[House Hearing, 118 Congress] [From the U.S. Government Publishing Office] TAKING ON MORE RISK: EXAMINING THE SBA'S CHANGES TO THE 7(A) LENDING PROGRAM PART I ======================================================================= HEARING before the COMMITTEE ON SMALL BUSINESS UNITED STATES HOUSE OF REPRESENTATIVES ONE HUNDRED EIGHTEENTH CONGRESS FIRST SESSION __________ HEARING HELD MAY 10, 2023 __________ [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Small Business Committee Document Number 118-011 Available via the GPO Website: www.govinfo.gov ______ U.S. GOVERNMENT PUBLISHING OFFICE 52-168 WASHINGTON : 2023 HOUSE COMMITTEE ON SMALL BUSINESS ROGER WILLIAMS, Texas, Chairman BLAINE LUETKEMEYER, Missouri PETE STAUBER, Minnesota DAN MEUSER, Pennsylvania BETH VAN DUYNE, Texas MARIA SALAZAR, Florida TRACEY MANN, Kansas JAKE ELLZEY, Texas MARC MOLINARO, New York MARK ALFORD, Missouri ELI CRANE, Arizona AARON BEAN, Florida WESLEY HUNT, Texas NICK LALOTA, New York NYDIA VELAZQUEZ, New York, Ranking Member JARED GOLDEN, Maine KWEISI MFUME, Maryland DEAN PHILLIPS, Minnesota GREG LANDSMAN, Ohio MORGAN MCGARVEY, Kentucky MARIE GLUESENKAMP PEREZ, Washington HILLARY SCHOLTEN, Michigan SHRI THANEDAR, Michigan JUDY CHU, California SHARICE DAVIDS, Kansas CHRIS PAPPAS, New Hampshire Ben Johnson, Majority Staff Director Melissa Jung, Minority Staff Director C O N T E N T S OPENING STATEMENTS Page Hon. Roger Williams.............................................. 1 Hon. Nydia Velazquez............................................. 2 WITNESS Hon. Patrick Kelly, Associate Administrator, United States Small Business Administration, Washington, DC........................ 4 APPENDIX Prepared Statement: Hon. Patrick Kelly, Associate Administrator, United States Small Business Administration, Washington, DC.............. 31 Questions and Answers for the Record: Questions from Hon. Williams and Answers from Hon. Kelly..... 34 Questions from Hon. Bean and Answers from Hon. Kelly......... 45 Questions from Hon. Chu and Answers from Hon. Kelly.......... 50 Additional Material for the Record: None. TAKING ON MORE RISK: EXAMINING THE SBA'S CHANGES TO THE 7(A) LENDING PROGRAM PART I ---------- WEDNESDAY, MAY 10, 2023 House of Representatives, Committee on Small Business, Washington, DC. The Committee met, pursuant to call, at 10:00 a.m., in Room 2360, Rayburn House Office Building, Hon. Roger Williams [chairman of the Committee] presiding. Present: Representatives Williams, Luetkemeyer, Stauber, Meuser, Salazar, Ellzey, Molinaro, Alford, Crane, Bean, LaLota, Velazquez, Golden, Phillips, McGarvey, Gluesenkamp, Perez, Scholten, Chu, Davids, and Pappas. Chairman WILLIAMS. Good morning, everyone. I now call the Committee on Small Business to order. Without objection, the Chair is authorized to declare a recess of the Committee at any time. The committee is here today to hear testimony from Mr. Patrick Kelley, the U.S. Small Business Administration's associate administrator of the Office of Capital Access. Thank you for being here today, sir. And now I recognize myself for my opening statement. I want to welcome everybody here today to today's hearing which will focus on the much-needed oversight of the Small Business Administration and their proposed changes to the 7(a) loan program. The SBA administers several programs to support small business that encourage lenders to provide loans to main street who might not otherwise be able to obtain financing. Their flagship 7(a) loan program offers government guaranteed loans to eligible small businesses for short- and long-term capital needs. The SBA is in the process of finalizing two rules that will represent the most significant changes to the program in decades. Well, there are many more troubling aspects of these rules. The most problematic in my opinion are the changes to the underwriting standards while simultaneously allowing more fintech companies to become 7(a) lenders. The SBA is throwing away the nine prospective elements of underwriting that lenders have been using for decades to determine if a borrower is eligible for a government-backed loan. Instead, lenders will now be able to use whatever lending criteria they see fit considering that taxpayers will go and be the ones on the hook if a significant portion of those loans go bad. We should not be loosening the criteria for lenders to give loans. Additionally, these rules reverse the moratorium on licensing new Small Business Lending Companies, better known as SBLCs. The moratorium was initially put in place in the 1980s because the SBA recognized that they were not capable of being the primary federal regulator of these entities. Given the unacceptable levels of fraud that occurred in the SBA's pandemic programs, I have serious concerns that the agency is not up to the task of taking on more responsibility. I am not alone in raising these concerns about the SBA's capabilities. Last month, when the SBA's Inspector General testified before this Committee, he noted the significant challenges that the agency will face in managing the increased loan volume going forward as well as the significant shortages of staff within the department charged with overseeing SBLCs. There are serious concerns that these changes to the program will be detrimental to taxpayers and small businesses alike. If more loans start to default, the fees to the program are going to have to be raised, or the agency will come to Congress to ask for more taxpayer dollars to make up for the shortcomings. The policy noticed released late last night which lays out implementation for just one of the final rules is not sufficient and does not satisfy our concerns. This is an extremely important hearing as we in Congress discuss what the future of this program will look like, and what we must do legislatively to ensure the programmatic integrity of the 7(a) program in the future. I want to thank you all again for being here with us today and I am looking forward to today's conversation. And with that, I yield to our distinguished Ranking Member from New York, Ms. Velazquez. Ms. VELAZQUEZ. Thank you, Mr. Chairman, for holding this important hearing. The Small Business Administration's 7(a) program is the agency's flagship lending initiative. Under the 7(a) program, SBA guarantees significant portions of loans encouraging lenders to extend credit to small businesses that might not typically be able to obtain financing. So far in FY23, the SBA has approved over 30,000 loans totaling more than $14.6 billion proving just how integral the 7(a) program is to our nation's entrepreneurial ecosystem. 7(a) loans strengthen local communities, create jobs, and move our economy forward. Given the critical nature of the 7(a) program, this committee must carefully consider and vet any significant changes. Last month, SBA issued two final rulemakings that have substantial implications for the 7(a) program. The affiliation rule loosens lending criteria, updates loan conditions, and eliminates various affiliation standards. While the second rule on SBLCs ends the SBA's longstanding moratorium on licensing new SBLCs. In the final rule, SBA states that it can license and supervise three new SBLCs and it is speculated that some, if not all, of these new licenses will be granted to fintech companies. SBA instituted these rules to address persistent gaps in access to capital as part of the Biden administration's broader economic agenda. Increasing access to capital for underserved entrepreneurs has been and will remain a priority for me as the top democrat on this committee. However, I am apprehensive about the SBA's decision to remove many of the longstanding guardrails and program requirements on loan criteria and affiliation standards that have served the 7(a) program well while also lifting its moratorium on the licensing of new SBLCs. I am especially concerned by the possibility of new SBLC licenses being granted to non-federally regulated fintechs with no experience in 7(a) program lending. Researchers have highlighted that fintechs facilitated most of the significant fraud associated with the Paycheck Protection Program. I appreciate SBA taking this situation seriously and the steps the agency has taken thus far to hold the blatant actors responsible for their actions. With that said, we will be doing a disservice to American small business owners by moving forward with changes that weaken and destabilize a highly successful program that has helped millions of entrepreneurs. The last thing we want is for unintended consequences of sweeping changes by rulemaking without detailing accompanying SOPs to harm the future of this program which is an essential tool for many small business owners and entrepreneurs. On the matter of SOPs, I remain concerned about policy changes being released later at night to everyone's surprise. As many of us on this dais have indicated, it is alarming that major programmatic changes can come on a whim, no matter the administration. These continued changes to the incredibly important details are the reason we are taking our time to truly understand the impact they will have. As SBA moves forward with these rule changes, this committee must ensure that they are responsibly implemented and do not negatively impact the 7(a) program and individual borrowers. Ensuring that businesses owned by women, people of color, and underserved groups is an important goal that I share with Administrator Guzman. I look forward to hearing from Mr. Kelley on the steps SBA is taking to ensure these rules do not risk the integrity of the 7(a) program. I remain committed to filling the gaps in the market in a bipartisan and thoughtful way. The Small Business Committees in the House and the Senate have proven that we can work together to make a difference for our main street businesses. Whether during a global crisis or hard fought SBIR reauthorization, we have always come together to put politics aside and do right by our nation's job creators. I look forward to doing just that again and working with the SBA and my committee colleagues in both the House and the Senate to find a solution. Thank you, and I yield back. Chairman WILLIAMS. Thank you very much. And I will now introduce our witness. It is my privilege today to introduce our witness, Mr. Patrick Kelley. Mr. Kelley is the associate administrator for the Office of Capital Access at the Small Business Administration. At the SBA, Mr. Kelley leads the agency's Office of Capital Access and has been leading the charge for the rules change we speak of. Mr. Kelley is a graduate of Colgate University and Boston College Law School. In a previous stint at the SBA, Mr. Kelley served as deputy chief of staff, deputy association administrator, and senior advisor at the agency and also worked at the U.S. Department of Commerce. In between his time at the SBA, Mr. Kelley served as the executive vice president for channel partnerships at Live Oak Bank where he primarily worked for the bank's corporate strategy and development team. Mr. Kelley, I want to thank you for joining the Committee today and I am looking forward to today's important conversation. So with that I now recognize Mr. Kelley for his 5-minute opening remarks. STATEMENT