[Senate Hearing 119-19] [From the U.S. Government Publishing Office] S. Hrg. 119-19 HEARING FROM LENDERS: MANAGING RISK FOR THE LONG-TERM IN THE 7(a) LOAN PROGRAM ======================================================================= HEARING before the COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP OF THE UNITED STATES SENATE ONE HUNDRED NINETEENTH CONGRESS FIRST SESSION __________ FEBRUARY 26, 2025 __________ Printed for the use of the Committee on Small Business and Entrepreneurship [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Available via the World Wide Web: http://www.govinfo.gov ______ U.S. GOVERNMENT PUBLISHING OFFICE 59-473 WASHINGTON : 2025 COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP ONE HUNDRED NINETEENTH CONGRESS ---------- JONI ERNST, Iowa, Chair EDWARD J. MARKEY, Massachusetts, Ranking Member JAMES E. RISCH, Idaho MARIA CANTWELL, Washington RAND PAUL, Kentucky JEANNE SHAHEEN, New Hampshire TIM SCOTT, South Carolina CORY A. BOOKER, New Jersey TODD YOUNG, Indiana CHRISTOPHER A. COONS, Delaware JOSH HAWLEY, Missouri MAZIE K. HIRONO, Hawaii TED BUDD, North Carolina JACKY ROSEN, Nevada JOHN R. CURTIS, Utah JOHN W. HICKENLOOPER, Colorado JAMES C. JUSTICE, West Virginia ADAM B. SCHIFF, California JON HUSTED, Ohio Meredith West, Republican Staff Director Sean Moore, Democratic Staff Director C O N T E N T S ---------- WITNESSES Page Mr. Timothy Fitzgibbon, Senior Vice President, First National Bank, West Des Moines, IA...................................... 15 Prepared statement........................................... 17 Mr. Raymond Lanza-Weil, President, Common Capital, Springfield, MA............................................................. 19 Prepared statement........................................... 21 Ms. Itzel Sims, SBA Director and Senior Vice President, First Security Bank, Little Rock, AR................................. 26 Prepared statement........................................... 28 Ms. Mayrena Guerrero, Founder and CEO, Colorful Resilience, West Springfield, MA................................................ 36 Prepared statement........................................... 39 COMMITTEE INSERTS Ernst, Senator Joni & Williams, Roger, U.S. Representative Letter dated April 24, 2024.................................. 2 Ernst, Senator Joni Letter dated January 21, 2025................................ 6 ADDITIONAL STATEMENTS FOR THE RECORD America's Credit Unions Letter dated February 26, 2025............................... 56 Ernst, Senator Joni Statement.................................................... 59 National Association of Government Guaranteed Lenders Letter dated February 26, 2025............................... 60 HEARING FROM LENDERS: MANAGING RISK FOR THE LONG-TERM IN THE 7(a) LOAN PROGRAM ---------- WEDNESDAY, FEBRUARY 26, 2025 United States Senate, Committee on Small Business and Entrepreneurship, Washington, DC. The committee met, pursuant to notice, at 2:30 p.m., in Room 428A, Russell Senate Office Building, Hon. Joni Ernst, chairwoman of the committee, presiding. Present: Senators Ernst [presiding], Hawley, Justice, Husted, Markey, Shaheen, Booker, Hirono, Rosen, and Hickenlooper. OPENING STATEMENT OF SENATOR ERNST The Chair. I call the Committee on Small Business and Entrepreneurship to order. Nearly two years ago, we met to discuss the reckless new rules the Small Business administration implemented for the 7(a) loan program. They removed time-tested underwriting standards that mitigated the risk of default for American taxpayers who guarantee these loans. These new rules also opened the door to foreseeable fraud by enabling a potentially unlimited number of unregulated, non- depository institutions to become permanently licensed SBA lenders, as small business lending companies, or SBLCs. The last administration's 7(a) rules were the most drastic changes to the program in decades, which is why members on a bipartisan basis voiced their concerns. Unfortunately, those concerns fell on deaf ears. I aggressively sought to understand how the SBA was selecting and approving these new SBLCs to participate in 7(a). The types of lenders the SBA was looking to license, fintechs, were responsible for facilitating widespread financial fraud and improper payments in the Paycheck Protection Program. I ask unanimous consent to enter into the record an April 24th, 2024, letter that I sent with House Small Business Committee Chairman Williams, to the SBA requesting information on the SBLC selection process. Without objection, so ordered. [The information referred to follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] The Chair. Two years later, we still have little insight. Even the recent SBA Inspector General's report on the subject was woefully inadequate. The IG report stated the SBA followed its own procedures, but they failed to evaluate whether those procedures were adequate. The IG didn't bother to investigate whether there was collusion between SBA officials and one of the largest applicants for a lending license, Funding Circle U.S., nor did the report answer why the SBA and the IG concluded the cash position of Funding Circle U.S. was sufficient despite the fact that it was losing millions. The Biden SBA's dangerous loosening of the underwriting and eligibility rules weren't the only efforts to undermine the financial soundness of the 7(a) loan program. A year before the rule, the agency started to cut the fees charged to borrowers and lenders--fees meant to protect the taxpayer from having to subsidize bad loans. For three years straight, the SBA cut these fees, inexplicably allowing loans of up to $1 million to be made without the borrower or lender having to pay for the guarantees the American taxpayer provided. As I said in a letter to President Trump on January 21st, the looming 7(a) fee increases are entirely due to the previous administration's incompetent management of the program, which has harmed taxpayers and the small businesses saddled with debt they can't manage, while irresponsible lenders get paid no matter what. I ask unanimous consent to enter this letter into the record. Without objection, so ordered. [The information referred to follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] The Chair. We are seeing the impacts of these rule changes with the 12-month default rate more than doubling to roughly 3.2 percent since these rules went into effect, and defaults on loans less than 18 months old nearly tripling to almost one and a half percent over that same period. While the Biden Harris SBA tried to blame this on rising interest rates, defaults on SBA loans have been increasing faster than those in the private sector, which is evidence of poor policy decisions. It should come as no surprise that for the first time in 12 years . . . [emphasis] 12 years, the 7(a) program lost money. This negative cash flow must be immediately addressed by reversing the misguided decisions of the past administration. This program was designed to operate with zero subsidy and I worry we are on the cusp of forcing taxpayers to foot the bill, something we should avoid at all costs. I want to commend Administrator Loeffler for her recognition of these problems in her day one memo released this week, and her willingness to hit the ground running. It is clear that the solvency of the SBA's lending programs is a major priority for the Administrator, who is committed to doing what's necessary to ensure their zero-subsidy status is secure. Today's hearing provides an opportunity for us to speak with SBA participants to understand their concerns about the 7(a) program's financial stability. It also allows the committee to gather concrete suggestions on ways to reduce the risk faced by taxpayers while ensuring the program continues to be a resource for entrepreneurs who need assistance accessing capital. I'd like to thank our witnesses for being here today, and I look forward to your testimony. I now recognize Ranking Member Markey for his opening statement. STATEMENT OF SENATOR MARKEY Senator Markey. Thank you, Madam Chair, very much and thank you for hosting this hearing to discuss the government's role in connecting entrepreneurs with the funding which they need. Access to capital is always a top concern for small business owners. For 70 years, the small business administration's flagship lending program, the 7(a) program, has provided government- backed loans to small business owners who are not eligible for a conventional loan. Without government backing, traditional banks would only lend to the biggest, safest businesses in town while deeming loans to the smallest as too risky. Innovative ideas that benefit communities across the United States would never have come to realization. Ideas that start in a garage would be thrown away before they can ever