[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
SBA MANAGEMENT REVIEW: OFFICE OF CREDIT RISK MANAGEMENT
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HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
FEBRUARY 5, 2020
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 116-069
Available via the GPO Website: www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
39-556 WASHINGTON : 2020
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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 and Chief Counsel
Kevin Fitzpatrick, Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Nydia Velazquez............................................. 1
Hon. Steve Chabot................................................ 2
WITNESS
Ms. Susan E. Streich, Director, Office of Credit Risk Management,
United States Small Business Administration, Washington, DC.... 3
APPENDIX
Prepared Statement:
Ms. Susan E. Streich, Director, Office of Credit Risk
Management, United States Small Business Administration,
Washington, DC............................................. 17
Questions and Responses:
Questions from Hon. Nydia Velazquez, Hon. Steve Chabot, and
Hon. Ross Spano to Ms. Susan E. Streich and Responses from
Ms. Susan E. Streich....................................... 22
Additional Material for the Record:
None.
SBA MANAGEMENT REVIEW: OFFICE OF CREDIT RISK MANAGEMENT
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WEDNESDAY, FEBRUARY 5, 2020
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 11:35 a.m., in Room
2360, Rayburn House Office Building. Hon. Nydia Velazquez
[chairwoman of the Committee] presiding.
Present: Representatives Velazquez, Finkenauer, Golden,
Kim, Evans, Schneider, Delgado, Craig, Chabot, Burchett, and
Hern.
Chairwoman VELAZQUEZ. Good morning.
The Committee will come to order. I thank everyone for
joining us this morning, and I want to especially thank the
witness for being here with us today.
This morning, the Committee will examine the management and
performance of SBA's Office of Credit Risk Management,
otherwise known as OCRM. It is responsible for conducting
oversight of SBA's lending programs and its $120 billion 7(a)
and 504 loan portfolios.
All of us are acutely aware that access to capital plays a
vital role in the success of our nation's 30 million small
businesses. Without it, small businesses cannot stock their
shelves, pay their employees, or upgrade equipment. Capital is
the key to unlocking opportunities to grow and create new jobs
in the local economy. Yet, this Committee has heard from
numerous small businesses from across the country, and they
consistently tell us that one of the biggest challenges they
face is accessing affordable capital.
The SBA 7(a) loan program plays an essential role in
filling the gap left by the private markets. In fiscal year
2019, almost 52,000 small businesses were approved for 7(a)
loans, injecting over $23 billion in long-term capital into
local communities across the country and supporting
approximately 500,000 jobs. To optimize SBA's lending programs,
SBA established the Office of Credit Risk Management within the
Office of Capital Access. OCRM conducts reviews of lenders to
ensure that they are complying with the program requirements.
While the office played an important role in lender
oversight, unprecedented growth in the program combined with
deficiencies identified by GAO in SBA's credit risk management
prompted congressional action. To that end, Congress passed the
7(a) Lending Oversight Reform Act, which codified OCRM and gave
it the tools needed to conduct proper oversight and hold non-
compliant lenders accountable.
Today, I would like to learn more about how the SBA is
implementing the legislation. The regulation was expected to be
finalized months ago, so I am eager to hear when the final rule
will be published.
Secondly, I would like to find out what is currently
working at OCRM, and what more can be done to address the
ongoing concern the Inspector General has with high-dollar,
early-default loans, which present a significant credit risk to
the 7(a) program.
Finally, I would like to know more about the steps you are
taking to address the concerns of the Inspector General's
November report. The report highlighted some areas where there
is room for improvement, and my motto always is, if it is not
perfect, let's make it better.
So, on the heels of that IG report, and in anticipation of
SBA's budget submission to Congress, this hearing is a timely
one.
We look forward to hearing from the Director of the Office
of Credit Risk Management, Ms. Susan Streich, regarding the
challenges she has faced since taking over at OCRM, as well as
whether there are any additional tools Congress can provide
OCRM as it works to continue strengthening the 7(a) loan
program.
Again, I want to thank the witness for being here today,
and I now yield to the Ranking Member, Mr. Chabot, for his
opening statement.
Mr. CHABOT. Thank you, Madam Chair. And thank you for
holding this hearing.
Financing for a small business, entrepreneur or startup is
the fuel that turns the Nation's economic engine on and propels
it forward. It can be the key to transforming an idea into the
next great American product or service.
Unfortunately, as our economy moves forward, access to
capital remains one of the top challenges for the Nation's job
creators. When financing options are limited, small business
have the option of turning to the SBA, the Small Business
Administration, and its numerous lending programs. These
public-private partnerships offer government guarantees based
upon a multitude of factors. Annually, these programs provide
capital assistance to small businesses all across the country,
including in America's greatest state, Ohio.
However, with any Federal Government program, vigorous and
comprehensive oversight is mandatory to safeguard American
taxpayer dollars.
