with borrowers should be able to make these changes with their own authority. I do mean minor changes here, such as typos in names and addresses. I think an example from one of my colleagues in the CDC industry may best demonstrate how these minor reviews can delay small businesses from receiving their funds. During the last government shutdown, when SBA was not open to do these approvals, one small business could not close on their loan because it needed SBA approval to add periods to the ``LLC'' in their company name. Delays like this could result in our borrowers paying higher interest rates, forfeiting their deposits on properties, or completely losing the property if the sellers in these transactions are not accommodating. Allowing a CDC to perform a correction like this will help entrepreneurs move forward in their businesses without any additional risk to the taxpayer. Second, provide consistent and clear rules on what documents need to be submitted to SBA for a loan closing and when those documents need to be submitted. Right now, this can vary depending on where the small business is located in the country. This leads to unnecessary delays, frustration, and this can impact the borrowers' interest rate. I am happy to share more of our successes and suggestions for further improvement. And, again, thank you for having me today, and I look forward to your questions. Chairwoman CHU. Thank you. Mr. Williams, you are now recognized for 5 minutes. STATEMENT OF WAYNE WILLIAMS Mr. WILLIAMS. Thank you. Chairwoman Chu, Ranking Member Spano, and other distinguished members of the Committee, good morning, and thank you for inviting me to testify. My name is Wayne Williams, senior lending officer of Business Finance Group, a nonprofit, mission-based certified development company headquartered in Fairfax, Virginia, with additional offices in Maryland, West Virginia, and Washington, D.C. As the Congresswoman mentioned, we are the number-one 504 lender in the mid-Atlantic and a top-20 CDC in the Nation out of over 200. Since 1982, we have assisted over 3,000 small businesses with $1.8 billion in 504 loans, supporting over $4.8 billion in total capital investment, resulting in over 41,000 jobs created and retained in the local communities that we serve. By statute, 504 loans stimulate local economic development through job creation and retention. CDCs deliver that required measurable economic impact at zero subsidy. That differentiates us from other SBA and conventional loan programs. We are proud of this accomplishment and determined to preserve it with prudent underwriting and responsible portfolio management. But CDCs do more than 504 lending. At Business Finance Group, we participate in SBA's Community Advantage and ILP loan programs. We view these as complementary to 504, allowing us to provide clients with access to affordable, responsibly underwritten capital along a continuum of credit, from start-up to growth and expansion. Other CDCs offer SBA microloans, USDA loans, State and local loan programs, business incubators, and technical counseling services. CDCs must invest excess capital generated from 504 lending into other economic development. As I stated, since 1982, Business Finance Group has assisted many successful small businesses, but I would like to highlight one for you today that was in my written testimony as well. Greater Unity Adult Services is based in Richmond, Virginia, and is owned by Eugene Thomas, Jr. The company provides training, treatment, and support for adults with disabilities, including intellectual disabilities, mental illness, and physical challenges. The company runs a day support program facility and various assisted-living residential care homes. When we started working with Greater Unity in 2012, they had 2 locations and 10 employees. Today, after 6 504 loans and 3 ILP loans, the company has 8 locations and 60 employees. They have been a true 504 success story for us. Many small businesses like Greater Unity have successfully used 504 to fund growth and expansion, but even more could benefit from the program with modifications and streamlining to implement and adjust to changing market conditions, to increase program access, and improve speed, transparency, and certainty. I listed several recommendations in my written testimony, including streamlining the closing process and improvements to 504 debt refi, but I will elaborate on my recommendation to reduce the owner-occupancy requirements. Occupancy requirements are a challenge that prevent or limit the ability of small businesses to use the 504 loan program, particularly in more densely populated urban communities with multistory buildings and limited real estate inventory. Current statute requires a borrower that purchases an existing building to occupy 51 percent or more of that building. In urban areas of the country, it is common to have multistory buildings where the small business may only need the first-floor space. Owner-occupancy is 50 percent for an evenly split two-story building and progressively drops with more than two levels. In these cases, these properties are not eligible for SBA assistance. Relaxing the occupancy requirement across the board from 51 percent to 50 percent will increase small-business access to 504's attractive features. Urban