get off the ground. This is especially true for underserved communities, entrepreneurs of color, and women who have an even harder time historically getting funding as a result of historic discrimination. It wasn't until 1974 that a woman was able to get a loan at a bank without a male relative signature. Unfortunately, as we all know, discrimination still exists today. Black owned businesses are more likely to be denied loans or received less money than other borrowers. In fact, according to the Fed's small business credit survey, in 2023, only 32 percent of black small business owners with employees received the funding they applied for, compared to 54 percent of white small business owners. This is why SBA's lending programs are so critical. They fill gaps. They level the playing field. In particular SBA's program, the Community Advantage program which is a subset of 7(a), utilizes community centered nonprofit and mission-based lenders. The program makes small dollar loans with a focus on reaching underserved small business owners. While the program does not define underserved by race, gender metrics, it reaches certain populations better than the traditional 7(a) program. For example, in fiscal year 2024, the Community Advantage program made 53 percent of its loans to startups, and 43 percent to entrepreneurs of color. The traditional 7(a) program in comparison made only 32 percent of its loans to both groups. SBA has a responsibility to address the inefficiencies in private lending to support true competition. It is the government's responsibility to make sure that there is capital for all entrepreneurs regardless of their background. The Biden administration understood this. They doubled the amount of small dollar loans, maintained a healthy 7(a) loan program, and ensured a 99 percent repayment rate, a 99 percent repayment rate. My witness here today from Massachusetts, Ms. Guerrero, is a clear example of an entrepreneur who just wanted to serve her community, but struggled to get the funding to do so. She was unable to receive funding from her community bank, who is also an SBA lender, and she did not have generational wealth to rely upon. That's where Common Capital, a Massachusetts-based lender and SBA's Community Advantage program stepped in. So, thank you Ms. Guerrero for taking the time to share your experience with the committee. Your story is just one example of why SBA programs like the Community Advantage program is so important. And I look forward to hearing from our witnesses about their experiences with SBA's lending programs. And I also want to acknowledge the committee's efforts last Congress to codify the Community Advantage program. And I'm hoping that we can work together, Madam Chair, on a bipartisan basis, not only to maintain the integrity of SBA lending programs, but also to ensure that they serve small business owners from all backgrounds across our country. Thank you, Madam Chair. The Chair. Thank you very much, Ranking Member Markey. And now I want to extend a warm welcome to all of our witnesses. Thank you for joining us today. I want to introduce the two witnesses who are testifying today on behalf of the majority. I am thankful that these two accomplished community bankers made the trip to Washington DC, to share their expertise and insight into the SBA's 7(a) loan program with this committee. And so, we'll start with my Iowan first, and thank you. It's Mr. Timothy Fitzgibbon, who is the Senior Vice President at First National Bank from West Des Moines, Iowa. Mr. Fitzgibbon started and built the SBA lending business at First National Bank, where he has worked since 2017. Previously, Mr. Fitzgibbon was the senior vice president at the National Council of Higher Education Resources for 12 years. And prior to that, he was the director of the Guaranteed Student Loan Program at the Iowa College Student Aid Commission for more than 14 years. Mr. Fitzgibbon holds a bachelor's degree from the best university, Iowa State University. And next is Ms. Itzel Sims, and she is the director of SBA lending at First Security Bank, headquartered in Searcy, Arkansas. Ms. Sims has a 24-year background in SBA lending and previously worked at Simmons Bank and Regions Bank. Ms. Sims obtained a Bachelor of Business Administration from the University of Texas at Dallas. Thank you, again. And I now recognize Ranking Member Markey to introduce his witnesses. Senator Markey. Thank you, Madam Chair. And I'm pleased to introduce our two witnesses who have a business relationship and can explain how it works for all small businesses. And I would like to add, though, I'm kind of shocked that Mr. Fitzgibbon did not go to the finest Jesuit College in Iowa, Loras. [Laughter.] Senator Markey. I think that Fitzgibbon, somehow, I don't know how much they welcomed you home when you didn't go to the Jesuit school. Mr. Raymond Lanza-Weil is the president of Common Capital, which is a nonprofit community development financial institution located in Springfield, Massachusetts. Common Capital provides SBA micro loans and community advantage loans, as well as technical assistance to small businesses in Western Massachusetts. Mr. Lanza-Weil's work provides entrepreneurs from underserved communities with financing to start and grow their business ventures. His team works with borrowers in a holistic manner to ensure the success of these small businesses. Ms. Mayrena Guerrero is a mental health counselor, and the owner and founder of Colorful Resilience, a business that provides mental health services to all, but especially to people of color, the LGBTQ community, and immigrants. She has operated Colorful Resilience for three years. And as a result of her entrepreneurial spirit the community advantage loan, she now runs a thriving small business with 15 employees, and has provided vital mental health services to over 3,000 clients. So, it's a perfect example in Springfield of these two institutions being able to work together to make sure that we have a thriving small business. I thank you Madam Chair for welcoming these witnesses. The Chair. Yes. Again, thank you to all of our witnesses for being here and thank you Ranking Member Markey. Briefly, I'd like to take a moment to explain our lighting system there in front of you, the little boxes. There are three lights in front of you. Green means go. Yellow means you're running out of time, and red means to go ahead and quickly wrap up your remarks. I ask unanimous consent that the witness's full statements be included in the record. Without objection, so ordered. As your written testimony has been made part of the record, the committee asks that you limit your oral remarks to five minutes. And with that, Mr. Fitzgibbon, you are recognized now for five minutes for your testimony. STATEMENT OF MR. TIMOTHY FITZGIBBON, SENIOR VICE PRESIDENT, FIRST NATIONAL BANK, WEST DES MOINES, IOWA Mr. Fitzgibbon. Chair Ernst, Ranking Member Markey and distinguished members of the committee, thank you for the opportunity to appear before you today to discuss managing risk in the SBA 7(a) loan program. My name is Tim Fitzgibbon, I'm a senior vice-president with First National Bank, a $1.1 billion community bank based in Ames, Iowa, and founded in 1903. I'm testifying today on behalf of the Iowa Bankers Association and First National Bank. My responsibilities include managing two specialty loan programs- SBA and student loan refinance, and I'm also a licensed investment advisor. I'm here today to share my viewpoint, not just as an SBA lender, but also a 40-year participant in government backed loan programs, including home mortgages and student loans where I've spent a good part of my career, helping borrowers manage their debt, improve their credit, and avoid default. Risk in any loan program is primarily managed through sound underwriting policies. Prudent underwriting ensures equitable treatment for all applicants and is intended to be a good predictor of a borrower's future success. In short, good underwriting protects the consumer along with the lender, and in the case of the government backed SBA program, the taxpayer as well. In 2023, new rules were written for the SBA program with the admirable goals of streamlining the application process and increasing access to funding for small business owners, particularly those in underserved communities. Major underwriting changes included removing the applicant's personal financial resources from the ``credit elsewhere'' test, waiving equity injections, reducing insurance requirements, and permitting lenders to ``do as you do'' in underwriting SBA loans. Reducing underwriting criteria to increase loan access is not a new idea in federally backed loan programs, but it has not always proved wise. A similar approach was used in the 1990s to increase home ownership