While this Committee conducts congressional oversight, the
SBA also dedicates an entire operating unit to this endeavor.
The Office of Credit Risk Management is charged with overseeing
lending partners and monitoring program risk. Last Congress,
the Chairwoman and I led efforts to codify this office and to
ensure that it remains a top priority moving forward.
That is why it is critically important that the office's
director is testifying today. I am looking forward to a
productive conversation that examines each program's
performance and each program's risk. Additionally, I would like
to hear how last Congress's oversight bill has been implemented
and whether it has provided the tools necessary to access and
to assess and guard against risk within the 7(a) loan program.
Each program is unique. Thus, each program requires its own
specific oversight plan. I am looking forward to examining each
program at this hearing. The timing of this hearing is
fortuitous because in the coming days we will receive the
President's budget and each agency's congressional budget
justification which will include fiscal year 2021 requests.
These important documents add another layer to the monitoring
of these programs.
I know this Committee would like to continue to work with
the SBA to ensure these programs run effectively and
efficiently on behalf of the small businesses that truly need
the SBA's services.
I want to thank the witness for joining us this morning. I
welcome the conversation, and I yield back, Madam Chair.
Chairwoman VELAZQUEZ. Thank you, Mr. Chabot. The gentleman
yields back.
If Committee members have an opening statement, we would
ask that they be submitted for the record.
I would like to explain the timing rules. The 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 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 only witness today.
Our witness is Susan Streich. Susan joined the SBA in 2016
as Director of the Office of Financial Program Operations, part
of the Office of Capital Access. She became director of the
Office of Credit Risk Management in 2017. Prior to joining the
SBA, Susan spent her distinguished career engaged in SBA
lending, working with a diverse array of financial services
organizations, including a 7(a) bank, a CDC delivering the 504
program in Arizona, and a small business lending company with a
national footprint. More recently, Susan served in senior
consulting roles with Booz Allen Hamilton and NFI Consulting,
leading projects with USDA's Office of Rural Development and
the U.S. Treasury's CDFI Fund.
Ms. Streich, you are now recognized for 5 minutes. Thank
you for being here.
STATEMENT OF SUSAN E. STREICH, DIRECTOR, OFFICE OF CREDIT RISK
MANAGEMENT, UNITED STATES SMALL BUSINESS ADMINISTRATION
Ms. STREICH. Thank you, Chairwoman Velazquez, Ranking
Member Chabot, and members of the Committee for inviting me to
speak today. It is my pleasure to appear before you as we start
this new calendar year.
As director of SBA's Office of Credit Risk Management, or
OCRM for short, I am responsible for the oversight of lenders
participating in the Small Business Administration's business
loan programs.
I bring to this position over 37 years of lending
experience and a commitment to the small business community and
the lending partners that serve them.
In 2016, I was selected by SBA to serve as director of the
Office of Financial Program Operations in the Office of Capital
Access. While in that position, I successfully oversaw SBA's
loan origination servicing and liquidation operations. In 2017,
I became the acting director of OCRM, and was made permanent
director 3 months later by then-administrator Linda McMahon.
OCRM is responsible for developing and implementing
effective risk management practices and overseeing SBA loan
programs and lender participants. The four main
responsibilities of my office are to provide lender oversight,
monitor the entire 7(a) and 504 loan portfolios for
performance, administer enforcement and supervision of SBA
approved lenders, and when necessary, suspend or debar program
participants.
In 2018, Congress passed the Small Business 7(a) Lending
Oversight Reform Act, which statutorily codified the existence
and responsibilities of OCRM.
I want to thank Congress, and particularly the members of
this Committee, for their work on this very important
legislation.
The 2018 legislation required SBA to promulgate regulations
to implement certain provisions of the law. The agency has
pursued this rulemaking in a diligent manner and published the
proposed Lender Oversight Rule in June 2019, 1 year following
enactment of the law. The final rule is expected to be
published by the end of the month.
Over the last 2 years, OCRM has also been seeking ways to
better fulfill its mission while adapting to the current
lending environment. OCRM has accomplished this by improving
its operations, as well as by bringing on additional staff.
In 2019, OCRM implemented nationwide expansion of the
Lender Oversight Pilot Program so that one team is overseeing
all federally regulated 7(a) lender participants. This national
rollout created a consistent review methodology across the
Nation, improving lender oversight and resulting in a more
robust, effective and efficient lender review process. This
program enhancement was coupled with a renewed focus on
customer service with program participants.
OCRM is increasing its number of personnel from 36 to 42
staff members in order to better fulfill its mission. OCRM has
built strong and collaborative relationships with the Federal
Deposit Insurance Corporation and the Office of the Comptroller
of the Currency as part of its lender oversight activities.
These partnerships with the primary Federal regulators for
lenders have enabled OCRM to fulfill its mission and enhance
its effectiveness in providing lender oversight of SBA program
participants.