OF THE HONORABLE PATRICK KELLEY, ASSOCIATE ADMINISTRATOR, UNITED STATES SMALL BUSINESS ADMINISTRATION Mr. KELLEY. Chairman Williams, Ranking Member Velazquez, Members of the committee, it is a pleasure to be here on behalf of President Biden, Vice President Harris, and Administrator Guzman. As Chairman Williams noted, I have been the associate administrator for the Office of Capital Access since March 1, 2021. During that time I have been responsible for the CARES Act programs, as well as the Restaurant Revitalization Program which was a part of the American Rescue Plan, and then also in July of 2021, I took over responsibility for originations for the disaster loan programs. Historically the Office of Capital Access has overseen the post-close servicing of those assets. With respect to the core programs that have been highlighted by the Ranking Member's statement, as well as the Chairman's statement, I also oversee the 7(a) loan program, the 504 program, the SBA Microloan program, and the Surety Bond program. Since March 1, 2021, under Biden-Harris and when Administrator Guzman came on board at the latter part of March, we have focused like a laser on the outstanding issues that we inherited with respect to fraud, waste, and abuse associated with the Paycheck Protection Program, as well as the COVID EIDL program. During the 2-year period that I have overseen these programs, we have reviewed close to 42 million, 41.9 million applications across those programs. We have approved across those programs 21 million applications for close to $1.2 trillion. We have identified $6.7 million suspicious loans. We have done that through automatic screenings, as well as data analytics or supervised learning tools that the GAO and the Inspector General have highlighted are best practice with respect to identifying suspicious activity. There have been close to 3.8 human-led reviews which have resulted in referrals to the Office of the Inspector General, and we estimate that a million loans that were disbursed across the PPP program and the COVID EIDL program represent $41 billion of total fraud undisbursed. The estimated number of fraud prevented is north of $100 billion. And there was $500 billion that was never allowed to move forward as an application through the automated screening. In the coming days, Administrator Guzman will be releasing a white paper report detailing all this, as well as the detailed steps, the automated screening, the supervised learning model that we deployed, as well as the human-led reviews and the referrals to the Office of the Inspector General. President Biden's budget lays out a request for $100 million for the Office of the Inspector General as a result of this. They currently have processed 776 indictments. They have testified before this Committee to be working on 500 open case files, but certainly, the numbers that we have referred, that the SBA has referred to the Office of the Inspector General, the so-called bad guys that we believe they should go after need resources. With respect to the lessons learned from this and how we will handle the issues and concerns that were highlighted by Chairman Williams and Ranking Member Velazquez's opening remarks, we will be moving forward as we did for phase three of the Paycheck Protection Program and as we did for the Restaurant Revitalization Program with a regulatory compliance and fraud framework pre etran authorization and that process will validate not only know your customer or fraud issues like OFAC and other issues but it will also identify alerts and flags with respect to eligibility. The core of eligibility is a for-profit company domiciled in the U.S., an operating company considered small by SBA size requirements with no character issues and legal resident status. All of those indicators were vetted in the Restaurant Revitalization Program and it is important to understand that we did not need to make the tradeoff in 2020 between speed and certainty. We were able to stand up a program in 30 days post- passage, disburse $28.6 billion to 101,000 restaurant and related entities, and we were able to do that with certainty that there would not be fraud or ineligible folks. So I look forward to taking questions and I appreciate the opportunity to address any concerns. Thank you. Chairman WILLIAMS. Thank you. We will now move to the Member questions under the 5-minute rule. We need direct answers, not long answers if you would do that for us, please. Mr. KELLEY. Yes. Chairman WILLIAMS. I recognize myself for 5 minutes. Last week, the White House put out their Small Business scorecard that states the SBA saw a record volume of lending in Fiscal Year 2022. This includes $43 billion in capital approved for small businesses across SBA products and an increase in small loans under $150,000 in the SBA 7(a) loan program. Now, this is the opposite of everything that the SBA has been saying to justify these rule changes and different than what you told our staffs regarding the need to bring more lenders into the program. So my first question, Mr. Kelley, so who is not being truthful, the SBA or the White House? Mr. KELLEY. Neither is not being truthful. What we have stated is that over a 5-year period there is a 40 percent, or 50 percent decline in the number of loans and dollars lent under $150,000. So what we are reporting in those numbers is a year over year increase. So since the Biden-Harris administration took over, and as Ranking Member Velazquez referenced prioritize making small dollar loans an issue, we have seen improvements in year over year. There is still a stark decline in the access of capital for the loans under $150,000. Chairman WILLIAMS. So the SBA's Office of Inspector General has found that many nondepository lenders in the 7(a) program were subject to limited oversight until a default occurs and identified significant issues within the agency relating to lender oversight. The Inspector General also noted a failure of the SBA to conduct regularly scheduled examinations over high- risk lenders. In short, the OIG has reported on many issues that questions the agency's ability to be a regulator. And I share these serious same concerns. Last night, the SBA released the policy notice for just one of the final rules to lenders that will help implement these new rules. It appears that for loans under $500,000, the agency removed almost all underwriting criteria and lenders are allowed to give out loans however they see fit to anybody. In carving out smaller loans from any standard underwriting requirement is one of the worst ways to mitigate risk and will increase the changes of predatory lending on small businesses and taxpayers. So the agency is bringing on more lenders and diminishing underwriting standards at a time when the agency is already failing to conduct all the necessary oversight over the risk lenders. You do not need to be bigger; you need to be smaller. And this is a recipe for disaster. So Mr. Kelley, what percentage of the current loan portfolio is under $500,000? And how will the SBA monitor the many different underwriting models that will be used by the lenders since you took away the uniform standard? Mr. KELLEY. So, two things. First, the reports you reference from the Office of the Inspector General reference high-risk lenders based on a quarterly rank order that the agency and the Office of Credit Risk Management does to all of its assets. We rank each outstanding loan as high risk, medium risk, and low risk, and then based on the percentage of a lender's portfolio, we schedule supervised oversight as a result. That report does not single out a type of lender. It speaks to all lenders. And the overwhelming majority of lenders that the IG has reviewed in its sample set are, in fact, regulated entities, banks and credit unions. So that is number one. Number two, with respect to the underwriting standards, since 2004, and under a Republican Congress and under President Bush, the program SBA Express, has existed. And for 20 out of 23 years, when you compare a term loan originated by those lenders under that program versus a term loan with a standard 7(a) referencing the nine criteria that previously enumerated in the reg, the term loans with the standard consistent with your similarly sized non-SBA policy has outperformed in terms of default rate and loss rate. So what I would say to Chairman Williams, and I think we can all agree, is that letting the marketplace lenders and removing red tape has demonstrated in that program which was originally a pilot program that a Republican administration started. In addition, a Republican administration expanded that exact same criteria to Patriot Express for veteran-owned loans and Community Express to attack the very same problem that was identified under Bush which is the dearth of small dollar loans going to sole proprietors. The rough order of magnitude of loans under 50,000 in terms of units is somewhere between 40 to 45 percent annually, and 60 percent of those units have been originated in the SBA Express program because that standard allows the lenders to follow their credit and collateral policies and it has performed better. Chairman WILLIAMS. Okay. In a letter my Senate colleagues sent you, you stated that the SBA has the same standards as all the other federal regulators including the Bank Secrecy Act and the other Know your Customer anti-money laundering requirements. Now, I have been told this simply is not true. So I would like you to set very quickly the record straight. Can you confirm that the SBA does, in fact, require all SBLCs to comply with the FPSA and KYC regulations, and where can I go to see the guidance that you gave to lenders on how to comply with these requirements? Mr. KELLEY. You can go to the SOP and the letter clearly states that all lenders participating, and it should be noted, and you noted it in your opening remarks, Chairman, that while there has been a moratorium for 40 years, those SBLC licenses could always be purchased by any type of lender. And in fact, 61 times were purchased and approved. And there has not been an issue with the Committee in that 40 years regarding those 61 transfers. With respect to the oversight---- Chairman WILLIAMS. Our time is---- Mr. KELLEY.