through lowered credit standards for private market and FHA loans, which contributed significantly to the subprime mortgage crisis of 2008. A more recent example continues today with the Federal Parent PLUS Student Loan Program. Already low underwriting standards were further diluted in the early 2010s, to allow more families to access the Parent PLUS program, which has resulted in countless older Americans becoming buried in debt they cannot afford. Originating government-backed loans for borrowers who can never repay them is predatory in nature. It is imperative that the SBA closely monitor the impact of its reduced underwriting standards on the borrowers it serves. To that end, early indicators suggests that there are already signs of credit stress for SBA loans made under the new rules. For example, according to a recent risk assessment by the SBA, ``The Small Business Administration's Flagship 7(a) program lost hundreds of millions of dollars in 2024 as agency fee reductions combined with an increase in loan defaults to result in negative cash flow''. Similar analysis done by third party service providers, show loans made under the new rules are defaulting at a much faster and higher rate than loans made in other years, particularly those originated by non-bank lenders. I'd like to end my statement with a cautionary observation based on testimony provided just last year by Administrator Guzman in hearings before this committee, where she suggested the SBA should restart its direct government lending program. I urge committee members to study the current condition of the Federal Direct student loan program before considering such a move. History has shown that direct government lending can lead to expensive loan modifications and even debt forgiveness to mask non-performing loans. Loan forgiveness does not manage debt, it simply passes the cost onto the taxpayer. Iowa banks are committed to providing access to SBA financing to our small business communities. While we applaud efforts to streamline SBA loan processing and expand in a safe and sensible manner, the number of small businesses the SBA program can assist, we urge Congress and the small business administration to restore prudent underwriting standards and ensure proper oversight for all of its lending partners. I look forward to your questions, and I thank you again for the honor of participating in this hearing. And Senator Markey, I'm proud to tell you that my daughter's a Loras graduate. [Laughter.] [The prepared statement of Mr. Fitzgibbon follows.] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Chair. Thank you, Mr. Fitzgibbon. Now we will recognize Mr. Lanza-Weil, and you are recognized, sir, for five minutes of your testimony. STATEMENT OF MR. RAYMOND LANZA-WEIL, PRESIDENT, COMMON CAPITAL, SPRINGFIELD, MASSACHUSETTS Mr. Lanza-Weil. Thank you and good afternoon, Chair Ernst, Ranking Member Markey, and distinguished members of the committee. I appreciate the opportunity to speak with you today. I am Raymond Lanza-Weil, recovering banker and president of Common Capital, a 35-year-old nonprofit CDFI loan fund based in Springfield, Massachusetts. Common Capital makes loans to small businesses that can't get the financing they need from conventional lenders, such as banks and credit unions. We make loans up to $300,000 and we provide no-cost business education, and training to our borrowers; Our business assistance program is primarily funded by annual grants from the SBAs microloan program. Common Capital serves a four-county region with 820,000 residents. Our annual operating budget is just shy of $2 million. Even though we're a small organization serving only a fraction of the state's geography and population, Common capital is the leading SBA Microlender and SBA Community Advantage lender in the Commonwealth of Massachusetts. Since our founding in 1990, we've made over 900 loans totaling more than $35 million to small businesses in western Massachusetts. All sorts of loans, not just SBA loans, loans that have helped create or retain 2200 jobs. At the end of 2024, Common Capital's loan portfolio totaled $9.4 million, a little smaller than First National Bank's. 54 percent of our loan receivable were SBA Micro Loans or Community Advantage Loans. And by itself, the CA loans, the Community Advantage Loans, make up 34 percent of our portfolio. Common Capital's lending is high impact and that includes our CA loans. 87 percent of our CA portfolio dollars is loaned to businesses owned by people with low to moderate income or located in LMI census tracts. 73 percent is loan to startup businesses, 47 percent to woman owned businesses and 17 percent to veteran owned businesses. Common Capital was one of the original Community Advantage lenders. Since making our first CA loan in 2012, we've made 41 CA loans totaling $5.3 million with only one loss. The Community Advantage program helps us fulfill our mission of creating economic opportunities for people with low to moderate income by increasing access to capital for the small businesses they own. For example, here's a story about one of CA loans. Alan had worked in construction in rural western Massachusetts for over 35 years, when in 2018, he had an entrepreneurial seizure and decided to open his own timber frame construction business. After three successful years, significant supply chain issues and higher prices on construction materials resulted in losses on a large fixed price contract. But demand for Alan's craftsmanship continued to grow, so the business sought financing for new equipment and working capital from their bank, which was unable to help them due to their recent losses, Alan turned to Common Capital. The path to Yes, was challenging because the business' assets available as collateral were well short of our underwriting requirements. Common Capital was able to offset the shortfall with an 85 percent Community Advantage guarantee. And today, this rural business has retained its six employees, hired new ones, and is thriving. As you know, and as this story illustrates, regulated, financial institutions can't help every business that applies for a loan and nor should they. Banks necessarily say ``no'' to some applicants in order to protect their depositors and shareholders and to contribute to the safety and soundness of our financial system. Yet, banks and credit unions are our primary source of referrals. We don't compete with banks; we support and augment their customer relationships. Referring banks keep their customers as depositors and continue to provide other banking services to these businesses. When we provide a loan to a bank's customer, it's a win-win-win. Before I conclude, I want to tell you another story. Celeste and Jessica had a combined 30 years of experience working as nurses in and around Springfield when in 2021 they recognized the growing need for home healthcare in their urban communities. They responded by starting their own home healthcare agency. Celeste and Jessica could not obtain financing from a bank due to being a startup and a lack of sufficient collateral. Once again, common capital turned to the SBAs Community Advantage Program to overcome these challenges and help two entrepreneurs start a business that is providing essential healthcare services and creating jobs. Senators, as I wrap up, I want to tell you that too many small businesses and business owners that hear ``no'' from a bank successfully search online for easy money. It's available, it's expensive, and it's harmful to our business community. To combat this, CDFIs like Common Capital and other community loan funds try to fill the gap. With our help, these small unbankable businesses are creating jobs, generating economic activity, and paying taxes. These small businesses continue to be bank customers and if they do well enough, they'll become bank borrowers as well. We accomplish this work with support of the SBA. Our continued success and the success of the small business community in western Massachusetts depends upon the availability of SBA microloans and the CA program. I urge you to continue supporting the Community Advantage Program, to expand it so that more mission-focused lenders like Common Capital can increase access to capital, for low to moderate income and low wealth entrepreneurs. Thank you. [The prepared statement of Mr. Lanza-Weil follows.] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] The Chair. Thank you, Mr. Lanza-Weil, and we will move next to Ms. Sims. And you are now recognized for five minutes of testimony. STATEMENT OF MS. ITZEL SIMS, SBA DIRECTOR, AND SENIOR VICE PRESIDENT, FIRST SECURITY BANK, LITTLE ROCK, AR Ms. Sims. Chair Ernst, Ranking Member Markey, and members of the committee. Thank you for the opportunity to testify at today's hearing. My name is Itzel Sims, and I am the director of SBA lending for First Security Bank, which is headquartered in Searcy, Arkansas. I'm testifying today on behalf of American Bankers Association, Arkansas Bankers Association, and First Security Bank. Small businesses are the backbone of American economy. The SBA 7(a) program helps small businesses that might not otherwise have access to capital obtain loans so they can grow and create jobs. In my 26th year of making loans to small businesses, I'm very proud of the work we do at First Security Bank, to assist businesses across Arkansas with 7(a) and other small business loans. First Security is a privately held community bank with a 1.5 billion in total capital, 8.13 billion in assets and 1,000 employees throughout Arkansas. After holding several SBA lending positions, I joined First Security Bank and started an SBA lending platform for 7(a), 504, and express loans. First Security is right now topped at top 10 SBA lender in Arkansas. This is in a very important time for 7(a) program. Two years ago, SBA lifted the moratorium on the number of non-bank lenders that could participate in the 7(a) program while simultaneously loosening underwriting standards for these loans. It has experienced increased defaults since those changes, particularly in loans originated by non-bank lenders. This committee can play an important role in strengthening the program so that all lenders make 7(a) loans in a safe and sound manner, that helps small business gain access to capital. Here are recommendations for improving the program: in 2023, SBA lifted the moratorium on the number of non-banks that can participate in the 7(a) program, granting six new non-banks to participate in the program. At the same time, the agency also loosened underwriting standards for loans of $500,000 or less. This has contributed to rise of default rates. Data compiled by Lumos Technologies show that 7(a) loans originated by non-bank lenders in 2023 had a default rate of 8.1 percent in 2024, which is more than double the default rate of 7(a) loans originated by banks in 2023. SBA should return to the more robust criteria for underwriting 7(a) loans that had been in place prior to 2023. Moreover, the agency should focus on increasing the number of banks that participate in the 7(a) program instead of new non-bank entrants. SBA should also reinstate the loan authorization as a required document for 7(a) loans. It should also reinstate the requirement that 7(a) small business owners provide a 10 percent equity injection when a borrower is a startup, or when the borrower was purchasing an existing business. To increase efficiency, SBA should reinstate the franchise directory, a valuable resource that assisted lenders with determining the eligibility of a franchise for a 7(a) loan before it was discontinued in 2023. Although the focus today is on strengthening the 7(a) program, the small business lending landscape continues to be threatened by the CFPBs implementation of Section 1071 of Dodd-Frank. Section 1071 requires financial institutions to collect and report detailed data on each application for small business credit, including the race, sex, and ethnicity of the business owners. The CFPB Rule expanded the 13 data points required by Congress to 81 data points for each applicant for credit. This will significantly increase the cost of credit, decrease the availability of credit, and make it harder for us to serve small business customers. Congress should repeal section 1071. In conclusion, we strongly support the committee's goal of strengthening the 7(a) program and facilitating small business lending more broadly. We urge Congress to ensure that the SBA reinstates previous underwriting standards on 7(a) loans, not grant additional non-bank licenses without a demonstrated need and proof that the agency can effectively supervise new entrants, take the actions to improve the efficiency of the 7(a) program provided in our testimony, and repeal Section 1071 of Dodd-Frank. This would help strengthen small business lending, and enhance the ability of banks to make critical loans that drive economic growth in our nation's communities. I really appreciate the opportunity to testify and I look forward to your questions. [The prepared statement of Ms. Sims follows.] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] The Chair. Thank you very much, Ms. Sims. And now, Ms. Guerrero, you are recognized for five minutes. STATEMENT OF MS. MAYRENA GUERRERO, FOUNDER AND CEO, COLORFUL RESILIENCE, WEST SPRINGFIELD, MASSA- CHUSETTS Ms. Guerrero. Thank you. My name is Mayrena Guerrero. I'm a licensed mental health counselor and entrepreneur in Massachusetts. I am honored to be here and talk about my experience with the SBA Community Advantage Loan through Common Capital. My business is Colorful Resilience, a mental health clinic that provides outpatient mental health services to Black Indigenous People of Color, Lesbian, Gay, Bi, Trans, and others with various sexual and gender identities, immigrants, first generation people and our allies. What sets us apart, is that our team members represent the communities we work with. These brings about cultural competency that comes not just from education, but shared lived experiences with our clients. I hold a Bachelor of Science degree from University of Catlica Santo Domingo in Dominican Republic, and a Master of Science in mental health counseling from Fitchburg State University in Massachusetts. Go Falcons. After graduate school, I worked in community mental health for three years providing outpatient services. After completing the necessary hours and passing the licensing exam, I obtained my license to practice mental health counseling independently in Massachusetts. In 2016, I established a private practice marking the beginning of my entrepreneurial journey as a solo practitioner. My practice filled up quickly as clients discovered me through the PsychologyToday.com providers directory. In my published profile, I discussed my therapeutic approach and comfort in working with immigrants, people of color, and members of the LGBTQ plus community like myself. I quickly noticed clients sought me out primarily because of our shared identities. In 2020, due to the mental health crisis resulting from the pandemic and the Black Lives Matter movement, inquiries for services increased from two a day to 20. My practice was packed and I wondered where to refer individuals seeking support based on identity affinity. I realized then that there was a niche in the market that was not being addressed, and that is when the idea for Colorful Resilience was born. If I were going to do this, it will be done right. My company will have multiple practitioners and be the work environment I always dreamed of. The humanity of the clinician will be front and center because happy and healthy clinicians, produce better therapeutic outcomes. I will do things differently and go against the industry standard. My clinicians would receive a guaranteed bimonthly paycheck with a salary that exceed the living wage for our county, based on the MIT living wage calculator. A yearly inflation raise will be essential to prevent a pay cut and an annual productivity raise would incentivize meeting productivity goals. Both part-time and full-time Employees will have access to health and dental care. Additionally, the company will reimburse continuing education credits as 15 CEs are required annually to maintain our licenses and now, we're in year three and in this year, we're able to offer 401k to our employees. Burnout is a significant issue in the mental health field leading to frequent turnover and a mass exodus from the profession. I recognize that establishing reasonable and sustainable productivity expectations is crucial. Furthermore, supporting and encouraging clinicians to attain their private practices is essential for maximizing their earnings and increasing representation from these communities in the field. In other words, my team members were not leaving Colorful Resilience because we were a lousy employer, but because they were ready to self-actualize professionally. So, the idea was there and it was a good one, but I needed capital. So, I went to talk to my community Bank of 15 years. I sat down with a person from Commercial Lending, business plan hand, he listened to me and told me it was an excellent idea, but that they didn't fund startups. For them to lend me the 300K I needed to start my business, I would need to have assets, assets that amounted to that much, which I didn't. It was the bank who told me about Common Capital. I went to Common Capital's website and filled out a simple form. Then with a business plan in hand I met with them. They supported my idea and told me they would work with me to secure the funds I needed to make it