I want to briefly touch upon the report that SBA's
Inspector General released in 2019 regarding the oversight of
high-risk lenders. The report covers lender oversight practices
from 2015 to 2017, which was before I took my role as director
of OCRM. The report offers six recommendations to improve
oversight activities. We are in the process of addressing those
recommendations and will continue to address the concerns
raised in the report.
Finally, I want the Committee to know that OCRM is pursuing
several significant goals during the current fiscal year to
improve its ability to proactively monitor portfolio
performance and identify and mitigate lender risk. These
include adding microloan intermediary oversight capabilities by
the end of this fiscal year; publishing the final lender
oversight rule by the end of next month; revising our two OCRM
SOPs, SOP 5053, which is the Supervision and Enforcement SOP
and SOP 5100, which is our examination manual; and continuing
to enhance our partnerships with the FDIC and OCC.
Thank you, Chairwoman Velazquez and Ranking Member Chabot,
for inviting me to testify here today. I look forward to
answering your questions and continuing our work together with
you to ensure proper oversight of SBA loan programs.
Chairwoman VELAZQUEZ. Thank you, Ms. Streich.
I will begin by recognizing myself for 5 minutes.
Last June, the SBA published a proposed rule to implement
the 7(a) Lending Oversight Reform Act. The agency received 35
comments from the public in response to the proposal. Can you
describe the nature of the comments OCRM received in response?
Ms. STREICH. Thank you. Okay, sorry.
I do not have that information, that level of granularity
with me today. I would be happy to get that for you if you
would like.
Chairwoman VELAZQUEZ. Sure, thank you.
I am happy to hear that the rule will be published at the
end of this month. Will the rule be significantly different
from the proposed rule, the final rule?
Ms. STREICH. No. Not in my estimation. Not significantly
different.
Chairwoman VELAZQUEZ. Okay. The IG has an ongoing high-risk
7(a) loan review program to see if high dollar 7(a) loans that
defaulted early were originated, closed, and complying with
SBA's rule. The IG has identified numerous such loans that have
created a considerable credit risk to the agency. What specific
action items are you taking to make sure noncompliant lenders
are held accountable?
Ms. STREICH. So Chairwoman Velazquez, the primary
responsibility for that activity actually resides with my
former team, the Office of Financial Program Operations, and
they work closely with the OIG on those issues throughout the
year and try to resolve them as quickly as they can.
Now, how it impacts OCRM, as we are involved in lender
oversight and reviews for those lenders that have actually
originated those loans, we are looking and collaborating with
our team members over an OFPO to see how we can actually build
upon what they are learning and make sure that we are
collaborating and learning from one another how we can help
coach that lender into doing the right thing from a compliance
standpoint going forward.
Chairwoman VELAZQUEZ. The Oversight Act gave you additional
tools to deal with program violations. How, and how often have
you used them?
Ms. STREICH. We have approximately, in a variety of ways,
ma'am, we have approximately 40 lenders on the watch list,
which means that they are under increased supervision. That
list changes almost monthly depending upon----
Chairwoman VELAZQUEZ. What type of supervision? Are you
coaching them? Informal mechanism or----
Ms. STREICH. It involves everything from voluntary
agreements with them to stand down on use of delegated
authority or PLP authority, to standing by on sale of any loans
in the secondary market without our view and permission of each
and every loan transaction. So, it can be a pretty significant
impact on those lenders. Many of those lenders are under orders
from their primary federal regulators.
And then we have additional informal and formal actions
under way right now. I cannot be specific as to what they are
as you might know because they are confidential. And we have
additional supervision actions that we take, including when we
are conducting a review of a lender and we have concerns about
the performance that is exhibited both operationally for them
and in deficiencies in the loan review process. We will call
them in to headquarters and have a conversation with them and
give them some kind of an action plan to work with us on.
Chairwoman VELAZQUEZ. How many lenders are you dealing with
in this category?
Ms. STREICH. Probably close to 125 at this point in time.
Chairwoman VELAZQUEZ. Ms. Streich, as you may know, earlier
this summer an SBA loan broker pleaded guilty to SBA loan fraud
amounting to more than $100 million and was sentenced to prison
for 9 years. Back in 2013, a codefendant was sentenced to 15
years and ordered to pay restitution of $91 million. Clearly,
keeping track of loan brokers and agents like this is a
challenge for the SBA. How effective is the current mechanism
for tracking loan brokers and agents? Please comment on its
effectiveness.
Ms. STREICH. Thank you, ma'am.
Two things to think about here. One is that I am the
suspension and debarment agent's agent for the SBA for all
financial programs. I have the ability with OIG and OGC
participation to take suspension and debarment actions against
individuals that have received convictions or even indictments
that we are concerned that should get out of the lending
industry entirely. And we do take those actions regularly.
Chairwoman VELAZQUEZ. Have you taken such actions?