--of those entities, it is exactly the same across all entity type. Chairman WILLIAMS. Thank you. I now recognize the Ranking Member for 5 minutes of questions. Ms. VELAZQUEZ. Thank you, Mr. Kelley, for being here today. The rules are set to go into effect within the next week; correct? Mr. KELLEY. That is correct. Ms. VELAZQUEZ. Yet, the SBA did not release any information about the implementation of either of these two rules until late last night and SOPs still have not been published. Can you explain why the SBA has waited so long to release any guidance when it knew the rules were going into effect this week? Mr. KELLEY. Yes. So as has been noted by Ranking Member Velazquez and Chairman Williams, I have participated in the Obama administration. I also, as Chairman Williams noted, participated for a large SBA lender for 6 years in the private sector. There is nothing about the implementation with respect to the posting of procedural notices that precede SOP publication post rules becoming final. As you know, we are in the 30-day window before the rules become final. We wanted to get the procedural notice out before the rule becomes final. We achieved that and the SOPs will follow. The language that is reflected in those procedural notices will be reflected in the SOP. Ms. VELAZQUEZ. Okay. When do you expect the SOP to be published? Mr. KELLEY. I think it will be published, if not today, this week. Ms. VELAZQUEZ. When you went to the Senate you stated that it will be released on May 3. Mr. KELLEY. Yes. Ms. VELAZQUEZ. Why did you not release it on May 3? Mr. KELLEY. Chairman Velazquez, could I---- Ms. VELAZQUEZ. Ranking Member. Soon to be Chairwoman. Mr. KELLEY. Sorry, sorry, I apologize. Sorry. Sorry, Chairman Williams. Sorry. Apologies. Apologies. I gave you a promotion there. So, I, too, would like a promotion. I would like to be able to deliver timelines---- Ms. VELAZQUEZ. Okay. My question then is, you know, you say May 3. It did not happen. How is the SBA expecting lenders to comply with the rule without the SOP? Mr. KELLEY. So as a person that worked for the nation's number one SBA lender by dollars lent in the private sector, when rules were changed, so, for example, in 2018, 2017, rules were promulgated by the Trump administration. The order of operations that we are following is exactly consistent and prior---- Ms. VELAZQUEZ. That does not make it right. Mr. KELLEY. Well, it makes it necessary in terms of there is an order of the way that APA and our procedures call for in terms of you pass the rule, the rule becomes final, you cannot operate until the rule has become final. If you want to give the guidance before the rule becomes final, which we have done, and then you do not want to proceed or create confusion that lenders can operate before the rules become final. Ms. VELAZQUEZ. Have you considered delaying the rules in order to give lenders and borrowers more time? Mr. KELLEY. No, because the changes in the rules, specifically the underwriting criteria, all remove red tape and bureaucracy that banks and credit unions in my 13 years of being exposed to this have asked for repeatedly and routinely over every year. Ms. VELAZQUEZ. Okay. The final rule changed the definition of an SBLC from what was proposed in the rule. The proposed rule stated that an SBLC was ``only to make loans pursuant to the 7(a) and Microloan program.'' But in the final rule, SBA deleted the word ``only.'' By removing the word ``only,'' was the intent to allow SBLCs to begin making non-SBA loans? Mr. KELLEY. Well, today, all of our lenders make non-SBA loans. We are responsible for overseeing the loans that they make within our program. And as the IG has highlighted in its Management Challenges Report, the key areas that we are responsible for oversight are eligibility and reasonable reassurance of repayment. And so, we are responsible for overseeing that. I cannot speak to the exact clause that you are talking about but the intent has always been an SBLC---- Ms. VELAZQUEZ. Right here. Right here. Small business lending companies. It is a nondepository lending institution that is SBA licensed and is authorized by SBA to--and what was proposed in the proposed rule, in the draft, only to make loans pursuant to section. The word ``only'' was deleted. My question to you is, if SBLCs were to begin issuing both SBA-backed loans and non-SBA loans, are you concerned that these lenders will prioritize their private issuances over their SBA portfolio defeating our goal to increase access to capital for the smaller loans? Mr. KELLEY. Yes. So, and feel free to engage with lenders on this point. But one of the things that happens today is non- bank lenders or competitors make loans that are subordinate to senior debt or SBA loans today. So it is the case today that small business owners seeking working capital seek out additional capital if they can get it. With respect to the issue that you are speaking to, we dealt with this issue, for example, in the Community Advantage Program where a community advantage lender, a CDFI, was originating loans on an interim basis and then refi-ing them into the Community Advantage loan program. Ms. VELAZQUEZ. What I do not understand is why did you make the deletion? Why did you delete ``only''? Mr. KELLEY. Yes. I am happy to follow up with your staff. Ms. VELAZQUEZ. Okay. Mr. KELLEY. Because while I a lawyer---- Ms. VELAZQUEZ. My time has expired. Mr. KELLEY.--I have to take a look at the actual citations that you are citing. Yeah. Chairman WILLIAMS. All right. Thank you. I now recognize the Members for 5 minutes. And I first recognize Mr. Luetkemeyer from Missouri for 5 minutes. Mr. LUETKEMEYER. Thank you, Mr. Chairman. Welcome, Mr. Kelley. When you opened your remarks you said you are here representing the president and vice president of the United States. Have you spoken to them recently? Mr. KELLEY. No. I am a political appointee and so I work at the pleasure of the---- Mr. LUETKEMEYER. But you are representing them you said. Mr. KELLEY. Of course. Mr. LUETKEMEYER. Okay. Do you talk to the White House administration at all about---- Mr. KELLEY. Yes. Yes. Mr. LUETKEMEYER.--the programs? Do you know if Ms. Guzman ever talks to the White House? Mr. KELLEY. Yes. Mr. LUETKEMEYER. Does she talk to the president? Mr. KELLEY. Yes. She was with the president Monday, last Monday. Mr. LUETKEMEYER. Well, that is a first because I can tell you we have asked that question multiple times of her in this Committee and we never got an answer from her. That may be the first time she has ever met with him as far as we know. Mr. KELLEY. It was a publicly attended event in the Rose Garden---- Mr. LUETKEMEYER. Was it about small business issues? Mr. KELLEY. It was for National Small Business Week. Yes. Mr. LUETKEMEYER. Okay. Mr. KELLEY. And it was celebrating the nation's small businesses. Mr. LUETKEMEYER. Well, I hope she talked about some of these programs and how they are---- Mr. KELLEY. She did. Mr. LUETKEMEYER.--negative affecting the small business community because that to me is what needs to be done. Okay, Mr. Kelley, how many people are at the SBA? Mr. KELLEY. I think---- Mr. LUETKEMEYER. In the office here in D.C.? Mr. KELLEY. In the office here in D.C.? I am not sure what the total head count for the agency is I think something around 2,000-plus. And then it goes up and down. Mr. LUETKEMEYER. How many people are in your department? Let's put it that way. Mr. KELLEY. So there are 300 FTE in the historically defined Office of Capital Access. We---- Mr. LUETKEMEYER. Okay. How many people showed up for work today? Mr. KELLEY. All of them. Mr. LUETKEMEYER. In this building, in your SBA building, how many of them showed up today? Mr. KELLEY. I do not have a head count of who showed up physically today. As you know---- Mr. LUETKEMEYER. Are they all required to show up to work every day? Mr. KELLEY. Yes. Mr. LUETKEMEYER. I am not talking about off campus being qualified work. I am talking about physically being in your office. Mr. KELLEY. They are complying with what they have been asked to do. Mr. LUETKEMEYER. That is not what I asked. I am sorry; that is not what I asked. Mr. KELLEY. I understand that but that is how I am answering your question. Mr. LUETKEMEYER. I asked a question of whether they are actually showing up in the office that you work in---- Mr. KELLEY. Yes. I understand---- Mr. LUETKEMEYER.--every day. Mr. KELLEY. I understand your question. And civil servants are complying with what they are asked to do. They serve---- Mr. LUETKEMEYER. No, you are not answering my question. Mr. KELLEY.--on behalf of the public and they are responsible to comply with what they are asked---- Mr. LUETKEMEYER. Okay. So they are not showing up at your office is what you are saying because---- Mr. KELLEY. They are doing their job as they were required by their position descriptions and as their supervisors---- Mr. LUETKEMEYER. Okay. So you are telling me that they are not which that goes to the point---- Mr. KELLEY. Well, it is no different than any of the private sector entities that are doing exactly the same thing. Mr. LUETKEMEYER. I am not talking about the private sector, Mr. Kelley. I am talking about your office that you are in charge of. The people are not showing up personally to sit at a desk in your office building to do their work. You are allowing them to do it from home which that is fine if you want to do that but the next question is whenever you have, well, in 2019, the inspector general claimed that the Office of Credit Risk Management failed to perform effective oversight over the OCRM, only conducted 108 of its planned 358 reviews of high-risk lenders. COVID-19 only exasperated this issue as oversight staffing levels decreased by an additional 38 percent. Despite this, the SBA has lifted the SBLC moratorium allowing for more nondepository entities who are purely regulated by the SBA rather than federal regulators to enter the market. So it goes to the point that the inspector general said you need more oversight and you have less people to do it and they are not even at the office to do it themselves. This is a problem. It is a big problem. So, you know, I guess the rational is how do you expect to get anything done whenever you do not have anybody in your office? Mr. KELLEY. Well, judging by the fact that the agency supported $1.2 of lending and grant activity over a 2-year period where the entire agency was teleworking, I think we have demonstrated that we will do our jobs. Mr. LUETKEMEYER. Well, thanks to the banks and credit unions that were able to put that all out, which goes back to the point I was wanting to make here a little bit ago. You talked about I think $1.2 billion that went out the door which was great. And you talked about one million applications I think it was, $41 billion in fraud. Mr. KELLEY. Yep. Mr. LUETKEMEYER. What percentage of that is EIDL versus PPP? Mr. KELLEY. It is roughly 45-55 PPP to COVID EIDL. So, for $46 billion we paid the lenders to---- Mr. LUETKEMEYER. Okay. So the EIDL program---- Mr. KELLEY.--instances of fraud. Mr. LUETKEMEYER. The EIDL program was roughly $400 billion and they had about $20 billion worth of fraud. And then the PPP program was about $800 billion and they had about less than $20 billion in fraud. Mr. KELLEY. Or we paid the lenders $46 billion in servicing fees for a 4 percent fraud rate. Mr. LUETKEMEYER. So it goes to the point though that the PPP program was highly successful and most of the fraud, according to the IG report, was in the fintech fraud. Mr. KELLEY. That is not what the IG report---- Mr. LUETKEMEYER. Mr. Ware was sitting in that seat about a month ago. Mr. KELLEY. He did not say that. He did not say that. Mr. LUETKEMEYER. And that is what he said. So it is hard for you to dispute that, sir. Mr. KELLEY. It is easy to dispute---- Mr. LUETKEMEYER. So the problem is that you are trying to make up your own set of facts---- Mr. KELLEY. I am not. Mr. LUETKEMEYER.