a reality. Common Capital helped me secure an SBA Community Advantage loan for $250,000 and a $50,000 microloan at a six-year term and a 7.5 interest rate. In addition to the loans, Common Capital helped us get marketing and technical assistance help from a third party, contributing to our recruitment efforts. From the very beginning, Colorful Resilience has submitted monthly profit and loss and balanced sheet reports to Common Capital, helping keep us accountable as we go. Common Capital invested in Colorful Resilience and we continue to experience and support to this day. On February 23rd, 2022, Colorful Resilience, LLC became a registered business entity, and in August of that year, we started seeing clients. Today, according to the Boston Business Journal, Colorful Resilience is the 27th largest LGBT owned business in the state of Massachusetts. We're a profitable company currently employing 15 people and on track to hire three more full-time clinicians this year. We have about 550 active clients and 3000 people have had access to care because we exist. Outpatient mental health is primary care. Clients who are adequately supported and at outpatient mental health level rarely need to access higher, more expensive levels of care like partial hospitalization, inpatient, or like a residential program. We keep the cost of mental health care down. We don't depend on government grants to function and we pay taxes. Businesses like Colorful Resilience keep the American economy going in the right direction. The SBA Community Advantage Loan changed my life and the lives of many others. I am grateful that this program exists and was lucky to have access to it. Please continue to support organizations like Common Capital so that they can make businesses like mine possible. Thank you. [The prepared statement of Ms. Guerrero follows.] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] The Chair. Thank you, Ms. Guerrero, and thank you for your work in mental health, we really do appreciate that as well. So now we will move on to the question-and-answer portion of the hearing, and I will recognize myself for five minutes for questions, and I will start with Mr. Fitzgibbon. So, Mr. Fitzgibbon, as you know, the Biden administration significantly weakened underwriting standards in the SBA's 7(a) loan program. Since those changes were implemented, the 12- month default rate has more than doubled and the early default rate has almost tripled. How important are strong underwriting standards to the long-term stability of the 7(a) loan program? Mr. Fitzgibbon. Thank you, Senator. I think prudent underwriting provides the foundation for long-term stability. There are other factors like guarantee fees and so on, but they're not as important as underwriting. It's truly the cornerstone of managing debt. The Chair. Yes, that's good. And Ms. Sims, thank you for being here today. The previous administration allowed additional non-banks, including fintech firms to participate in the 7(a) loan program. So as a community banker, how do your underwriting processes differ from those that are non-bank lenders, such as fintech firms, and how do these differences affect the loan performance in the 7(a) loan program? Ms. Sims. Community bankers, we live and we dine and we use the services that business owners have. So, we see people, when we provide loans, we're not just providing loans to paper, we're providing loans to people. So, we try to find financial solutions and complement our banking needs through SBA programs, depending on how much assets they have, how much capital they need. And so having that availability through the SBA program is imperative for us. The credit underwriting is the same for SBA lending. We still have to make sure that the loan can be repaid back, but a lot of times our entrepreneurs need education. They need to know how much debt they need to have; they need to have a budget. I like to say the saying, if you don't plan, you plan to fail. And a lot of times these business owners need guidance from us as a community banker to be able to either say, hey, you need to start with us, or they may need to start with a Community Advantage lender just to get started. So just being there to educate the client makes us very different than fintech, which is where my concern is. Fintech is more about a predatory approach and trying to just give money as fast as they can. And they don't really see them as human. They just see them as another source of financing and getting rates. So that's where my concern is the most, is the fact that they're taking the human approach away from community banking when you allow fintech to take over. The Chair. Yeah, I do appreciate that support. Thank you. And Mr. Fitzgibbon, the SBA has had four straight quarters of negative cash flow. Over roughly that same period upfront borrower fee revenue has decreased by 13 percent while loan purchases, which occur when SBA has to buy a defaulted loan from a lender have increased by 73 percent. How concerning are these trends and what steps need to be taken to ensure that the 7(a) program continues to operate at zero subsidy from the taxpayer? Mr. Fitzgibbon. Well, thank you, Senator. I mean, four quarters of data is you can't draw every conclusion from four quarters of data, but it's all we have, and it is alarming for the comparison to the other vintages. So, I think looking at borrower fees is probably, and lender fees and reintroducing them is probably necessary. I would say that the cost of inaction is high, because regardless of the cost of the taxpayer, every loan that shouldn't have been made those defaults, ruins the financial life of that small business owner. And so, you could take a wait and see approach for the year and see if things normalize, but I think there's a human cost to that, that to me seems unadvisable. The Chair. Okay. Thank you. And now I would like to ask a question to all the lenders on the panel. Over the last five years, we have seen a dramatic expansion in the use of lender service providers or LSPs by SBA lenders. These LSPs assist SBA lenders by referring processing and servicing loans and are often increasing the volume of SBA lending. Does your company utilize an LSP and could you just talk about the proper role of an LSP in assisting SBA lenders and Mr. Lanza-Weil I'll start with you first and then we'll go to the other lenders. Mr. Lanza-Weil. Well that's easy: No, we don't. The Chair. Okay. Thank you. [Laughter.] The Chair. Mr. Fitzgibbon. Mr. Fitzgibbon. We don't use them. I think they play a helpful role if the lender that they're partnering with has good guardrails. But I think in combined with a fintech lender that it's all about churning volume, I think that they can be a part of the problem. The Chair. Okay. Thank you, Ms. Sims. Ms. Sims. Starting an SBA department in a community bank is daunting. It's a difficult task. And so, it can be very alluring to look at an LSP. I looked at it at one time when I was starting the department, but it's really difficult to keep consistency of your culture of who you are as a bank when you outsource it to somebody else. Keeping that consistency and also keeping the culture of your bank is out of your control. And a lot of times the customer experiences very bad customer service because they're not only dealing with us, they're also dealing with the LSP. If it's sold in the secondary market, they're not able to renegotiate their interest rates. So, they're also putting some guardrails on that. So LSPs do have a sense of purpose, don't misunderstand me, but they can also abuse that situation. So, we do have to enter that cautiously when using LSPs. The Chair Okay. Thank you, that's very helpful. Ms. Sims. And we do not use LSPs, by the way. The Chair. Okay. Thank you very much. I appreciate that. I will turn it now to Ranking Member Markey for your questions. Thank you. Senator Markey. Thank you so much. And so great news, really, really, really great news. In the United States last year. Last year, the Biden administration, 886,000 jobs directly related to 7(a) were either created or retained, great number. Another great number in Donald Trump's last year before Covid 2019, the 12-month default rate on 7(a) program 2.75, percent last year the last year of the Biden administration, 2.76 percent default rate. Now, we do admit that the default rate did go down to 1.32 percent at the height of COVID, but that was because of this great committee's work, passing the PPP program, passing the EIDL program, we were actually able to lower the default rate because of our actions to help those small businesses. But it's returned to normal, Trump 2.75 percent Biden 2.76 percent. So, we'll give Trump the win there by one 10th of 1 percent. Okay. He wins in that one category, but let's just say we're back