Ms. STREICH. Yes. Yes.
The risk that loan agents pose to the agency is something
that we are constantly monitoring. About 11 percent of the
portfolio in 7(a) has been generated through loan agent
activity. We work closely as the FDIC and the OCC guidance has
been provided to their lenders. We work closely with the
lenders involved that have those contractual relationships with
loan agents, and we work with them to see how they are managing
the third parties that they retain, including loan agents. When
we have an upcoming review of a lender, we ask them if they
have third parties involved in their SBA loan operation at any
stage. If we do find out that they do have third parties, we
get copies of the loan agreements that they have, the contracts
that they have with those agents. We review those as part of
our overall review, and then for each one we ask them to
complete a nine-page questionnaire to give us much more detail
about what is going on with that lender relationship and what
services they provide. That gives us a great deal of
information. That just began about the last 6 months so we do
not have lots of comprehensive data yet, but we are gathering
it in hopes that it will give us insight into how we can manage
that and monitor that more closely.
Chairwoman VELAZQUEZ. So last point.
Ms. STREICH. Yes.
Chairwoman VELAZQUEZ. Do you have enough staff to keep
track of loan brokers?
Ms. STREICH. Ma'am, I think it depends on what you mean by
``keep track.'' In terms of monitoring the risk on the
portfolio and the performance for lenders, yes, at this point
we do.
Chairwoman VELAZQUEZ. Okay.
Now, we recognize the Ranking Member.
Mr. CHABOT. Thank you, Madam Chair.
Thank you for being here today, Ms. Streich.
As you know, Congress passed, and President Trump signed
into law the Small Business 7(a) Lending Oversight Reform Act
in the last Congress. While there are many provisions in the
law that strengthen the SBA's ability to oversee risk, I want
to touch on just one that is essential for the program to serve
small businesses that truly need the SBA's resources.
Could you walk the Committee through the credit elsewhere
test and how your office monitors that?
Ms. STREICH. So the legislation that you passed last year
and I would expect we will see something like this in the rule,
and we have SOPs that designate what the credit elsewhere rule
means and how lenders comply with it. And it is very specific
in the SOP 50 10(5)(K). And we apply and interpret that in our
reviews of lender files so that we can determine whether or not
they are actually maintaining compliance with credit elsewhere.
The challenge with credit elsewhere, frankly, has been that
we do not have an easy, automated, electronic solution at this
point in time to check the box and determine how many of each
reason for credit elsewhere not being available the lender may
have actually checked. So, it is a bit of a manual exercise for
us right now in the loan review process.
Just to give you an idea of the volume of loan files that
are reviewed, the federally regulated team reviewed 2,000 loan
files last fiscal year, and that did include the SBA supervised
loan files that were reviewed, each and every one. We are
manually keeping that information on spreadsheets at the moment
in hopes that eventually we will be able to actually have a
database that we can include that information on and make it
easier to query and gather that information and share it with
you more specifically.
Mr. CHABOT. Thank you.
How often does it occur that lenders violate the credit
elsewhere test?
Ms. STREICH. It is interesting that you would ask that. We
had a meeting about this just the other day, wrapping up 2019
reviews, some of which the reports, or some of them are still
getting completed and getting out. And we only have one lender
in all of 2019 that really, in your opinion, was egregious with
regard to not documenting credit elsewhere to our satisfaction,
and we have talked to that lender.
Mr. CHABOT. That is good to hear. Thank you.
Congress was notified this time last year that the 7(a)
loan program required a $99 million subsidy to continue
operating in fiscal year 2020. In the coming days we are set to
receive the fiscal year 2021 number. Will the 7(a) loan program
and/or the 504 CDC loan program require a subsidy moving
forward?
Ms. STREICH. I am sorry; I will not be able to answer that
question. The Office of Capital Access and OCRM are not
involved in determining what the subsidy model components are
and how it is going to be developed. That really resides with
our OCFO office.
Mr. CHABOT. Expecting, anticipating that answer, let me ask
the question in another way.
How have the 7(a) loan program and the 504 loan program
performed this year compared to last year?
Ms. STREICH. So I would say that overall the entire
portfolio is performing well, both in 7(a) and 504. 504
defaults are at a remarkable low level, remarkably low level.
7(a), we have seen early defaults in 7(a) creeping up slightly
year over year, but not changing dramatically and are not
presently a cause for concern.
Mr. CHABOT. Okay. Thank you.
As you stated in your testimony, the SBA lending programs
are reserved for ``creditworthy small businesses that otherwise
would not be able to access capital to start or expand their
business.''
We want to continue to work with your office to ensure the
appropriate small businesses have access to these programs.
What, if any, additional tools do you think that you might need
at your disposal to meet this mission? Anything come to mind?
Ms. STREICH. Thank you very much for asking.