--which are not verified by the Inspector General Report. So, again, whenever you go back to the compliance of KYC, BSA, how do you get the fintech companies to be able to comply with that? Because this is where the problem is. This is where, and now you are expanding to the fintech companies. It really begs the question of do you know what the hell you are doing? Because it is putting the fox in charge of the hen house again. You are allowing the very people who are the problem children to be involved in the program and continue to do things without any oversight. This is crazy. Mr. KELLEY. It is not. And as I mentioned in my opening statement, and as we demonstrated in the Restaurant Revitalization Program as well as Phase 3 of PPP, we have and will place in front of etran authorization our fraud---- Mr. LUETKEMEYER. Were those sort of oversight principles in place during the PPP program? Mr. KELLEY. Yes. Mr. LUETKEMEYER. And they were not adhered to and this is why the fraud---- Mr. KELLEY. They were not in place during 2020 under the Trump administration. They were in place under the Biden-Harris administration. Chairman WILLIAMS. Time is expired. Mr. LUETKEMEYER. So we put fraud controls---- Chairman WILLIAMS. Your time has expired. I now recognize Mr. McGarvey from Kentucky for 5 minutes. Mr. MCGARVEY. Thank you, Mr. Chairman. Mr. Kelley, thank you for being here today and for providing insight of the SBA's intentions with these proposed rules. I know a lot of small businesses would not be where they are today without the SBA's support including from the 7(a) program. It is critical that we have 7(a) remain an effective program so that small businesses have this, particularly minority-owned businesses, businesses that would struggle without access to capital. Under the affiliation rule, the SBA is eliminating standardized underwriting requirements for loan issuance and replacing them with a system that considers lending criteria like a borrower's credit score and history and their business's earnings and cashflow. Under the policy noticed that were released late last night and kind of surprised everybody here on the Committee, the SBA is now clarifying that loans over $500,000 still have some semblance of underwriting requirements. It still seems that the SBA is requiring the bare minimum of prudent lending standards even though the procedural notice from last night indicates underwriting standards applied to larger loans. Can you explain to us why some mandatory underwriting requirements were left untouched and if this could have the potential to affect the SBA's ability to protect small businesses from inappropriate loans and the 7(a) program from significant loan losses? Mr. KELLEY. Yes. So as I mentioned in my opening statement, the criteria for underwriting and collateral for loans under $500,000 has been used historically since 2004 and before that in a pilot program. So we can look at the default and loss rate history for, and incidentally, 5 out of 10, in some cases 6 out of 10 loans, each fiscal year from 2004 to 2023, were originated with that criteria. So we have performed subsidy calculations and managed to zero subsidy in nearly all of those years with the exception of the Great Recession and a few exceptions during the Trump administration to zero subsidy. So we do not have to guess whether or not that criteria works or what its impact will be because we can look at the last 23 years of its performance. Mr. MCGARVEY. I appreciate that but at the same time as it is removing standard underwriting requirements, the SBA is lifting the SBLC moratorium. And I think potentially that is opening the program to non-federally regulated lenders through the SBLC rule. So, do you think the combination of these two rules could create a loan evaluation environment where federally regulated lenders that have stricter requirements will be forced to compete with non-federally regulated lenders not subject to the same underwriting requirements? Mr. KELLEY. No, because the 2004 SBA Express pilot program was created with advisory under the Bush administration with banks, for banks. And it is the banks that have historically used that. So the top 25 depository institutions have credit score loans in the SBA Express program, the Community Express program, the Patriot Express program for years. Credit scoring is used by every bank on the consumer side and it is used to a varying degree, depending on loan size, in the commercial sector. This is not a new development. You heard Deputy Inspector Sheldon Shoemaker in the Senate hearing speak to that fact towards the end of the hearing. It is in the transcript where he reflects on the fact that financial technology, including credit scoring, is used by banks and credit unions today. It is the banks and credit unions who have made up the majority of our lending year in, year out, will continue to do so, and they are the ones that have sought out the changes that we have put in the SOP. Now, as depository institutions, do they want additional competition from nonbank lenders? No, they do not. But in terms of the actual eligibility and underwriting criteria, these are changes they have asked. The National Association of Development Corporations, which represents the 504 CDCs of which there are over 200 in the country, have been working on eligibility issues since 2011 in the Obama administration where they called for the elimination of the personal resource test, as well as the affiliation rule change that we have made final. So these are things that have long been understood as necessary to remove red tape and bureaucracy to get small dollars out of the loan. It impacts not just the size of the loan but it impacts every gap in the marketplace. So, for example, in rural America there is a dearth of construction financing. There is a dearth of loans to businesses with no collateral. All of these issues are why this program exists, and why lenders are looking to make the core product more cost- effective. Mr. MCGARVEY. I appreciate that. And obviously, you know, for our small businesses we want to have less red tape and bureaucracy that we can have access to capital in our small businesses. But this is still a piecemeal approach of regulatory and procedural changes often that do not have enough guardrails in them. They often come at the last minute. Do you think that the SBA is risking confusing lenders and borrowers about the actual rules by which they are expected to comply? Mr. KELLEY. No, because the rules that are reflected in those procedural notices exist today and what is piecemeal is their application. What has made the agency, so what has made lending for SBA hard is you have to hire a nerd like me to figure out all of the different variations within the SOP. What this administrator has done is said you do not have to hire a nerd like Patrick Kelley. Chairman WILLIAMS. Time is up. Mr. KELLEY. You can harmonize the rules to optimize the outcome. Chairman WILLIAMS. I now recognize Mr. Meuser from the great state of Pennsylvania for 5 minutes. Mr. MEUSER. Thank you, Mr. Chairman. Mr. Kelley, earlier when Mr. Luetkemeyer was asking you about the number of employees in the office you dodged, you hid the answer. That is a big difference in the private sector. If you ask that question to a private sector company and I ask them often they will say, yeah, 50 percent of our customer works remotely, 50 percent tech service works remotely. You would not answer the question. You were embarrassed by it. And you---- Mr. KELLEY. I said, I said, no, sir. I said---- Mr. MEUSER. There is no question. I take back my time. Mr. KELLEY.--100 percent, I said 100 percent, no, sir---- Mr. MEUSER. Repeatedly today, you know, something, you might do what you want in your bureau. We have oversight here and you are going to follow the rules of this Committee. The SBA has the 7(a) rules, have caused great concern among both Republicans and Democrats. Mostly everyone I speak to feels that you are hell bent on rushing these rules without any concern for Democrats and Republicans, ignoring the final rule. Why is that? Mr. KELLEY. It is not the case. Mr. MEUSER. We believe it is based upon the facts of the situation and the fact that you are just blowing off any recommendation or question. But you just state that is not the case and that is that? Mr. KELLEY. Would you like me to elaborate? Mr. MEUSER. Well, by moving the program, the 7(a) portfolio towards a more subjective underwriting method for loans under $500,000, how does that protect taxpayers from losses, the OIG has concerns, and you have actually used language, maybe not you, to do what they do for loans under $500,000, which is 75 percent of all the 7(a) loans, how does that instill confidence in us? Mr. KELLEY. The standard that you are speaking to consistent with similar size non-SBA loans and the euphemism that was explained at a bank trade association conference, do what you do, has been around for over 2 decades and is reflected in every budget that has been passed since then with respect to the subsidy calculation. So, lenders came, banks, credit unions, came to the SBA and said back in the 2000s under the Bush administration there is too much red tape associated with small dollar loans, loans at that time under $350,000, and then this body raised the threshold for Express from $350,000 to $500,000. That standard has been in existence. The lenders know this. I understand that they are upset about three additional non-depository institutions potentially becoming SBA SBLCs and they have equated that with fintech and that is why we are discussing the concerns, which are legitimate. Safety and soundness is terribly important. I have been a part of the agency's creation of the Office of Credit Risk Management since 2010. I was involved with the regs that were put forward to create the Paris framework---- Mr. MEUSER. Thank you. Mr. KELLEY.