core markets, like Washington, D.C., and Baltimore in my region, are home to thousands of small businesses that can benefit from 504 if occupancy requirements are relaxed even further for those specific targeted areas. Indicative of this challenge, we have only approved 159 loans in Washington, D.C., in our 25 years of serving this particular market despite thousands of small businesses that operate here. These changes would better position 504 to reflect today's business dynamics and real estate market. Thank you for inviting me to testify, and I am happy to answer any questions. Chairwoman CHU. Thank you, Mr. Williams. Ms. Fairman, you are now recognized for 5 minutes. STATEMENT OF ELAINE FAIRMAN Ms. FAIRMAN. Good morning. I am Elaine Fairman of Business Expansion Funding Corporation, known as BEFCOR, in North Carolina. BEFCOR is a Certified Development Company that provides 504 loans and other small-business support throughout North Carolina and portions of South Carolina. In addition to the SBA 504 program, BEFCOR operates another program that provides much smaller loans in rural and hurricane-impacted areas. Our 504 loans have created or retained 11,500 jobs through the nearly 1,000 loans that have been made, totaling $519 million. These numbers have had a significant impact in our economy. One of our successful borrowers is a catering business that began in 2010 and had offices and kitchens in multiple locations. In 2014, a 504 loan approval enabled this business to unite all operations under one roof, improving efficiency and quality. As a result of the 504 loan, this business's workforce tripled. Now the business is very successful, and its owner was named North Carolina's Small-Business Person of the Year in 2018. Without a 504 loan, that business would not have been able to grow as quickly or as strongly. In addition to the program's successes, I would like to speak with you about strengthening the 504 program. There are many topics that would improve 504 loans and access to capital for small businesses. I would like to recommend several key areas--EPC/OC rules, occupancy percentages, and refinancing, among others in my written testimony. And I want to focus especially on the often-avoided EPC/OC rules. EPC/OC rules impact regular applicants who seek 504 loans and form a separate corporation to own their own building. The active business that creates products and services is known as the OC. When the OC purchases a building, it forms a separate legal entity to own its real estate. That entity is known as the EPC. The EPC then leases its building to the OC, the operating company. While the two companies often appear to operate as one, they are legally separate and distinct, and a written, formal lease agreement outlines certain legal requirements between the two entities. Reasons for having a separate EPC and OC are varied, with the three most common being: reducing liability risk to the OC, normal tax strategies, and normal business strategies. All of these reasons are legal, sensible, and responsible. The EPC/OC structure is common in today's business practices and environment; it was not common, however, when the SBA rules were originally written. When considering through a modern business lens the outdated rules on EPC/OC that were developed decades ago, there are many problems created: The rules are intrusive and overbearing. The rules do not appear to protect the SBA from losses or bad loans. The rules interfere with practical, basic business and management financial decisions, and they dictate the details of the relationship between the EPC and OC. The rules exclude normal expenses from the lease that are generally tax-deductible for other non-SBA business owners. The rules potentially make the operating company more vulnerable to legal action by removing protections desired by the owner when the EPC is formed. And, finally, the rules adversely affect 504 borrowers who lease their unused space to another business. CDCs often ask: If these rules do not protect the government and do not help small businesses, why are the rules still here? The time to repair this is now. In addition to the EPC/OC rule issues, please consider simplifying occupancy and refinancing rules. Both limit the program's effectiveness, especially related to small-business expansions. I wholeheartedly believe that when we approach a challenge with a common mission we have the opportunity to make improvements. Some would say we have an obligation. I believe we have both at this time. Our four-person panel is committed to serving small businesses, and, collectively, we represent over 90 years of experience lending in the 504 program--90 years. So we respectfully seek your guidance in helping resolve some of these issues that impair the ability of small businesses to grow. Thank you for your time. Chairwoman CHU. Thank you, Mr. Fairman. Ms. Mirenda, you are now recognized for 5 minutes. STATEMENT OF BROOKE MIRENDA Ms. MIRENDA. Representative Chu, Ranking Member Spano, and other distinguished Committee members, good morning. I am Brooke Mirenda, and I am here on behalf of Sunshine State Economic Development Corporation in Florida. I am pleased to have the opportunity to discuss the economic development work our CDC does and the jobs we help create, particularly