I think at this point we are still trying to digest all the
changes that have come about because of the act that you all
were so wonderful to provide for us and the additional
authority provided to us. We are actually also making changes
organizationally and functionally to make sure that we can do
everything from a regulatory standpoint that we are changed
with and do it well. Obviously, interest and sustaining a
program integrity for the long term and serving the needs of
the small businesses who really need access to capital. So, I
think we need a little more time to digest everything before I
can recommend anything new that we might need in terms of
authority.
Mr. CHABOT. Thank you very much.
Since I am in single digits as how much time I have left, I
am going to yield back rather than go over here. Thank you. I
yield back.
Chairwoman VELAZQUEZ. Thank you. The gentleman yields back.
Now we recognize the gentleman from Pennsylvania, Mr.
Evans, for 5 minutes.
Mr. EVANS. Thank you, Madam Chairperson.
For the 7(a) loan program, SBA is not the direct lender.
Instead, it relies on private sector lenders, and these private
sector lenders are mostly banks. But it also includes small
business lending companies. FinTech lending has become
increasingly popular for small businesses looking for loans.
Are there any plans for the SBA to engage with FinTech lenders,
and do you think it should?
Ms. STREICH. Thank you for the question. I appreciate it
very much.
We have talked to a number of FinTech lenders through the
course of the last couple of years. There is not an easy
relationship between what they do and what we do at this point
in time, but we are learning from one another. And the result
of just that concept of quick decisioning and Internet-based
applications has helped foster the lender Match program at SBA.
You may have heard about that. It is an online application that
is actually free to the borrower or the proposed borrower and
enables a number of lenders participating in the 7(a) program
to review applications that come in right to the SBA website.
It is a very successful program. It is actually going forward
and being improved now. And by the end of, I believe, March, we
are going to have a Spanish version of Lender Match.
Mr. EVANS. So you are going to engage with FinTechs?
Ms. STREICH. It is a very similar approach to the FinTech
solution because it is an Internet-based application. Yes, that
is similar. We not really working one of the FinTechs to do
this, however.
Did I answer your question, sir?
Mr. EVANS. Yes, you did.
Ms. STREICH. Okay.
Mr. EVANS. In your written statement you said that your
office participates in informal and formal enforcement actions,
including volunteer agreements and suspensions from
participation in SBA programs. How many enforcement actions did
your office initiate in 2019? And what were the nature of these
actions?
Ms. STREICH. In 2019, we had informal and formal
enforcement actions. I think it was five. We have since then
taken additional actions in fiscal 2020 and we are continuing
to be rigorous in our approach to suspension and enforcement
activities. The informal activities generally involve calling a
lender into a headquarters meeting, which is actually a very
serious occasion wehore we sit down with them and we ask them
if they understand why they are not compliant with our
requirements and what we can do to get them on track. We want
them on a compliant path, obviously, to go forward.
And then secondly, we have voluntary agreements. So if it
is a PLP lender, a preferred lender that has delegated
authority, we will ask them to please stand by in delegated
authority and submit all of their loan applications to the
center in Citrus Heights for their review, underwriting, and
approval. So, we can track through the center how they are
performing in terms of application activity. Are their
applications complete? Do they really catch everything from a
credit administration standpoint in the credit memo? Do they
follow up and abide by the credit elsewhere criteria? All of
that can be checked by the center and they feed that
information back to us. When we think that they have solved
their problems and they are performing well, then we are
willing to let them use delegated authority again, but not
until then.
Mr. EVANS. This is somewhat of a piggyback on the
Chairwoman's question earlier about resources. The 7(a) loan
program has made rapid growth in recent years, and in fiscal
2012, the program approved $15.2 billion in loans. By fiscal
2017, that number increased to $24.5 billion.
Ms. Streich, how has your office adapted to this rapid
growth? And does it need additional resources to provide
effective oversight of credit risk?
I think what I heard you when you were responding to the
Chairwoman, you said, kind of gave an answer that was not that
clear to me.
Ms. STREICH. Okay. Happy to have to provide additional
information.
We have a great data warehouse called the Loaner Lender
Monitoring System, LLMS for short. It is managed for us by Dun
& Bradstreet. And that system provides great data analytics for
us to measure performance by loan, by loan segment, by
industry, by industry type, by geography and a variety of other
segmentations that we can perform of the portfolio to identify
where risk is in the portfolio, where emerging risk may be, and
then what we need to do to mitigate it. So that information is
readily available from LLMS. And we use that information
weekly, monthly, quarterly, semi-annually, and annually in
intense deep drives into certain aspects, segments of the
portfolio give us great data to use to determine what kind of
course of action we as a risk identifying and mitigating group
have to proceed to make sure that we have managed risk in the
portfolio for 7(a).
Did I do a better job of answering that question?
Mr. EVANS. I yield. Yes.
Chairwoman VELAZQUEZ. The time has expired.
Mr. EVANS. I yield. Yes. Thank you.