--the smart framework. Mr. MEUSER. ON April 20th, we sent you a letter. Chairman Williams, Vice Chair Luetkemeyer, Chairwoman Van Duyne, myself, about the ability of SBA to be able to handle this, these new responsibilities related to the concerns of IG Ware. It was April 20th, 3 weeks ago, basically. You have never responded. Any reason you did not respond or can we expect a response sometime in the future? Mr. KELLEY. Yes, you can expect a response. Mr. MEUSER. Okay. Any time? Can you tell me when? Mr. KELLEY. In short order. The process goes through an agency clearance process. Mr. MEUSER. Okay. April 12th, press release, the SBA stated that these new rules will utilize modern technology to make lender oversight and borrower protection stronger. Can you tell us what the technology is to make borrower protection stronger? Mr. KELLEY. Yes. So, the way that Bank Secrecy Act laws are complied with today is the use of third party databases where you take a unique identifier from each applicant. So in our case we are dealing with TIN, tax ID number for business, applicant, and then owners of 20 percent or more, or in banking vernacular, beneficial owners. We run that against databases to create alerts and flags across 19 different screening categories which traverse eligibility. I mentioned the eligibility criteria earlier. And also, run them against lists like OFAC and other fraud issues. So for the first time in the agency's history, and what is highlighted in the IG's report is that delegated lenders have historically not had anything pre- approved prior to obtaining etran authorization. So, under this administrator we are instituting this not just in our CARES Act programs but in the general business loan programs, including 7(a) and 504. Mr. MEUSER. When I was revenue secretary in Pennsylvania we implemented something similar. Do you know how much it costs? And is it ready and when will it be ready to be implemented? Mr. KELLEY. Yes. The great aspect of this from a cost perspective, and this is something we should all celebrate, is that the oversight fees beginning in 2017 can be charged to all the lenders and are on a pro rata basis. And we are able to use other contract vehicles based on a performance base to institute the technology. Mr. MEUSER. Thank you. Chairman WILLIAMS. Time is up. Mr. MEUSER. Thank you. Chairman WILLIAMS. Thank you. Next, I recognize Ms. Chu from the great state of California for 5 minutes. Ms. CHU. Associate Administrator Kelley, I want to thank you and Administrator Guzman for partnering with me to provide a disaster declaration for my community of Monterey Park, California, in the aftermath of the tragic mass shooting in January that took the lives of 11 people. The eligibility for these disaster loans will truly help our small businesses surrounding that shooting site tremendously. So, thank you for that. I also want to thank you and the administrator for your focus on increasing lending in underserved communities and your 4-year partnership in making the new Community Advantage SBLC program as effective as possible for lenders and small businesses. I was pleased to see in SBA's recent notice on May 1st that the Community Advantage SBLC will, indeed, be required to make 60 percent of the loans in underserved markets, as in the current Community Advantage program. I also want to thank you for clarifying in the notice what loan loss reserve requirements these lenders will face and for modeling these requirements after legislation that I introduced last Congress. These loan loss reserve requirements will ensure that these small, nonprofit lenders who have been making Community Advantage loans for more than 5 years will have greater flexibility and more capital to do even more lending. However, the May 1st notice does not address the capital requirements and oversight fees that the new Community Advantage SBLCs can expect. The current Community Advantage pilot program lenders do not have capital requirements which is important because these are small, nonprofit lenders with far less cash on hand than larger financial institutions like banks. Regular SBLCs currently have a capital requirement of $5 million which would be extremely prohibitive if applied to these mission lenders. Additionally, the regular SBLCs face much higher oversight fees than current CA pilot program lenders, and would again be cost prohibitive if applied to the new Community Advantage SBLCs. The lack of clarity on these questions is especially concerning because the final rule goes into effect on Friday. We have heard that a standard operating procedure is forthcoming and will cover these details, but can you confirm that the upcoming SOP will clarify that the oversight fees and capitalization requirements within the Community Advantage SBLC program are to remain unchanged from what Community Advantage pilot program lenders currently face? Mr. KELLEY. Yes. And with respect to capital requirements, as you mentioned, there is a capital requirement threshold for for-profit SBLCs. The capital requirement for the Community Advantage pilot program had historically been applied not on a balance sheet but on a per loan basis because of the issues that you highlight for the nonprofit lenders. It has historically been 10 percent based on your bill and Chairman Cardin's bill. And working with the community, the threshold has been established at 5 percent with a sliding scale for trialing portfolio performance that is good over 36 months to come down. So, there is no ambiguity. The capital requirement has always been applied through the loan loss reserve on the individual loan in the Community Advantage program. That is what the procedural notice lays out. For the entire pilot program, Community Advantage lenders, like all lenders--SBLC, credit unions, banks, CDCs, all lenders--are subject to oversight and oversight is charged on a pro rata basis. So the reason that the Community Advantage lenders do not pay as much oversight as for example, Live Oak Bank would have paid, is because in 12 years, together, all 100 plus entities have originated 7,000 loans over a billion dollars. Whereas, for example, Live Oak does close to $2 billion in 1 fiscal year. So what will continue is on a pro rata basis we will apply oversight to all lenders. Ms. CHU. Well, the most important question is will that be in the SOP? Mr. KELLEY. Yes. It is in the SOP today. That is how Community Advantage lender oversight has been applied. I know there has been confusion created in the marketplace by a single voice but I can assure you they have always been charged a pro rata basis and will continue. And that is true for all lenders. Ms. CHU. And then the high fees. There was a question of the other SBLC lenders having high fees and then the Community Advantage program lenders cannot hardly afford them. Mr. KELLEY. So I am not sure what that references but let me see if I can just clarify. So, fees charged to borrowers are universally applied across all lenders and interest rates are capped and universal to all Members. So that was true. What historically was true in Community Advantage pilot---- Chairman WILLIAMS. Time is up. Mr. KELLEY. Sorry. Chairman WILLIAMS. Time is up. Mr. KELLEY. Okay. Chairman WILLIAMS. Next, I now recognize Mr. Stauber from Minnesota for 5 minutes. Mr. STAUBER. Thank you, Mr. Chair. As a former small business owner, I understand how important it is for small businesses to have access to affordable credit without loan programs that enable our small businesses. They will not be able to grow, support jobs, and help countless Americans achieve that American dream. The Small Business Administration's, including the 7(a) loan program had been a huge success in my opinion and an important tool to small businesses across our great nation. Like many of my colleagues here today, however, I am troubled by the rules that were finalized last month by the Biden administration addressing the 7(a) program. While I support allowing flexibility for our small businesses and lending institutions, we must ensure the necessary guardrails are place to protect this program. I have heard from 7(a) lenders and businesses in my district, including community banks and local credit unions that are worried that these rules will jeopardize the future of the 7(a) program. Mr. Kelley, annually, about how many investigations or reviews did the SBA conduct into high-risk lenders? Mr. KELLEY. I think it is in the order of magnitude, depending on the fiscal year of $300,000, $400,000. Mr. STAUBER. Okay. The SBA's inspector general reported that the SBA failed to conduct 108 of the 358 planned review of high risk lenders in the Fiscal Year 2020. That is a third of the high-risk lenders that the SBA missed. Under the new rules, the SBA will be lifting the moratorium on new licenses and grants for small business lending companies. With the lifting of this moratorium, what do you estimate will be the increase in new loan activity? Mr. KELLEY. So I do want to clarify something that has been mentioned regarding the IG report. What the IG report speaks to is that is levels of supervisory review on site, offsite. And so what it references is that those reviews were conducted. They were just conducted at a different level of review in terms of procedure. So I just want to clarify that. The second thing that I want to speak to with respect to the estimate, so the estimate was included in the proposed rule and the final rule. And so at cruise altitude, typically SBLCs contribute about 450 loans per fiscal year. For example, we have three SBLCs today that are in the top 10 of SBA lending. And as I have mentioned, these licenses have changed hands over the last 40 years 61 times. And the agency has been responsible for approving who becomes an SBLC. So, we review their safety and soundness, their portfolio of performance. And if we do not want to grant a license, we have the discretion not to do so. Mr. STAUBER. Do you think the SBA has the capacity right now to do the oversight? Mr. KELLEY. Yes. Mr. STAUBER. Okay. Do you think lenders and financial institutions need to have proper regulator oversight in order to protect consumers, yes or no? Mr. KELLEY. Yes. Mr. STAUBER. Do you believe the Small Business Administration has the capacity, expertise, or bandwidth to be the sole regulator of any financial institution? Mr. KELLEY. Yes. And what I would like to clarify on that point because it is important, the use case for what we oversee is loan assets. And it is a simpler use case to stand in than it is for OCC or FDIC because, for example, with FDIC or OCC, they have first order problems that they need to address. Let's say the loan portfolio, commercial estate is underperforming. They have second order of concerns, which is the depositors. So if a bank goes under, are we going to honor deposits? Then they have third order, which is the impact of that in the local marketplace. We have shown throughout the SBA's history that if a lender comes and goes and dissolves, we can transfer the book of assets to another SBA lender and it does not create the disruption or the need for intervention on the part of the federal government. So those loan portfolios can be transferred. They are conforming assets, which means they are easy to underwrite from a diligence perspective. We have a rank order of the quality of the credit profile on a quarterly basis. And as a result, a willing buyer will take that asset portfolio. So if we decide that someone is not participating in lending as we do on a quarterly basis through the Loan Oversight Committee, we can remove their delegated authority. Mr. STAUBER. Okay. Mr. KELLEY. The director of OCRM can suspend them at her complete discretion for up to 2 years pending an investigation. And we can ultimately debar the lender from participation. Mr. STAUBER. Thank you for that explanation. At the end of the day I have two main concerns. First, the SBA's track record in protecting against fraud, most recently during our PPP leads me to conclude that the SBA does not have the capacity to carry out its oversight rule over an expanded 7(a) program, let alone act as a chief regulator of any financial institution. Second, I am deeply concerned that local community banks and credit unions in Northern Minnesota will have more oversight, scrutiny, and regulation put on them than the Silicon Valley fintech startups. We must protect the 7(a) program. And I yield back. Mr. PHILLIPS. Mr. Chairman, before Mr. Stauber leaves I think we should wish him a Happy Birthday. Chairman WILLIAMS. Well, I do not know if he wants us to or not. Mr. LUETKEMEYER. Mr. Chairman, I second that. Mr. PHILLIPS. I withdraw my motion. Mr. STAUBER. I am celebrating my 39th birthday 19 