with the 504 loan program, as well as discuss areas of opportunity. Sunshine State Economic Development Corporation, also known as SEDCO, was born from the result of a merger of two 30-year- old CDCs in 2016. SEDCO is headquartered in beautiful Clearwater, Florida, and is one of four CDCs that operate within the State. We are considered a midsize CDC, and we have seen significant growth over the last several years. While the 504 loan program is our primary focus, we also offer other loan programs to meet the demands of our small- business borrowers, which include the SBA ILP and CA loan programs. SEDCO also utilizes its own resources to offer financing to small-business owners through a women/minority/ veteran loan program and SEDCO loan program. We believe that our coordinated lending alternatives are essential in helping small businesses grow and create jobs. I joined the CDC in 2016 as senior vice president/business development officer after 15 years in the financial services industry, primarily in mid- and executive-level management. I have had the privilege of working with small-business owners around the State, helping them access funds they needed to continue to grow their business and create more jobs. In November of 2017, the board of directors appointed me as the president and CEO. As SEDCO president, I continue to be intimately involved in helping small businesses reach their maximum potential. The SBA 504 loan program not only creates jobs in our economy, it also offers up competitive rates and terms for our small-business owners, which helps preserves capital and grow their businesses, while still operating at a zero subsidy. I want to turn my attention to the work our CDC does with the 504 loan program in particular. We work with lenders throughout the State of Florida to offer a solution to small- business owners that is not only attractive but leverages them in a way conventional financing cannot. I would like to take a brief moment and share one of our many successes of the 504 loan program. A couple dreamed of owning their own business and being their own boss. They purchased a cafe in September of 2011 in Fort Myers. That cafe continued to grow and flourish over the years. They were leasing their building until the owner of the building sold, and they had a very short time period to relocate. They did so, and right as they did, Hurricane Irma hit. They were faced with trying to relocate and dealing with a decline in diners and tourists which negatively impacted their business. They had an opportunity to purchase a building on Fort Myers Beach perfect for their growing business. However, with declines in revenues due to the hurricane and the money they had to utilize for relocation, being able to purchase a building with 20 or 25 percent down just simply was not an option. Along with a third-party lender, we were able to secure a 504 loan for these entrepreneurs. They were able to reopen as a full-service restaurant, creating seven new jobs. I am proud that SEDCO can bring these resources to Florida entrepreneurs. However, during my time with the CDC, I have seen some policies that are not helpful to my small-business borrowers but also do not seem to protect the taxpayers' loan guarantee in a meaningful way. I hope Congress and SBA will review them and consider improving them to better meet the needs of our small-business owners. One way to help small-business owners is to allow a more robust refinancing option in the 504 loan program. Thanks in great part to the leadership of this Committee, small-business owners can now refinance existing conventional loans using a 504 loan. That has been invaluable to many businesses and jobs. However, there is an important exclusion from 504 refinance eligibility, and that is other small-business loans from government-guaranteed programs. A small-business owner that purchased their building with a government product is now barred from refinancing via the 504. This refinancing barrier does not exist for other government-guaranteed lending programs. As a result, this subset of small-business owners cannot take advantage of the 504 loan program with the low 20- and 25-year fixed rates. These borrowers would still need to meet all of the eligibility requirements that any other small business would. Thus, the soundness and quality of the refinancing program would not change if they participated. Ensuring that 504 refinancing is an option available for these small-business owners would give them an additional tool when deciding what best meets their needs, while not increasing a risk to taxpayers. Congress, SBA, and CDCs all have a shared goal of supporting small businesses while ensuring proper use of taxpayer dollars. The 504 loan program is a wonderful example of that. It creates jobs while at no cost to the taxpayer. The opportunities for change that I have outlined in my written testimony as well as illustrated today will help keep that proper balance, and I urge Congress to consider them. Again, thank you for inviting me to testify today, and I am happy to do my very best in answering any questions that you have. Chairwoman CHU. Thank you. And thank you to all of our witnesses. We appreciate all that you have shared with us. We will now begin the questioning, and I will begin by