Chairwoman VELAZQUEZ. Now, we recognize the Ranking Member
of the Subcommittee on Economic Growth, Tax, and Capital
Access, the gentleman from Oklahoma, Mr. Hern.
Mr. HERN. Thank you, Madam Chairwoman, Ranking Member
Chabot.
Director Streich, thanks for being here.
As the Ranking Member of the Small Business Committee,
Subcommittee on Economic Growth, Tax, and Capital Access, I
understand the need for small businesses and entrepreneurs to
obtain access to capital. Additionally as a founder of a small
community bank, I also understand that heavily financial risk
involved with lending and loan programs such as this, sort of a
loan of last resort, if you will, I have experience with both
the banking and the business side. I find that it is essential
that we have the necessary checks and balances in place to
ensure that the SBA's loan programs are being properly executed
and that the government is not being taken advantage of due to
lack of oversight. So, thank you.
As you know, the 7(a) loan program gives small businesses
the opportunity to gain access to capital who often do not have
the capacity to gain funding on their own. This successful
program has provided nearly 52,000 loans for small businesses
and entrepreneurs across the country, and the program operates
by taking fees which allow the SBA to run the loan program
efficiently while also protecting our taxpayers.
These built-in fees meant to cover all program costs have
been sufficient until recently as the 7(a) program claimed the
need for a $99 million subsidy in fiscal year 2020.
As someone who has successfully managed budgets his whole
life this was very concerning. It was concerning for every
member on the panel, the Chairwoman, both sides of the aisle
here. To go from self-sufficiency to reliance on a $99 billion
subsidy leaves me with numerous questions including the
following.
And I appreciate it. I have been listening to you for short
minutes here and you have got answers. When your former CFO was
here, he seemed not to have any answers to the tough questions,
so thank you for coming prepared to answer questions today.
Director Streich, what performance characteristics
contributed to the 7(a) loan program needing subsidy? Was it
performance decline? What are you seeing today? You have
described some of those as I was walking in here. Could you
talk to us about what are you needing?
Ms. STREICH. So, Congressman, I do not have specific
information into the components, into the subsidy model that
was created by our OCFO office in conjunction with OMB. That
information is closely held, and they segregate that away from
those of us that actually are involved in the capital access
for purposes of, you know, making sure that----
Mr. HERN. But you are in credit risk----
Ms. STREICH. Right.
Mr. HERN. And I do not want this to be confrontational, but
you are in credit risk. So, you look at a lot of actuarial
data, historical data. We do not ever throw that away. You
described a growing economy. You described a default rate that
you are collecting your monies. And so, it is hard for us I
think, I do not think most members' thoughts have changed on
this because we have not had anything to change it. The economy
has even gotten better. We have not heard a lot, or anything
about business failure. So, what, in your assessment of credit
risk, there has to be some thoughts about what would go on to
drive this need for extra money to some mythical credit risk.
Ms. STREICH. So let me go back to my banking and lending
days and running a SBA loan production center, and talk to you
about just the countercyclical nature of SBA loans because I
think that will be helpful.
During the Great Recession, SBA lending really took off and
we put in the portfolio a lot of really high creditworthy
borrowers because the banks and others, as you might recall,
stopped doing lending almost entirely. So, the only way some of
these borrowers could get money was through the SBA loan
program.
As a result, with the economy being strong, those loans
performed really well. Now, those loans are refinancing and
going conventional because the conventional credit box during a
strong economy has actually been opened up as a lender. If you
have a conservative credit box during tough times, you have a
more open credit box as you probably did at your community bank
during good times. And as a result, more loans are going
through that process conventionally, which is really the
purpose of the program. And then we are getting loans that may
be a little higher risk and falling outside of the
conventional, the new conventional credit parameters.
Mr. HERN. If I may stop you because I have got one other
question, but I like the word you just put in there, may be.
They have not proven to be, and so they are not based on really
historical facts. They are based on presumption. And so, we
have not seen that yet.
Let me ask you this last question before we lose our time
here.
As a result of the 7(a) loan program having a subsidy, what
has your office done to ensure taxpayer dollars are being
protected moving forward?
Ms. STREICH. So we identify through each of our lender
reviews targeted and full reviews, we pull credit files, loan
files from the lenders and we review each and every page of
each and every file, usually thousands of pages, to make sure
that they are being compliant with SBA's requirements. If we
identify deficiencies during those loan file reviews, we
communicate that information back to the centers that are
involved in the operations side, the origination and the
Guaranty Purchase Center. Through the cron, which is an
electronic communication tool, we tell them where to focus
their attention. If that loan goes into default and ends up
with a purchase request to honor the guaranty, the NGPC, which
is the National Guaranty Purchase Center in Herndon, then that
financial analyst that pulls that information up on the cron
can go right to that part of the file, identify whether there
is a deficiency that is material, and if so, can either repair
or deny the guaranty. That enables us to make sure that we are
not providing taxpayer dollars unnecessarily and
inappropriately to a lender who has done the wrong thing.