times, Dean. Chairman WILLIAMS. Okay. I now recognize Ms. Davids from Kansas for 5 minutes. Ms. DAVIDS. Thank you, Chairman. And thank you, Mr. Kelley for joining us. I think that this has probably been one of the more lively Small Business Committee hearings I have been in. But it, I think, reflects how imperative oversight is as it relates to protecting our small businesses and then, of course, as Mr. Stauber said, the integrity of the 7(a) program. I want to jump right into a follow up actually to some of the questions that Mr. Stauber was asking which is around the regulation of the lenders. Can you like share a bit about where you believe the SBA's statutory authority comes from to examine what would normally be the core requirements of a lending institution or depository institution that has the variety of assets that you were describing earlier, whether it is capital requirements, liquidity, risk management. Can you share where you believe the statutory authority comes from for SBA to be able to do that? Mr. KELLEY. Yes. Under the Trump administration there was a law passed with the Republican Congress outlining and detailing the role and responsibility of the Office of Credit Risk Management located in the Office of Capital Access to do all of those things which has historically been understood to be authorized under our administration of the program from the Small Business Act, section 7(a), which requires that we determine reasonable reassurance of repayment and eligibility for the program. So in order to determine reasonable reassurance of repayment---- Ms. DAVIDS. I am sorry; your reasonable reassurance of repayment is not the same thing as ensuring that you have the ability to fully examine the allocation of assets, liquidity requirements, and risk management overall of an entire entity in the same way that depository institutions are. Mr. KELLEY. So, if you are talking about asset allocation, like long-term dated Treasuries with respect to deposits, agreed. And that is not what we do. If you are talking about assets generated in our program and their ability to be repaid to the taxpayer without the guaranty being honored then we do have the authority. Ms. DAVIDS. Okay, so I want to, I also want to follow up on some of the questions that Mr. McGarvey was asking because I will give you the benefit of the doubt. I think that you were responding to his question about lenders by talking about the borrowers and the need to reduce red tape, both on the borrower's side and on the lender side. Could you expand a bit on what you mean when you talk about the reduction of red tape? Because the request for less red tape from lenders is not the same thing as opening up the program for additional lenders that are not being regulated or overseen in the same way that depository institutions are. And I just want to make sure that I am fully understanding your response and real quick, because I have a feeling you will use the rest of the time, when it turns red, if you could just stop and make sure that it would not be more appropriate to follow up with a written response to the question you might find that the rest of the hearing will go a little bit smoother. Mr. KELLEY. Agreed. And I want to apologize to Mr. Meuser for my Irish coming up, and I understand that we will be able to answer questions as we normally do, so. I am passionate about defending civil servants and the role that they have played in the pandemic, so I apologize. So, with respect to your question about lenders, so what I am describing, and this is I guess important and I hope to leave you all here where we are in agreement is that for time in memorial, the subsidy calculation has incorporated the underwriting and collateral criteria and all that we have done is harmonize across a standard 7(a) small loan with an SBA Express term loan, that standard that more lenders have used historically every fiscal year. And so if the object of the exercise is to engage, for example, the 4,500 community banks more meaningfully. So it has been reported that 83 percent of those same 4,500 community banks did not make a single 7(a) loan in the 2 previous fiscal years prior to 2020 Paycheck Protection Program. So if we want them to meaningfully be available in their communities, we need to optimize the responsibilities---- Ms. DAVIDS. Can I stop---- Mr. KELLEY.--the criteria that they need. Ms. DAVIDS. Can I stop you there? I absolutely recognize that. I just will add that some of the fintechs that we have been talking about are not subject to all of the rules and regulations in oversight that our community banks have been adhering to for a very long time. With that, I will yield back. Chairman WILLIAMS. I now recognize Mr. Ellzey from the great state of Texas for 5 minutes. Mr. ELLZEY. Thank you, Mr. Chairman. Mr. Kelley, thank you for being here. Howdy. How are you doing? Thank you for being here. You have got a long history of service as a civil servant, and I understand that you want to defend the folks that you work with. That is highly admirable, and I understand that you went to Colgate and then BC Law. So you are an immensely talented man. You worked at a bank and, you know, Mr. Williams has been in business for, oh, a couple of eons, I think. But he has been a small business man for many, many years. My colleague from Missouri has as well been in business for a long, long time. I have never heard Mr. Luetkemeyer get upset before and somehow you managed to do that. And I am not sure if I heard the answer or not but it is kind of a proforma question that we have been asking in all of our Committee hearings after the declaration that the COVID catastrophe is over. How many folks are going to work? Because it does not matter the Committee that we are on. You look across the street at a government building and there is generally not a whole lot of people there and the parking lots are empty, and I think that that goes directly to the service that the taxpayers who are paying for these services are receiving and oftentimes it does not really matter the agency that it is in. And you have got your rice bowl that you are worried about and not worried about any others. It does not matter if we ask DHS, HHS, or anybody else. We ask how many people are at work? Because Mr. Williams cannot run a car dealership if half of his people are not showing up. They cannot work remotely. And I do not think people get a good service if folks are not showing up to work. So, when that question comes up, just understand it is not aimed at you or anybody else but the question as the oversight authority for all of these agencies, as the funding authority is Congress's for all of these agencies, the simple question is, how many people are at work? And it may be a different answer. You are clearly a talented attorney. Maybe the question is, what is the policy on how many people get to show up? I will let you answer the question, but my policy is I have to show up at work. We are not doing remote anymore. I do not think any of the other agencies in our government should be remote anymore because we are seeing a declination of service to the taxpayer. So you have the floor now. What is the policy on how many people have to show up to work? Mr. KELLEY. Yeah. So the policy is you have to--so I understand that we disagree with what I am about to characterize. But you have to show up to work. So every single federal employee has to show up to work. As far as telework, and telework policy, Chairman Williams mentioned that I worked at the Department of Commerce at the U.S. Patent and Trademark Office. That is a distributed workforce as well and has long had a telework policy in place in processing trademarks and patents. We have a distributed workforce. Folks show up to district offices, loan production centers, as well as headquarters. And the policy today is that for each 2 week, biweekly period, you physically need to come into the office 3 days out of that period. And so, for example, I worked at a bank that Chairman Williams suggested, and we did something unconventionally where we did not have branches. Most banks have branches across the country. We chose not to use branches which is a physical presence in a physical footprint, to lend money. And that has served Live Oak as a comparative advantage in terms of its cost structure to become the nation's number one small business lender. So there are many different approaches to performing and optimizing how you deliver your service and your products. And so what I am arguing on behalf of the civil servants is that they are working hard I can attest to you. And as has probably been demonstrated and as you reflected, I expect that people perform as well as myself. Mr. ELLZEY. Well, BC Law is a good law school. It is a simple question. It really is. Virtual presence is actually absence. When you are a civil servant you need to be in the office because otherwise you cannot be supervised properly. I do not care what business it is. I know some airlines I will call up the customer service line and I will hear dogs barking in the back and I know they are not at work and I am not getting good service. I think it is expected by the taxpayer that civil servants be exempted from a private company. They are not like a private company. A private company can do whatever it wants. Civil servants need to be showing up for work. So is there a percentage in your policy that says how many people have to be at work every day? Does it exist or not? Mr. KELLEY. One hundred percent of policy without supervisor approval of leave of absence, you know, scheduled vacation, sick days, et cetera, have to show up to work. And there is a telework policy in place which I have explained the contours of. Mr. ELLZEY. All right. Mr. KELLEY. And you need to comply with that. Mr. ELLZEY. Okay. Well, I am almost out of time so I am not going to get the answer but, you know, folks need to be showing up in the office at work. We are seeing across the government an inability to effectively accomplish the job on the part of the taxpayer. But I thank you for your time and I yield back. Chairman WILLIAMS. Thank you. I now recognize Ms. Gluesenkamp Perez from the State of Washington for 5 minutes. Ms. PEREZ. Thank you, Mr. Kelley, for joining us here today. As a former small business owner, who successfully applied for a 504 Loan, I know that small business owners want streamlining when it comes to SBA programs. We do not have time to waste reading SBA regs. As part of the new SBA affiliation rule, the rule removes the detailed list of factors that the SBA currently utilizes when determining whether a loan applicant is credit worthy. Could you speak to the intent behind this rule? Mr. KELLEY. Yes. So the thing I would like to clarify, too, is affiliation is used for two purposes in underwriting alone historically at the SBA. And in the conventional commercial market affiliation is used solely for reasonable reassurance and repayment. So the impact of any affiliates to cashflow. Okay? In our programs today, tomorrow, and forever, the impact of an affiliate to cashflow remains and will continue to be the responsibility of lenders to look at. With respect to eligibility, which