recognizing myself for 5 minutes. Mr. Williams, I am the proud author of the CREED Act, which was enacted into law in 2015. It reinstated the ability for businesses to refinance their loans under the 504 program. So it is my priority to ensure that SBA is implementing this program effectively. Under current regulations, the 504 program cannot be accessed to refinance any government-guaranteed loans, including other SBA loans. What are some types of government- backed loans that could be refinanced under the 504 program if this restriction were removed? And how would that change impact small businesses? Mr. WILLIAMS. Thank you for your question. And I think it is a very important question, as this is a high priority for our industry and our trade association. And we also want to thank you for your leadership in getting this passed in the first place. As my colleague Brooke mentioned, this is very important for small businesses, and it would open up all government loan programs to be eligible for refinance, just as all other loan programs can refinance our debt. So it would balance the equation as we look at it. And provided it is in the best interest of the borrower and also not disadvantageous to the taxpayer, that is what is important for us. And, again, as mission-based lenders, it is our responsibility to make sure we are doing what is in the best interest of both of those parties. So we look at it as, you know, all programs will be eligible. The other point I would like to make, Chairwoman, is that, under the existing 504 debt refi with the expansion that we have had longer than the 504 debt refi program, we can already refinance existing government-guaranteed debt. And that has been allowed for a while, you know, since 2009. It is just in this other program, the permanent refi program, that we cannot. So, in some respects, the horse has already left the barn, you know, so it is time to, you know, kind of catch up, is the way I think our industry looks at it, and simplify the discrepancies among the programs. Thank you. Chairwoman CHU. Thank you for that. Ms. Mansfield, in places like my home State of California, rising real estate prices means that some small businesses struggle to secure the capital that they need to grow their businesses for their real estate. Under current law, certain businesses like small manufacturers are eligible for a larger SBA-backed debenture than typical 504 applicants, which allows them to redirect more of their resources towards growth and employment. How would increasing the debenture limit for real estate projects to at least match the limit for small manufacturers impact business in higher-cost States like California? Ms. MANSFIELD. Well, coming from Massachusetts, I know a little bit about rising real estate prices, so I would be very excited to see this pass as well. Any time we can help a small business by putting more funds through the 504 program, it is going to give them a longer term. It is also going to have the fixed interest rate for them. So we would be very excited to see they can utilize that program and save their funds for working capital purposes within their company. Also, job creation. Again, as we mentioned, job creation is a big component to the 504 program. If we can get more money out there to that small business, it also means they are going to create more jobs for our economy. Thank you. Chairwoman CHU. And, Ms. Mansfield, I have heard from CDCs in California that the refinancing process for 504 loans can be onerous. For example, SBA requires that refinancing applicants provide copies of original purchase agreements, closing statements, promissory notes, and grant deeds. For small businesses that have refinanced their debt previously, it is possible that the bank that originally issued the loan may no longer even be in business. So businesses in this position are then excluded from the 504 refinancing options. So, based on your experience, how can SBA improve the documentation requirements for small-business owners in the 504 refinancing process? Ms. MANSFIELD. Thank you. Again, simplification of the documentation. As you said, it is quite possible that some of these banks are no longer in business or they have merged and it is actually impossible to get some of these original documents. And requiring a borrower who has had a loan out there for 10 or 15 years that they want to refinance be able to provide original documentation is a bit onerous for them. You know, they are not in the business of keeping all of that documentation from an original loan. So anything we can do to eliminate that requirement would go a long way for helping more businesses be able to take advantage of the refi program. Chairwoman CHU. Yeah, Mr. Williams. Mr. WILLIAMS. I just wanted to add, it also kind of removes the barrier that small businesses see with SBA financing, the stigma associated with paperwork, you know, redundancy. And it simplifies that image and that reputational risk that the agency has. And I know as my colleagues and I have discussed, the agency accepts certifications for a large number of things with respect to, you know, a loan transaction--certifications from borrowers, certifications from lending partners, certifications from CDC partners. This would be another way to help