Mr. HERN. Thank you.
Madam Chairwoman, if I may, I would like to recognize the
fact that the SBA sent somebody that actually has answers to
some of our questions. I really appreciate that. This is a
refreshing follow up to the former member that was here. Thank
you.
Chairwoman VELAZQUEZ. Thank you.
Time has expired. Now we recognize----
Mr. CHABOT. We do not complement witness around here that
much, so that is pretty good.
Mr. HERN. That is a rarity. Thank you.
Chairwoman VELAZQUEZ. The gentleman from Illinois, Mr.
Schneider, for 5 minutes.
Mr. SCHNEIDER. Thank you, Madam Chairwoman. Thank you for
having this hearing.
Ms. Streich, thank you for being here. I will echo the
comments of my colleague, Mr. Hern. I think that is important.
He was touching on some important issues. As you related,
the countercyclicality of the portfolio within the SBA. And as
the economy is growing, access to capital is still critically
important, especially for small businesses who enter
conventional lending markets to tell their story. Often, they
may not have the track record of a larger business or a more
tenured business. It is a startup. And so, these opportunities
are vitally important to continue to grow our economy.
At the same time, while I think it is important that SBA
lending be easily accessed, efficient, effective, we need to
monitor and manage the credit. As you were implementing the
recommendations of the OIG report as you look to the future
what are some of the key things that we need to do to make sure
that we are protecting against in appropriate risk, identifying
and addressing when lenders are behavior inappropriately, but
making sure that we maintain that access for small businesses
to get the capital they need to grow their businesses.
Ms. STREICH. That is a great question. One of the
challenges that we are working with across all of our capital
access team, especially our Office of Financial Assistance and
our Office of Financial Program Operations is what kind of
additional training we can provide to lenders on a regular
basis through our district offices, through the Office of Field
Operations, as well as directly. We did 16 conferences last
year alone, both at district level, regional, and trade
associations. We do webinars regularly. The whole goal is to
make sure that lenders do not do the wrong thing. Do not make a
misstep. There is nothing worse if you are a small business
person relying upon your bank to be judicious in the amount of
credit they are willing to give you than to have them give you
too much, you cannot afford to repay it, and all of a sudden
then you are in trouble.
Mr. SCHNEIDER. Right.
Ms. STREICH. Right? So, we used to say, very similari to
the medical community, at first, do no harm. Right? And so, one
of the things that we have seen in our reviews of certain loan
files for certain lenders this last year, is that, in fact what
is happening in part is smaller transactions are being
overfunded. And as a result, the borrowers are not able to
repay that entire amount. They probably could have gotten away
with significantly less money and it would have been much more
affordable for them. So it is our job, in part, to make sure
that we are working with the trade associations and the
districts and all other opportunities to provide that kind of
insight and feedback to the lenders to get them to make sure
that they are actually making good, judicious credit decisions.
Mr. SCHNEIDER. I think that is important. Oftentimes here
we are talking about unconventional ideas, unconventional risk.
That does not mean they are inappropriate, that does not mean
they are outside the range of what is an acceptable risk. But
if you take them too far, I like to say, I grew up near the
mountains and I am very comfortable driving on mountain roads.
I tend to keep both wheels on the road and in the center. I try
not to go too far to the edge, and that is what I want these
small businesses to be able to do, is to take the risk, to make
the ascent, but to do it in a way that is supported by the
lender. So, I think it is important to communicate that.
Taking that a step further, how do we make sure that--and
this may be outside your role--that the lenders are getting out
to the marketplace so that small businesses understand what is
available to them. That there is an opportunity to get capital,
to fund their ideas and invest in their business, but to do it
in a way that is prudent and appropriate for them.
Ms. STREICH. That is an interesting question.
When I started in this business, in 1981, as a 503 lender,
nobody knew what SBA was, but they were horrified that they
might, as a small business borrower, need to access any capital
through the SBA. It was a terrible reputation. So, we had to
try to figure out how to sell everything by developing some
kind if credibility with the small business borrower first.
That is not true today. Today, wherever I go, I like to
talk to entrepreneurs--restuarants, my physical therapy
office--I like to ask them, you know, how did you get to this
point? And I love hearing them say, well, I got an SBA loan.
And then I always ask them from whom? Because I just like to
know who is active in each marketplace. And I just think it
just speaks to the fact that many lenders really like this
program. And they really are out there offering it to the
marketplace in a very active way. That is wonderful. They are
an adjunct to our educational opportunity for the marketplace.
Mr. SCHNEIDER. And just to close, I am a little bit past my
time, but the role that we can play as members of Congress
engaging in our community, we have seminars, roundtables. We
bring entrepreneurs together to say, hey, we can make a
difference, and I look forward to continuing that.
I yield back.