is a uniquely government requirement that the business be a small business based on SBA's size requirements, historically the agency took the position which we believe weas a red tape bureaucratic position which is the business needs to be independently owned and operated and it chose to construe independently owned and independently operated as two separate clauses as opposed to, say, a non- severable clause like cruel and unusual punishment. So what we are applying and what we saw work in the Restaurant Revitalization Program and the COVID EIDL program to a varied degree in the Paycheck Protection Program is a standard ownership test. So you know who owned your business. If I asked in the community who owns your business they would tell me to see you and the buck would stop with you. What was happening with the affiliation is that a subjective criteria of totality of the circumstances to determine whether third party management agreements that you entered into, you the small business owner enter into, creates negative control deemed by a federal government employee. So the federal government will tell you who controls your business based on the agreements that you have entered into with a third party. We believe that that is wrong. And so we took the position that independently owned and operated should be viewed like cruel and unusual punishment as a nonseverable cause for the purpose of determining eligibility because size standards, meaning total number of employees for certain NAICS codes, revenue standards for others, and in the loan program since 2010 when Ranking Member Velazquez passed the Small Business Jobs Act, includes the alternative size standard. And we found in both the government contracting division and in these loan programs is that even accounting for affiliates in eligibility, the businesses are still considered small. So if the definition of removing red tape and bureaucracy is to remove that, that is what we are doing. But with respect to whether or not we will get paid back as taxpayers, the requirement for affiliated analysis remains as it always has been. Ms. PEREZ. Thank you. Mr. Kelley, if a small business owner is denied a loan they can request reconsideration? Mr. KELLEY. Mm-hmm. Ms. PEREZ. The affiliation rule extends the list of people who can consider the reconsideration request and make a final decision to include the designated director of the Office of Financial Assistance and the SBA Administrator. Are there guardrails in place to ensure that these changes were not subjected in the consideration process? Mr. KELLEY. Yes. But I think what we should understand is that that rule was exactly responding to public concerns on the part of both lenders and borrowers that the process, by requiring it go all the way to the top of the House each time led to, you know, delays. And so this gives us the discretion to let the folks who, you know, we have talked a great deal about, the civil servants at work, to make those decisions based on their experience. So you will get a faster response. But in terms of the process, there are second look processes. You know, to the extent that people are trying to influence things, there is, as you all know, anonymous hotlines for tips to the IG and so forth. And those are all, you know, functional. Ms. PEREZ. Sorry. So could you describe those guardrails a little bit more in detail? Mr. KELLEY. Yeah. So the process as outlined, so for example, when the IG talks about its risk management challenges for anything, it starts with are there identified roles of who is responsible? What steps have to take place? Did those steps take place? And was there a second look process to ensure that there is not the discretion of a single individual. And those processes are outlined in the SOP. The roles, the whole, and then the second look aspects of it. Ms. PEREZ. Okay. Thank you. Mr. Chairman, I yield back. Chairman WILLIAMS. Also, let me remind all Members to turn their mics on when they need to. I now recognize Ms. Salazar from Florida for 5 minutes. Ms. SALAZAR. Thank you, Mr. Chairman. And good to talk to you, Mr. Kelley. My name is Maria Salazar. I represent the City of Miami where SBA is like the crown jewel. People really think that this agency is really cool. And ever since I got to the Committee 2 years ago, my first term, I had the honor of taking Administrator Guzman to my district. I am not sure if you are aware of that trip. I took her to Eighth Street. She was able to see, although, small businesses, the drycleaner's, and the flower shops. And people that look at the SBA as the crown jewel. You said that you are a political appointee, so that means that you know what the private sector looks like and how it works. And you said that you were a nerd. So nerds in the private sector usually do well meaning that they have, they can make a good name for themselves. So I just want to share a couple of ideas and then ask you three questions. We are very disappointed with the SBA. And we are trying to figure out how we can make this agency better for the average American small business owner. So I am going to ask you a couple of questions and I want you to answer me as if I were that let's say Indian American who wants to set up this drycleaners and he needs a small little help from the SBA because, you know, that is the American dream. And he tells you, look, I have called 10 times. The online service does not really work. I have uploaded my information seven times. Every time I call I talk to somebody else and it is very difficult for me, the Indian American wanting to set up this drycleaner's to get to the finish line and get the money. You are telling me and from the information we have is that now the SBA has 30 percent less personnel. When I spoke with Administrator Guzman she told me that she was going to improve the online services, the people, the operators, the people on the other side. That it was going to be streamlined and that service was going to look beautifully. My question to you is this. Tell me one thing that you are proud of in this last 12 months that you and Administrator Guzman have established and instituted to help this Indian American to get his loan so he can open up that drycleaner's in simple terms. Mr. KELLEY. Yes. So first, I just want for your use case because I assume it is a constituent. That constituent should find a different lender because we work through third-party lending intermediaries. So if you are seeking a small business loan in either the 7(a) or the 504 program and you are having those issues that you have described, there are plenty of banks and credit unions across the state of Florida, I am sure in the city of Miami and certainly nationally, that they should go to. Ms. SALAZAR. But sometimes they do not want to touch that person and that person needs to go straight to the federal government. The SBA, that is what we are there for. Mr. KELLEY. Yes. So---- Ms. SALAZAR. So let's suppose that he does not want to be touched because he is too small. We have to provide a good service and we are not. So go back. So do you agree with the fact that the agency that you are helping to run is not providing the service that the average small business owner believes; yes or no? Mr. KELLEY. So are you recommending that the Office of Capital Access and SBA take advantage of the authority we are afforded until the Small Business Act, section 7(a) to do direct loans as a final chance credit not available elsewhere? Ms. SALAZAR. Sometimes that is the last resort that person has. Mr. KELLEY. Okay. So in order to do, so the Agency has not done direct loans in its 7(a) program or general business---- Ms. PEREZ. But I am talking about what you are proud of is what I am saying. What is it that you have in the last 12 months, along with Mrs. Guzman established in order to redress some of the problems that I just mentioned which are endemic? Mr. KELLEY. Yes. So what we would be proud of is the rules that we have talked at great detail in this conference because to the extent that the use case you are describing is struggling with their bank or credit union or nondepository lender and having that terrible experience that you described, we want to take off the sidelines more credit unions and banks. So, for example, credit unions are thousands of depository institutions across this country---- Ms. SALAZAR. I am sorry I am interrupting. So you are telling me that they are going through your online system, when they are going through your computer system, when they are going through your staff---- Mr. KELLEY. That is what I am trying to clarify. The way that the program is set up, there is a waterfall under Section 7(a) of the Small Business Act which says that you should seek a conventional loan first. If you are not able to seek credit not available elsewhere, you can go to a participating lender for a loan guaranty. And so we work through that lending--all of the interactions, all of the online, the call center that you are describing, the experience is governed by the individual lender. If we were to use our authority for direct lending which we have under Section 7(a)---- Chairman WILLIAMS. Your time is up. Ms. SALAZAR. We will get back to you on that because that is not my experience. Thank you. Chairman WILLIAMS. I now recognize Ms. Scholten from the great state of Michigan for 5 minutes. Ms. SCHOLTEN. Thank you, Mr. Chair. And thank you, Mr. Kelley. Hillary Scholten from Michigan's 3rd Congressional District. Wonderful small businesses throughout the region. I think that the theme of today is oversight. And the importance of providing oversight to these nuanced rules. A lot of my questions and concerns have been covered here today so I am not going to repeat them but I do want to add my voice to those saying just how critical it will be for our Committee to continue to provide the necessary oversight. I have heard from financial institutions again and again just how concerned they are about the implementation of these rules. My question for you is, the SBA has repeatedly said that these rules will increase small dollar loans and expand access to capital for underserved communities. Can you go more in depth on the success of the Community Advantage Program and why the SBA chose to create this new type of SBLC and what sort of was the genesis there? Thank you. Mr. KELLEY. Yeah. So, if we build off of your colleague, Representative Salazar's example where in that case she was describing an Indian American drycleaning small business seeking a small dollar loan amount and being frustrated by the third party lender's customer service experience, et cetera. We need a wider distribution channel so that that person does not have to rely solely on one lender. They can go to the entire marketplace. And historically, certified development financial institutions were not eligible to participate in the 7(a) programs. So beginning in 2011, under the Obama administration, we temporarily lifted the moratorium so you are allowed under pilots to waive regulations. So we lifted the moratorium, issued temporary licenses. And we did that to experiment for safety and soundness reasons, but to experiment that those lenders who were embedded