streamline, simplify, without adding undue burden to the taxpayer. Chairwoman CHU. Thank you. Well, my time has now expired, and the Ranking Member, Mr. Spano, is now recognized for 5 minutes. Mr. SPANO. Thank you, Madam Chairwoman. Interesting stuff. Thanks so much for your testimony. I have a number of different things kind of bouncing around in my head, but, well, I will start with this. I mean, we have talked about, kind of, several areas where we think there might be some improvements, right, that could be implemented. What I would like to get from each of you, kind of without commentary, but just list for me, in each of your specific individual opinions, what is the single largest issue facing CDCs today. Ms. Mansfield? Ms. MANSFIELD. For me, I would think it would be streamlining the closing process---- Mr. SPANO. Okay. Ms. MANSFIELD.--would be the largest. Mr. SPANO. Mr. Williams? Mr. WILLIAMS. Streamlining the closing process and improvements to debt refi. Mr. SPANO. I only gave you one. Mr. WILLIAMS. I am sorry. Mr. SPANO. That is okay. I am just kidding. I was just kidding. I am just kidding. Ms. Fairman? Ms. FAIRMAN. Debt refi. Mr. SPANO. Okay. Ms. FAIRMAN. Barely. Mr. SPANO. Ms. Mirenda? Ms. MIRENDA. I would say streamlining the closing process, because that can affect borrowers and affect closings, and that is a pretty big deal for our small-business owners. Mr. SPANO. All right. So three of the four of you agree that streamlining the closing process is the number-one issue. Why is it that we have inconsistencies in the closing process, in your opinion? Honestly. Ms. Mansfield? Ms. MANSFIELD. Sure. I have been involved with 504 loan closings for quite some time, and we first talked about streamlining, I believe it was, back in 1997. Mr. SPANO. Uh-huh. Ms. MANSFIELD. And it seems that some streamlining has occurred, but it has not been for the benefit of the small business. Mr. SPANO. Okay. Ms. MANSFIELD. So I think we need to change the mindset and look at how the small business is impacted with all of this documentation and what would really affect them and help them out to get these closings done more smoothly. Mr. SPANO. When you say ``streamlining,'' are we also referring to differences in the process in regions around the country? Inconsistencies in the various regions around the country? Is that one and the same? Ms. MANSFIELD. That has been my experience, that closing alone, for instance, in the New England area is different than my CDC counterparts in other parts of the country. We have a very good process where we are, but I have heard that is not the case throughout the country. Mr. SPANO. And, Ms. Mirenda, is there anything as it relates to the various regions around the country that would justify or warrant, potentially, the differences and the inconsistencies around the country? Ms. MIRENDA. I wouldn't say so. I, you know--only, you know--I know, Mary, you are a multi-State. So, you know, for us, we are just Florida, so we deal with certain district councils, and we deal with the same ones, so our closing process is streamlined, as far as that is concerned. Where I come into play when I talk about streamlining is we are an ALP lender, which is Accredited Lender Program, which means we go through a pretty intensive process to be an ALP lender with the SBA, I mean, from financials, to governance, to looking at loans. And because of that, we would hope that we would have some leniencies when we decrease a loan by $4 to not have to go to the SBA for approval for those types of things. Mr. SPANO. Uh-huh. Uh-huh. Ms. MIRENDA. So, you know, just some leniencies there by being an ALP lender. Mr. SPANO. Can you walk me through, just very quickly, a typical closing process and what that looks like and how--I mean, you just gave me one instance, you know, but how, if there was a streamlined process, how that would positively impact---- Ms. MIRENDA. Sure. So you have, you know, from application, you then get an authorization. Any changes made to that authorization is called a 327 action. So when you are in that process where you are from authorization to 327, any time there is an outstanding 327, lenders will not close the loan, because they want SBA's blessing to make sure we are all good to close. Mr. SPANO. Uh-huh. Ms. MIRENDA. Obviously, you know the lenders are holding sometimes 90 percent of financing for up to 2 years. So that is a risk to the lender. So they want to ensure that SBA says, yes, that we are going to get to the finish line. And so, you know, those 327s can hold up closing. Now, once we get all those approved, we go to closing, we fund, and we move on, and, you know, it goes to funding, and then we go to debenture or sale. But that can be a pretty long process. And, you know, I would say banks, credit unions, and third-party lenders want to ensure, you know, they are not in any kind of, you know, high-volatility commercial real estate by financing up to 90 percent. Mr. SPANO. Uh-huh. Mr. Williams, you look like you had a---- Mr. WILLIAMS. Yeah, I will just add that, you know, there are various district councils that SBA has around the country that are involved in this process that receive closing packages from the CDCs around the country. And each of those councils has the discretion to have a cut-off date to receive