to normal in terms of the 7(a) program and we should be very, very proud of the work that all these business people are doing out there. This SBA Community Advantage program has demonstrated success in making small dollar loans to small business owners that struggle. We see this story here in Springfield, Massachusetts. We see the lender and the recipient creating some capitalist magic that otherwise would not exist. And these lenders don't just provide loans: they provide financial help, marketing help, technical assistance that otherwise Ms. Guerrero and people like her, all across the country creating 886,000 jobs would not otherwise have. Which is kind of this brilliant construct that we have. So, Mr. Lanza-Weil, you say in your testimony, we lent to people, not to paper. Can you explain how common Capital's approach to making a loan to small business contrasts with a conventional lender. Mr. Lanza-Weil. Absolutely. We're a high touch lender. It's all about building a relationship with a borrower, with an applicant. You know, my first day on the job as a bank trainee in 1986 an old-time lender who smelled like cigar smoke, pulled me aside and said, you got to know this, know your borrower, it's the first rule of lending. And I think sometimes in larger institutions, and certainly in fintech, which I'm not here to bash, we lose sight of that. I think Ms. Sims referenced it as well, building a relationship with an applicant, getting to know that person as a human being, getting to know them as something beyond the paper on which their credit report is printed is so important. And we invest a lot of time. It's inefficient, it's slow, it's high- touch, and it's highly effective. Senator Markey. I agree with you. When I needed student loans, I was sitting next to my mother and father at the First National Bank in Malden, and Mr. Wentworth the banker, he said, Mr. and Mrs. Markey, you paid every month on the mortgage, so we trust you. So, we'll give the loan. There you go, high touch, they knew the customer. So, Ms. Guerrero, talk about how Mr. Lanza-Weil and his operation was able to help you. Ms. Guerrero. Gladly. Common Capital has been just super helpful. The truth is that I really don't know how we would exist as a business if Common Capital and the SBA Community Advantage Loan program was not available to us. I like the fact that the support that we received from them, I mean, you told me earlier there were nine people in your team. I really don't know the nine of them, but I know six of them by name. And I know how to get a hold of them for questions or anything like that. And that is just that relationship that I don't have with my community bank. Senator Markey. And so, give us one quick example, if you can, of something that they could help you to do that you would've had no capacity as a startup or small business. Ms. Guerrero. I mean, exist, sincerely, Senator, who would've given me the--okay, my other option to get the money to start my business would've been a predatory lender that would've given me a really high interest rate in terms that were really not conducive to profitability. So, it's as simple as that. Senator Markey. And you could have found them in Springfield, Massachusetts. Ms. Guerrero. Oh, of course. Senator Markey. The predatory lending? Ms. Guerrero. You can find them anywhere. Senator Markey. Oh, yes. So, you are just a perfect example of a wonderful system creating 886,000 jobs that is working with the default rate equal to the Trump years. Okay. Which is just an incredible achievement. So really helps to show how America can be great in helping startups to get over that financial hump. The Chair. Thank you, Ranking Member. And I do want to stress, it's the early defaults are really the issue that we're getting at today. The last three years, loan defaults are rising faster than pre COVID levels. And the program is losing money for the first time in a dozen years. So, it is something that we do need to scrutinize and we need to understand why this is occurring. So, we will go next to Senator Husted. You are recognized for five minutes of questions. Senator Husted. Thank you very much. Welcome to all of you. Thanks for being here today. I have a background overseeing a small business development center. I have a background on the board of a community bank, where I was on the loan committee, and I know how much our regulators scrutinize what loans we do make and what loans we don't make. And that this is--the community banks around the country are very close to their customers, and they know these issues quite well. But what I don't know well, I've only been a senator for four weeks. [Laughter.] Senator Husted. So, I'm, I'm trying to catch up on all the things that have happened in the past, and I know Mr. Fitzgibbon and Ms. Sims, you talked about rule and fee changes that had happened under the Biden administration, and I want to understand that better, and how that impacted the 7(a) program and just what the exposure and the risk of that. So just help educate me a little bit more about what that means, what the impact is, Mr. Fitzgibbon I'll talk, start with you. Mr. Fitzgibbon. Thank you, Senator. So, briefly, the rule changes reduced the underwriting criteria, and over the last couple of years the guarantee fee and the lender fee were waived up to, I believe it's a million dollars, no guarantee fee to the borrower up to a million dollars, this year it's no lender fee up to $500,000. So those are fees that support the program in a sense, it's skin in the game for the borrower. Those have been waived for a couple of years. The concern is that the lessened underwriting criteria has resulted in loans being made that shouldn't have been made and that's what's driving up delinquency and default rates. Senator Husted. Okay. And Ms. Sims. Ms. Sims. So, when you get insurance, you have to pay a premium to have insurance. So, you think of the government guarantee in that sense, is that typically when you're asking for a government guarantee, it's protection on the loan for the bank. And so I've been an SBA lender for my entire career, and I've seen the fees my entire life where, you know, SBA has provided this guarantee, this insurance to the lender, AKA, the customer gets this insurance as well, there's protection on their side, so there's benefit for the customer on that side, but typically, because we don't want this to be a burden on taxpayers, they self-fund through these fees. And so that's, really important to understand that we don't want the fees to be inappropriate, but we also want to make sure that they're not impacting the taxpayer money. Senator Husted. So, you, so summary, you think that would improve default rates and it would help sustain the program so that it's not a burden. Ms. Sims. So, sustainability is the key, right? We want to make sure it can be in the black. We don't want it to be in the red. So, if we see that there's problems there, we got to see, we got to reevaluate the situation when it comes to you know, the underwriting, that's something else that I've never seen, what we call the SOP dramatically change, to ``do what you do'', that's the rule. And makes it very complicated to know, because I, as a community bank can operate differently than another community bank. And having the regulations so loose, if you do what you do, also doesn't provide what I call a level playing field. And so that's important to also understand is that the SOP has changed. And now if you feel comfortable providing loans that are what I would say, not prudent, then you're allowed to do that because you are not regulated in the same way as maybe a community bank that has higher regulations. Senator Husted. Great. Mr. Lanza-Weil, do you have a thought on that? Mr. Lanza-Weil. Thank you, Senator. I don't know much about the fees. What I do know is about underwriting standards. We're required to maintain our underwriting standards even when the rules change in the SOP, the standard operating procedures. I think what we are hearing is that there are some lenders that haven't followed their own prudent underwriting guidelines. And that's perhaps not the fault of the program, that's the fault of the lender. So, I'd be cautious about throwing the baby out with the bath water. Our default rate hasn't changed, and among all the CDFIs I know, the default rate hasn't changed because we're very focused on making good loans in our market. It sounds as if there's a lot of lenders out there that aren't doing that. And they should have more guidance and be more careful. And I would hate for their imprudent lending to harm our prudent lending. Senator Husted. Okay. Thank you. The Chair. Thank you, Senator. Senator Rosen. Senator Rosen. Thank you. Chair Ernst, Ranking Member Markey, and thank you all for being