Chairwoman VELAZQUEZ. The gentleman yields back.
Now we recognize the gentleman from Tennessee, Mr.
Burchett, for 5 minutes.
Mr. BURCHETT. Thank you, Chairlady, Ranking Member. It is
always a pleasure being here, ma'am. And thank you, ma'am, for
being here with us.
Let me make sure I have got the name right. Streich. Is
that how you say it?
Ms. STREICH. Just like strike three and you are out. Yes.
Mr. BURCHETT. All right. Well, Burchett. Just like the
tree, birch like the tree, and ett like I just ``ett'' lunch.
Which I did not, but the Chairlady always promises me she is
going to bring me a meal, but she never does, so anyway. That
is just what happens here in Congress, I guess.
Does the Office of Credit Risk Management need any
additional oversight tools to further protect our taxpayer
dollars within the microloan program? And if so, what would you
request?
Ms. STREICH. That is a great question. I cannot answer it
today. We have as our goal to take on microlender oversight in
2020 but we are just starting to recruit for that position, and
we will be taking over the oversight that the program office
has been engaged in heretofore. So, in another 3 to 6 months I
will be able to probably answer that question much better than
I can today.
Mr. BURCHETT. Okay. That was an honest answer. So, thank
you.
Let me ask you one more. What is the current oversight plan
that the Office of Credit Risk Management has in place to
oversee the microloan program?
Ms. STREICH. So microlenders, as you know, are
intermediaries for us. We provide a loan to them and they
actually provide the loans to microlending opportunities, and
they are usually within their community. And they do that very
well. Their performance overall has been very stellar in terms
of their portfolio. And what we want to be able to do is
examine what they are doing, make sure it is compliant with any
requirements that the SBA has for their performance, and make
sure that they are servicing those loans very, very well and
diligently. And if we request information or access to their
files that they will allow us to have a chance to look at them.
Very basic.
Mr. BURCHETT. Thank you, ma'am.
Chairlady, Ranking Member, I yield back the remaining 2
minutes and 59 seconds of my time. Please use it wisely as I
know you will.
Chairwoman VELAZQUEZ. The gentleman yields back.
Now we recognize the gentleman from Maine, Mr. Golden, for
5 minutes.
Mr. GOLDEN. Thank you, Madam Chair.
Director Streich, thank you for being with us today.
I want to follow up on an earlier conversation you were
having. Does SBA assign loan brokers and agents with unique
identifiers to systematically track their activity?
Ms. STREICH. Not at this time. No, sir.
Mr. GOLDEN. And would there be any benefit to your office
in carrying out your role if you were to do that?
Ms. STREICH. I do not believe so at this time. We have a
variety of tools available to us to track loan agent
performance by lender that they have relationships with. One
way is through the review process, and we ask the lender to
provide a great deal of information, including the agreements
that they have with those loan agents. We review those and see
what kind of relationship there is and what kind of services
are provided and what kind of fees are being charged and to
whom. We also have the Form 159, which is a form that really
gives us a great deal of information for any fees that are
charged during the course of a loan origination, whether it is
by the lender or by a loan agent. And we use that information
and are just starting to aggregate that so we can determine and
monitor loan agent risk and performance of each individual loan
that they have referred into a specific lender. If we see that
there is a trend that a lender specifically with a relationship
with a loan agent is experiencing challenges with their
portfolio performance, then we are talking to them about why
they are continuing to accept referrals from that loan agent
if, in fact, their performance is less than adequate.
Mr. GOLDEN. You have a good level of confidence that you
are pulling in the information that you need to have visibility
and that it is compiled in a way that is easy for you and your
staff to put it to good use?
Ms. STREICH. Well, we are certainly getting the
information. We are still working on the best way to compile it
and access it so that it is easier to automate and
electronically available to us.
Mr. GOLDEN. Thank you very much.
Chairwoman VELAZQUEZ. Well, Ms. Streich, thank you very
much. It is like a breath of fresh air to bring someone from
the Administration, at SBA, that really provides the facts and
is able to provide the answers to our questions. I really feel
confident that you are doing a very good job. Thank you.
We have now learned more about a key function of the SBA's
capital access programs and one without which the programs
could function effectively. However, we have also learned that
there is more work to be done towards ensuring proper oversight
and accountability over SBA's partner lenders. If we intend to
continue enhancing access to affordable capital for small
businesses, it is clear SBA's Office of Credit Risk Management
will be a key stakeholder.
I look forward to working with my colleagues from across
the aisle as we continue to work to enhance the efficiency of
SBA's operations and more broadly, to continue enhancing access
to capital for America's small businesses.
I would ask unanimous consent that members have 5
legislative days to submit statements and supporting materials
for the record.
Without objection, so ordered.
If there is no further business to come before the
Committee, we are adjourned. Thank you.
[Whereupon, at 12:25 p.m., the Committee was adjourned.]
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