closing packages. So, you know, there is variance around the country to receive those packages, to get them into a funding cycle for the next available bond sale for us. So, you know, borrowers are treated, you know, disparately around the country because of that. Mr. SPANO. And, to your opinion, have you been offered any explanation as to why there are these variances? Mr. WILLIAMS. Not publicly anything from SBA. Mr. SPANO. Uh-huh. Mr. WILLIAMS. And that is part of the challenge, is that borrowers are treated, you know, disparately in that process. And each district council can also add, you know, other things that they might want to see outside of a standard checklist. Mr. SPANO. Thank you. Madam Chair, I yield back. Chairwoman CHU. Thank you. The gentleman's time has expired, and I would now like to recognize a member of our Subcommittee, Mr. Tim Burchett. Mr. BURCHETT. Thank you, Chairlady. You got my name pretty close, so I am just going to---- Chairwoman CHU. I have learned my lesson. Mr. BURCHETT. Thank you. Thank you. My wife has told me to quit doing that to you all, so I am not going do it. Just not going do it. Thank you, Chairlady and Ranking Member Spano. I always wondered, though, when you say, ``I am going to recognize myself,'' why you don't say, ``Self?'', and then you say, ``Well, thank you,'' and then you recognize yourself but you really don't. I just--it is one of my pet peeves I just want you all to know about, okay? But thank you all for being here. The 504/CDC loan goes a long way towards helping folks grow and economic development, and it creates jobs and helps our small businesses across the country, and I realize all that, but the folks in my district in east Tennessee use this loan program to do just that. And, with that, I have a couple of questions. Ms. Fairman, can you share with the Committee what a small business experiences when they walk through your CDC? And who do they meet with? Who is their point of contact? Ms. FAIRMAN. We have a staff of 15, and the small-business owner is introduced to one of our business development officers, who goes through the program with them and explains the rules and requirements to them. So they work with someone who handholds them through the process and puts them at ease and reassures them that they don't have to worry about the rules and the regulations, that that is what our organization does on their behalf, and we advocate for that business. Mr. BURCHETT. Yeah. I would say it is kind of a daunting task when they walk in, a little overpowering, so I appreciate that very much. Ms. Mirenda, you mentioned a few different success stories of small businesses that you all were able to keep afloat due to the loan program in your testimony. Is that a common situation for all the borrowers of 504 CDCs, ma'am? Ms. MIRENDA. I don't know if it is common. I would certainly say that there is definitely a need out there for our small-business owners, especially when they are trying to expand and grow their business. Commercial real estate is a good investment for small-business owners, and they see that value as something that they can utilize and be able to continue to grow their businesses. So I would say it is, you know--it is not common to--you know, we sometimes will--we will save a business owner for sure, where there is a business owner that--I have one in my written testimony, if you will read that. It was a refinance, and without that refinance, they would not be in business today. So that does happen on occasion for sure, and we certainly try to do what we can to help them. Mr. BURCHETT. Do you all--and I come from, sort of, the Dave Ramsey, sort of---- Ms. MIRENDA. Oh, yeah. Mr. BURCHETT.--you know, paying off. You know, I tried to spread those values to my family, which my wife agrees, so we get out of debt. But do you all, you know--and I hear folks come in and they say, ``Oh, it is not bad debt; it is good debt.'' Well, to me, it is all bad debt. It is a sucker's bet, is what it is. Because, you know, the Bible says, you know, you are a slave to the lender. And I wonder, do you all push that, the getting out of debt? Or do you just refinance? You know, because I have talked to folks all the time and they say, ``Well, I got a great deal on this car.'' And then I say, ``Really? How is that?'' ``Well, I refinanced and I got my rates lower than my last car.'' But they are going to be paying for it for, you know, 672 more payments and that little beauty is going to be all theirs. So do you all encourage paying down, or do you go the other route? Ms. FAIRMAN. We always encourage repayment. But---- Mr. BURCHETT. Well, I am sure, but, I mean---- Ms. FAIRMAN. But---- Mr. BURCHETT. But getting out of debt and getting off the-- -- Ms. FAIRMAN. We all want the money back. But I think that, unfortunately, debt is required in order for businesses to grow. And so the mission of the industry is to put responsible, reasonably priced debt into the hands of small-business owners so that they have that opportunity. And by the way the program is structured, whenever we make that debt affordable to them, they are able to save other cash for growing and helping the economy. So debt is a necessary part of business growth. Mr. BURCHETT. You don't think it would be saving their own money and