here and just spending, well, of course, your life working with small businesses and for your work really in the mental health space, it's so needed. And I'm going to give a little bit of a plug here for Nevada's credit union and community banks, I know them all so well. And I will say during the COVID crisis, but all the time, like you said, they're in the neighborhood. These are their friends, their neighbors. They know people have a relationship with them. They know if maybe a family emergency happened and they can't pay something now, and they'll pay it later. And they really want to see communities thrive. So, I just know the importance of this kind of lending and that special touch that you can give it. It's very meaningful. And so, I think we can all agree that the 7(a) program, it's a vital source of funding for our small businesses. And Nevada business have received over 700 loans totaling $355 million just last year alone of 99 percent of businesses in Nevada, or small businesses, by the way. Although we're known for those big casinos, 99 percent are the small businesses. But it should be a shared bipartisan priority for the program, like you say, to run as efficiently as possible. And you know, I'm really thankful for your testimony so far, but it's not surprising that loan defaults delinquencies, they're more likely in times of economic uncertainty. And small businesses may face declines in sales or subsequent cash flows, mental health, of course I think you're going to stay pretty steady there. But similarly, poor economic conditions can put a strain on lenders who may be tightening their criteria and they reduce their loan volume. And so, we might look at looming tariffs, unreliable federal funding, economic uncertainty. It's critical we understand, again, the impact it's going to have on all of you. So, Mr. Lanza-Weil, can you discuss how the broader economic picture in this country is going to, in fact, affect maybe the borrower's loan performance and your lending activity? Mr. Lanza-Weil. Thank you, Senator. I think you said the word already, it's the uncertainty. The uncertainty that's existing in the marketplace today because of so much rapid and chaotic change is making it hard for us to plan. I don't know what the SBA's budget will look like next year. None of us do, obviously. I hope it's robust. But as we begin planning for our next fiscal year, we don't know how much money we can count on for an SBA grant that supports the business assistance that is so critical to supporting entrepreneurs like Mayrena. The business education and training that we provide is focused on helping people create and understand and use their financial statements and the management of their business. Mayrena knows how to be an exquisite mental health counselor, but probably didn't know much about QuickBooks before she came to us, or how to market her business. Senator Rosen. She learned pretty quickly us, and then that's what we're going to ask. How's the business environment impacting you and the uncertainty impacting you? You're working together, giving her the training, the resources, understanding how to be successful. How are you feeling in this moment? Ms. Guerrero. Well, it is true that the need for mental health services is there, but it's also true that the economic landscape is making--for example, I'm noticing that my clients, instead of booking weekly, they are booking biweekly because they can't afford the copay, or they have a hard time affording the deductible. Or like, people are losing their jobs, which means that they're losing access to healthcare. Or there could be like an executive order like freezing government funds, which affects Medicaid and Medicare, and that's 20 percent of my income. So definitely there's an impact in my business. Senator Rosen. Well, I want to go back to something you just mentioned. The importance of the SBA resource partners, as we see, it makes you successful. You're a great counselor, but maybe you didn't know QuickBooks when you started. And so, we have to bring that critical support and the training for our small business owners, from veterans' business outreach centers, small business development center, women business centers, and the like. I was so proud to bring the first ever Veterans Business Outreach Center to Nevada. We have almost a quarter million veterans in Nevada, very entrepreneurial. And really provide that tailored support and that free counseling, that technical assistance so that they can do what they do. And I know I have a short time left. Can you talk Mr. Lanza-Weil about the importance of this financial management counseling? I know all of you could really speak to this, but that's a big part of what you're helping a small business owner do, and how critical it is that we keep these resources flowing or their success and payback of the Loans. Mr. Lanza-Weil. Absolutely. Many of our applicants and borrowers have received services from our local small business development center network, and from our Women's Business Resource Center, which is the Center for Women in Enterprise, which serves all of New England and has had to lay off some staff already, because they are not getting the federal funds, they need on an ongoing basis to pay their staff to provide services to small businesses. The way we mitigate risk in a community development financial institution is with hands-on business assistance and training. By making Mayrena a better business person, she's also a better mental health counselor, and a better, a more sustainable and viable business in the long term. And at this particularly uncertain time, if the economy worsens, banks will tighten their lending as they always do. And CDFI loan funds, which are countercyclical, we'll see an increase in demand. And that increase in demand means that we'll need more help from our service partners to serve the businesses that we're able to make loans to. Senator Rosen. Well, thank you. I do believe small businesses are the engine of our economy in every state. Thank you for having this hearing, Madam Chair, and we need to continue to invest in the good work that you're doing. Thank you. Great. The Chair. Thank you, Senator Rosen. Senator Booker, you are recognized. Senator Booker. Thank you so much. I was excited to get on this committee when I got here, because I spent so much time as the mayor trying to get more access to capital for businesses in the City of Newark. And we were able to see an explosion during a recession, of new investment into our city, entrepreneurs succeeding. It was one of the best experiences that I got on this committee and it's been one of the better bipartisan committees that I've had here, and just finding ways because all of us know in our states, there's so much investment worthy people. I remember the now Secretary of State and I working together in the midst of the pandemic when the PPP loans coming out. But we found an arbitrary rule that disbarred people who had been justice involved returning offenders. They'd had to be out of for five years before they could qualify for a PPP loan, that was arbitrary and just dumb. And my Republican colleagues agreed, and we got it fixed under the Trump administration. So, it's just a great environment for us to continue to try to do good work. I'm a big person who believes in entrepreneurialism and the power for communities of capitalism, the double, triple, quadruple bottom lines that we find. And so, I just want to jump into some areas really quickly. One concern having had so much experience with Microloan programs inspired by the Grameen Bank in my community I'm really worried that we've had, you know, 15 years of mission- based lenders through the Community Advantage program that have worked closely with small businesses to help them get the capital they need, which is often small. But in January, the SBA announced it would increase the loan maximum up to half a million dollars, which I think is going to have a really stunning impact. And right now, I'm hearing from lenders that they haven't had communication, really from the SBA on whether they can offer increased loans to small business owners. There's a lot of delay going on. I got an extraordinary note from a small business lender in New Jersey, ``Last week, we had to decline a loan request from a farmer in Mullica Hill, who sought to expand his seasonal open-air farm into a larger year-round operation. The business was doing well despite its seasonal limitations. His goal was to provide his community with high quality produce plants and specialty groceries year-round instead of in his current just five-month operation. However, during our review, we determined that he required more than $350,000 to complete renovations, purchase equipment, and secure the necessary working