in communities where, for example, there are 1,700 banking deserts across rural and urban areas where there is not a bank branch within a 10 mile radius but there are CDFIs. And so the theory was if we have a diverse array of distribution channels, using the same core product that is ultimately beneficial to the lender and borrower. It is beneficial to the borrower because they get a fixed rate, they get a capped rate product and longer repayment terms with no prepayment penalties. That longer repayment period is good for the lender as well because it qualifies more loans. And then the backstop of the government guaranty in the secondary market helps them manage liquidity. So 7,000 loans have been made during that pilot for a billion dollars, and the distribution for underserved, including rural, HUBZone, veteran, small business, a business startup in business less than 24 months, that criteria for underserved has been met, you know, I think 60, 70 percent of the time. And incidentally, as was mentioned in the Senate hearing, our core product, whether it is a dollar loan or a $5 million loan over indexes in comparison to the commercial market to that same definition of underserved but we have seen a gap for women-owned businesses who make up a sizeable percentage of sole proprietors and yet, a single digit percentage of loans received through the SBA program. And it is in part because the census shows that those businesses are overwhelmingly sole proprietors, which means they are seeking very small dollar amounts, loans less than $150,000. And when you talk to a community advantage lender, you talk to a bank like JPMorgan, Chase, TD or large banks and you ask them why is there a disconnect? The disconnect is the cost-effectiveness of being able to underwrite and close the loan. And so we have responded by addressing the red tape that they have identified so that they can make a more cost-effective offering because we believe, and we take them at their word, that they will find these customers in their marketplace. Ms. SCHOLTEN. And have the results been borne out? Mr. KELLEY. Well, yes, in terms of, so the community advantage programs results over index in the underserved category even in comparison to a high number. And then with respect to minorities and women, it performs better. So, yes. Ms. SCHOLTEN. I yield back my remaining time. Chairman WILLIAMS. I now recognize Mr. Crane from Arizona for 5 minutes. Mr. CRANE. Mr. Kelley, thanks for joining us today. You probably do not know this. I am a small business owner myself so I definitely understand how tough it is to start a small business, pay employees, you know, deal with an everchanging economy. Do you know how I got my startup capital for my business, sir? I sold my motorcycle. Yeah. One of the best decisions I ever made. Sir, are you aware that Pew Research shows that 20 percent of the American people do not trust the federal government? Mr. KELLEY. I am not. Mr. CRANE. Okay. Well, they do not. And I think that if you polled this cross section of our citizens today you would probably see something similar. Sir, are you aware, yes or no, does the American taxpayer fund the SBA? Mr. KELLEY. Yes. Mr. CRANE. Okay. Does the American taxpayer--hold on. Hold on a second. Does the American taxpayer fund your salary, sir? Mr. KELLEY. It does. Mr. CRANE. Okay. Mine, too, as well; right? Mr. KELLEY. Yes. Mr. CRANE. All right. So, sir, Mr. Kelley, who is on the hook if these loans are defaulted on? Mr. KELLEY. So that is what I was going to explain with my exception. So, with respect to supporting the loan programs, and this is a really cool thing for you and all of the folks that might be---- Mr. CRANE. Real quick, sir. Real quick. My time is running. Mr. KELLEY. The fees and the collection from liquidated collateral creates a profit for the federal government that enables us to waive fees for the borrowers and lenders and not ask for appropriate dollars at SCORE in order to support the 7(a) and 504 programs. Mr. CRANE. Hold on a second. All right. First of all, the federal government does not make a profit. I think most people here are smart enough to know that. Do you guys know how much national debt we are in right now, anybody? Almost $32 trillion of national debt. Okay. So this government does not make a profit. As a matter of fact, it continues to spend money, upon money, upon money that we do not have. It just continues to print money that we do not have. And that is my problem here, Mr. Kelley. This town, these administrations that make up this town, the lobbyists, the special interests, are notorious for being poor stewards of the American taxpayer dollars. And now you are trying to implement changes to these loan programs to make it easier to lend people money that we do not even have. That is the problem. And it is for that reason, and because of the debt, the times that we live in, in our history in this town, in this government of showing zero fiscal responsibility that I do not support these changes and I do not think they are appropriate. I yield back my time. Thank you. Chairman WILLIAMS. Okay. I now recognize Mr. Phillips from Minnesota for 5 minutes. Mr. PHILLIPS. Thank you, Mr. Chairman. Welcome, Mr. Kelley. I want to start by thanking you. I know there are lots of things you could be doing with your life other than this, and I want to thank you for your service. I do a series in Minnesota called On the Job with Dean where I visit small business and work a shift for 2 or 3 hours and have learned a ton, the good, the bad, the ugly about the SBA. But mostly the good as a resource, as a provider of capital, and also mentorship. And I want to thank you for what you do. Just last week I was in Eden Prairie, Minnesota visiting the Asia Mall, which is a converted big box store, an extraordinary place. Administrator Guzman and a second gentleman came to visit. I worked a shift as a stockboy and a cashier and once again saw SBA loans creating a wonderful story of success in my district. And I also am a deep believer in shared success, in employee ownership. And have been trying to push both this Committee and my colleagues to look at ways where we can build bridges to more shared ownership. Our Ranking Member has a wonderful bill. I will be introducing one next week as well, and I want to focus on that. I know some of the changes, at least in the recent past, the 7(a) has only financed about five employee ownership changes in control. I know under the affiliation lending criteria rule now partial buyouts will be allowed under 7(a). So if you could just speak to how you think that might increase access to capital for employee ownership and any comments you might have. Mr. KELLEY. Yes. And not to pour salt in the wounds, but the forthcoming SOP will have delegated authority for ESOP transactions. So I did want to mention that. So with respect to partial buyout, the reason that this was put in here is to affect employee ownership. And historically what is challenging about an ESOP is that it is a formal process that requires role-based compliance. So, a fiduciary, a designated employee to take time away from, you know, doing the duties of a stockboy as you suggested to perform their roles to stay in compliance with the regulations governing that. So it works for a certain size company. It does not work for what President Biden has characterized as the Mom and Pops or the smallest of the small. So, what partial buyout does is it builds off of a process that has worked well for 7(a) lenders, which is change of ownership. A third of all SBA loans are either full partner buyouts or full stock or asset purchases today. This is a transaction that they do a lot of. And so now, today, an existing ownership can dilute their common stock ownership to their employees and the business's cashflow can pay for that transaction. And of course, all parties with 20 percent or more of stock in the company will remain on the hook with an unconditional personal guaranty. So we believe this transaction will be cost-effective. It will be one familiar to our core lenders and they will originate more details that way. Mr. PHILLIPS. Okay. Are there any other structural barriers that you think could be addressed to further increase availability of resources for ESOPs? Mr. KELLEY. So, we looked at ESOPs when I was lending, so I built out a lending division prior to the last role that was referenced and did about a half billion of lending. And we looked at ESOP transactions. They actually have very favorable benefits if, for example, you are a defense contractor. Okay? So, cost plus and things like that for reimbursement. But for the core businesses that are in your districts, the transaction costs were too high for the seller and the time it took to affect the transaction meant for a lender that, you know, we needed to move on to originate more loans. And really, everything about a lender, and this is good or bad or however you want to look at it, is I have got to meet my quota for that quarter and I have got to hit that bonus at the end of the year. And so I have to move on a timely basis. Mr. PHILLIPS. Okay. I appreciate it. A couple of quick questions. With turmoil in the banking sector, have you noticed any hesitancy amongst lenders in recent weeks, months, as it relates to 7(a)s? Mr. KELLEY. Well, it was cited that, you know, the lending is on track for about $14 billion today. I think there is no question, the Fed has reported this, it is in whatever periodically you consume each day, that there is going to be a tightening of the credit box. Now, in SBA lending, a tightening of the credit box normally means that this is a tool that becomes, you know, more handy, right, for the lenders. And the challenge, and I really want to reiterate why we are doing all these changes. In 7(a) lending today there are 20 lenders doing 50 percent of the lending nationwide every year. Mr. PHILLIPS. Can you say that again? Mr. KELLEY. Twenty lenders do 50 percent of the lending. So, a nation that has 33 million small businesses, because of the red tape and bureaucracy that we are removing but historically has been in place, has supported 20 lenders. And, you know, I have called myself a nerd here so I will take another. It needs nerds like me at the bank to comply with the rules. So we are trying to level the playing field so that we can get 4,400 banks and thousands of credit unions off the sidelines into using these programs. Mr. PHILLIPS. Thank you. My time is expired so I yield back. Thank you, Mr. Kelley. Chairman WILLIAMS. Okay. I would like to thank our witness for your testimony today, for appearing before us today. I think you see this Committee is bipartisan. We want the best service out of the SBA that we can get. Without objection, Members have 5 legislative days to submit additional materials and written questions for the witness to the Chair which will be forwarded to the witness. I ask the witness to please respond promptly, and you have been asked to do that today. So if there is no further business, without objection, the Committee is adjourned. [Whereupon, 11:33 a.m., the committee was adjourned.] A P P E N D I X [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]