reinvesting and being intuitive about things in the way to go with their money is a better route than debt, though? Ms. FAIRMAN. I don't. I think that for businesses that are starting out it is so expensive to buy real estate, it is so expensive to buy machinery and equipment. It is an expensive business climate, and businesses can't save up $5 million to buy a new building. If we make this money available to them in a responsible manner, then we allow them to grow faster, with some assurance that we are going to get our money back. The industry monitors portfolios well enough to know that we are doing everything we can to help those small businesses repay those loans. Mr. BURCHETT. All right. My time is up. Thank you, Chairlady, Ranking Member. Chairwoman CHU. Thank you. And we actually have time for a second round of questioning, if any of you have more questions. I certainly do, so I would like to ask these questions. Ms. Fairman, I would like to go to the 50-percent occupancy issue. The current law requires 504 borrowers who purchase an existing building to occupy at least 51 percent of the building. But this requirement prevents small businesses from ever buying buildings with two floors that are evenly split. Ms. FAIRMAN. Right. Chairwoman CHU. So could you expound on the implications of this rule and what kind of situations businesses have found themselves in and if lowering the occupancy requirements would benefit the 504 program? Ms. FAIRMAN. So the easy answer is, yes, it would help many small businesses be able to occupy buildings that they currently are not able to finance under the 504 program. Basically, businesses nowadays function differently than when some of these rules were written, and while they might have been reasonable in that time period, they are not reasonable now. Businesses that need to buy multistory buildings in order to get into an area where they can better perform their services and provide economic benefit are limited by these rules that are so old and outdated. Chairwoman CHU. Ms. Mansfield, there is even a more difficult situation in the urban areas, because the 50-percent occupancy rule would prevent business owners from having mixed- use developments, which is very popular right now, where businesses occupy the ground-floor storefront and there are apartment units on floors above. How would a special rule allowing small businesses to purchase mixed-use buildings benefit small businesses in those urban areas? Ms. MANSFIELD. It would greatly benefit the small businesses in the Boston and surrounding areas. Before coming here, I took a look at our statistics, and over the history of Bay Colony since 1981, we have only done 53 loans in the greater Boston area. And I believe, because of that, there are small businesses that we just weren't able to help. Again, we see a lot of these mixed-use businesses where you have a first-floor commercial property and the second floor is an apartment, and with the current 51-percent occupancy rule, we just can't help them. And it is a shame. Chairwoman CHU. This question is for both Mr. Williams and Ms. Fairman. 504 regulations limit small businesses to refinancing up to 50 percent of a project's cost, but there is confusion because the same rules do not apply for banks, which, of course, can go above 50 percent. So could you describe how this limit impacts the ability of small businesses to pursue financing under 504? Ms. FAIRMAN. It causes us to get into numbers and evaluations that are not helpful whenever we are reviewing prospective clients and businesses that need financing. Banks have a lot more flexibility and can do things that the program will not allow us to do with 504. Mr. WILLIAMS. And I think that, again, there is confusion because this limitation is in the 504 debt refi with the expansion, and the limitation applies that there is a 50- percent cap of the debt refi, and the 50 percent applies to the new project cost. So it is always difficult to explain to a borrower and a lending partner, because it is just not a calculation that is intuitive or easily available in the marketplace. So, you know, if you have a project that is $500,000 in new project costs, you are restricted to only refinancing $250,000 in existing debt. If you have a half-a-million dollars in debt on that project and $500,000 in new project costs, then you have a problem. You know, so you want to help the borrower, but you have restrictions, and it just complicates things. And it is not what the marketplace does. Chairwoman CHU. Yeah. Mr. WILLIAMS. And it is not what the other debt refi program does. Ms. FAIRMAN. And if I can add, the irony is that the program is based on business expansion and growth, and it is the expanding business that faces the restrictions in being able to access the program fully by these rules that are in place. And so it is counterintuitive that we want businesses to expand but, when they try to refinance their existing debt, we tie their hands and make it more difficult for them. Mr. WILLIAMS. And, again, pursuing the mission of assisting small businesses, we are nonprofit lenders. Our mission is to assist small businesses while preserving the taxpayer. And so there are much better ways of going about doing that. Chairwoman CHU. Thank you so much. My time has expired, and now I would like to recognize the Ranking Member, Mr. Spano, for 5 minutes. Mr. SPANO. Thank you, Madam Chairwoman. Just playing devil's advocate--I am an attorney, and so I like to do that--what was, potentially, the rationale in preventing borrowers from jumping from 504 program and refinancing with one of the other government loan programs? Any ideas as to what that rationale may have been? I have one in my mind, but I wasn't here during the history of the passage of the legislation. Any ideas on why they would have prevented that, if any, or do you think it was an arbitrary decision? Ms. FAIRMAN. I am not aware of any explanation for that. Mr. SPANO. Yeah. One thing that occurs to me is that maybe they wanted someone else to have an opportunity to have a government loan. Right? So someone has already received the benefit of a 504 loan, and now we are giving them a second bite at the apple, whether they probably need it, and I am sure in many cases they do. It is helpful. But that keeps someone else, some other small business out there who might benefit from a small loan--that is just a thought. I don't know if you have any opinions on that. Is that a possibility? Okay. All right. Good enough. You can only ask, right? The other thing, too, is, getting back to the occupancy requirement--so we can probably, I think, all agree that 50/50 certainly should happen. Right? I think you, Mr. Williams, said, well, it should probably be lower than that. So what should that number be in the best- case scenario? Mr. WILLIAMS. I think we are open--as an industry, I think we are open to discussions with the Committee and trying to come up with something that might work in urban areas. I don't think we have, you know, something hard and fast in mind. Just in multistories, that percentage is going to start going down pretty dramatically as soon as you add another story. But the reality is, small businesses operate in these buildings because of scarcity of real estate and the highest and best use of property. It is just a fact of the marketplace. But these small businesses still, you know, deserve access to financing and access to ownership. So I think we would like to work with the Committee to come up with something that would work and still fulfill the mission of the program without jeopardizing the taxpayer. But I don't know if we have a hard-and-fast rule right now---- Mr. SPANO. Yeah. Mr. WILLIAMS.--but I think it is certainly something that we can have a discussion about. Mr. SPANO. Uh-huh. Does anybody else have anything to add? Ms. MIRENDA. I would like to add something. Mr. SPANO. Yes, Ms. Mirenda? Ms. MIRENDA. So one of the things that we have to do when you underwrite a small-business owner, we have to look at cash flow, right? In a 504, we can't take any cash flow generated from any business--so if they are at 51 percent and they are leasing out 49 percent, it doesn't matter what they are paying that business for lease, we have to underwrite it. It is a rule. We cannot take that, you know, lease. So it protects us. At the end of the day, even if it is 40 percent, that is what protects and, I would say, makes the program great, because we are not lending to investors. That is the big concern, I think, for SBA, is we are not lending to investors. We don't want to lend to people who are just out there buying real estate, commercial real estate, and leasing the whole building out. And so our small-business owner, we have to--we do site visits. There are things that we have to do to be a CDC to ensure that we are maintaining the integrity of the program. Mr. SPANO. Yeah. Thank you. That is very insightful. I wasn't aware of that. So they have to be able to justify their ability to repay the loan based on the business that they are actually operating---- Ms. MIRENDA. Correct. Mr. SPANO.--not some type of a real estate investment. Ms. MIRENDA. Correct. Mr. SPANO. Got it. Thank you. Madam Chair, I yield back. Chairwoman CHU. Well, thank you all so much. I want to thank all the witnesses for taking time out of their schedules to be with us today. And I would like to make my closing statement. SBA's loan program, including the 504 program, is designed to fill the gaps left by the private markets, providing loans to small-business owners who cannot afford or obtain loans from conventional lenders. The 504 program takes this one step further by targeting small businesses with unique capital needs--the purchase of major fixed assets, such as land, buildings, and equipment. Ensuring that this program is effectively reaching and serving small businesses at this critical stage of growth is a priority of this Committee, and this hearing has provided important information and testimony that will help us do just that. I look forward to continuing to work in a bipartisan fashion to enhance the 504 program and ensure that small businesses have access to affordable capital. I would ask unanimous consent that members have 5 legislative days to submit statements and supporting materials for the record. Without objection, so ordered. And if there is no further business to come before the Committee, we are adjourned. Thank you. [Whereupon, at 10:57 a.m., the Subcommittee was adjourned.] A P P E N D I X [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] [all]