capital for successful expansion. He was concerned about the risk of undercapitalization. We had to decline the request. Given his limited collateral, securing traditional bank financing would have likely been a challenge for him. We believe the borrower needed Community Advantage 7(a) loans of at least $450,000.'' So, it's disappointing that small businesses in New Jersey are missing out on opportunities with these larger loan possibilities. And so just I'm hoping you shed some light on this, Mr. Lanza-Weil, have you been able to offer increased loan amounts in addition to the small ones that you're probably very familiar with? what would the impact be for your business folks? Mr. Lanza-Weil. For a long time, Senator our loan limit has been only $300,000. So, there's not been an effect in the past for the changes in the loan limits. But we'd like to raise our loan limit internally for all sorts of loans. And we find that most of our larger loans, and a larger loan for us is a loan over $75,000, our people coming to us with insufficient collateral. So, if we're going to raise our loan limit, we need an increased loan limit on the Community Advantage program in order to be able to continue to help low asset and low wealth individuals. Senator Booker. So, I just think there's a lot of common- sense fixes. I have some other questions I'm going to ask for the record that I don't think we'll be able to get through and the chairwoman is just rough on me. She particularly picks on New Jersey. So, I'm going to ask some questions for the record. I hope that you all will respond. I want to thank the four of you because I know your heart and your determination, you do this work really to see communities' flourish. And it means a lot to me that you would come down here and testify before the United States Senate. I know time is money, as you all know that, so it means a lot to me that you're here. But I hope you'll be as the hearing is open, I hope that you'll be responsive to some of the other questions I have that I think can really inform this committee, which I hope continues its record of just working in a bipartisan manner to help folk out. So, thank you. The Chair. Thank you. Senator Booker. My ears perked up when you said farmer? Senator Booker. I know. The Chair. I was so invested in---- Senator Booker. It's fourth largest industry. People don't think it is the garden state, you know. The Chair. In New Jersey, folks. [Laughter.] The Chair. Thank you, Senator Booker. Now we will recognize Senator Hirono for five minutes. Thank you. Senator Hirono. Thank you, Madam Chair. I just happen to have met with some farmers from Hawaii, and they have unique challenges because we are in the middle of the Pacific, and there are all kinds of invasive species, including axis deer. And, you know, people don't know that we have, yes--sheep and others, but be that as a it may. I think in you, Madam Chair, we have somebody who supports the that we can give from SBA, particularly to entities such as farmers and the people in rural areas. For Mr. Lanza-Weil, I just heard you say that you would want the loan limits to be raised, what is the loan limit that you are working with right now? Mr. Lanza-Weil. I believe it's $350,000. Senator Hirono. And that you would like that raised to what? And it requires the Congress to raise that limit? Mr. Lanza-Weil. I don't know who requires to raise that limit. Okay. But 500,000 would be helpful to us. Senator Hirono. Is that because based on your own experience, that the amount of the kind of loans that people requests are more in the 500 range as opposed to the 300,000 range? Mr. Lanza-Weil. Senator, we see when they come to us with our $300,000 loan limit, we see them scaling their plans and their ask to what they think they can get from us. If we had a higher loan limit, then they might reach further for the stars. And of course, everything's gotten more expensive over time. That's just the nature of money and time together, the time value of money, I think they taught us in in business school. So, our $300,000 loan limit has become somewhat obsolete. And $300,000 doesn't necessarily help launch many small businesses. We need to see more resources for that. Senator Hirono. I saw Ms. Guerrero, you are nodding your head, you would agree with loan limit issue? Ms. Guerrero. Definitely. I could have used $500,000 at the beginning of my business. And the reason why I say this is because I got that $300,000 from Common Capital, and about two years later, I needed an additional $100,000 from another lender. So, if I would've had that money from the beginning, that would be much easier for me. Mr. Lanza-Weil. If I may, Senator, excuse me for interrupting. As Mayrena said, as a business grows, if they outgrow us, at least in Western Massachusetts, there's not another resource. We need to have more resource so we can help the businesses as they grow, not just as they establish. Senator Hirono. Oh, that certainly makes a lot of sense. Ms. Guerrero, you got your loan through the Community Advantage program, which was created frankly not too long ago, and it was started as a pilot program. Could I ask, how much was your loan from the Community Advantage program? Ms. Guerrero. The Advantage Program gave us $250,000. And then I had an additional 50 grand microloan. Senator Hirono. So, without the Community Advantage program that you would have had a hard time getting your business off the ground? Ms. Guerrero. It would not have happened, Senator, because I wasn't going to fall prey of like predatory lending. Senator Hirono. How are you doing now? Ms. Guerrero. Oh, we are doing really well. We're really excited. I must say we're in conversations with Boston Impact Initiatives, which is a venture capital sort of firm that works with minority owners. And they're going to do a structured equity deal with us and just give us money so that we can have doubled the workforce that we currently have. So, we're about to grow significantly. Senator Hirono. Congratulations. Ms. Guerrero. Thank you. Senator Hirono. I really wish you the best. Mr. Lanza-Weil, then can you speak a little bit more about the importance of community lenders, because community lenders in a state like Hawaii, very important, but that's where your experience lies. Can you talk a little bit more about how important these kinds of lenders are in your---- Mr. Lanza-Weil. Absolutely. I think any high touch lender is very important. I started my career at a community bank in the San Diego area. To the extent that the bankers on either side of me are community lenders who have a high touch approach, I think that's very important. I think on the continuum of credit, we need everything from community lenders that are certified CDFIs and other community loan funds on through to community banks and credit unions. It's the know your borrower conversation, that I think perhaps you weren't in the room for yet, Senator. The first rule of lending is-know your borrower. Smaller banks, community banks and community loan funds get to know their borrowers, and that enables them to say yes more often and to manage the risk when they do say yes. Senator Hirono. So, for the two witnesses who are sitting to the left and right of you, are you both community lenders? Ms. Sims. Yes. I'm an SBA lender that works for First Security Bank, and we're community bank. Senator Hirono. So, you certainly would agree that community lenders like yours very important. Mr. Fitzgibbon. Yes. Senator, we're community bank in the middle of Iowa. Senator Hirono. Thank you. Thank you, Madam Chair. The Chair. Thank you very much. And I think we'll go ahead and wrap our hearing. Okay. I want to say thank you so much for the witnesses for being here today. This was a very productive conversation. Really appreciate your time and input to the committee today. And I ask unanimous consent that the record of today's hearing remain open for two weeks for members to submit questions, revise and extend their records, and submit additional information into the record. Without objections, so ordered. And with that, the Committee on Small Business and Entrepreneurship---- Senator Markey. Can I make a closing statement? Okay. Please, you'll like it, I promise. The Chair. Oh, we will allow. Proceed. Senator Markey. Thank You. Just want to say that the Community Advantage Program was a pilot program and is still not law. And the Senate Small Business Committee, in its wisdom in 2023, passed out of this committee by 18 to one, the codification of the Community Advantage Program. It was blocked on the floor by Senator Paul, which is a common fate for many pieces of legislation, I might say. But we could work together once again, to try to try to pass that bill. And I just wanted to note that even in early defaults, it was 1 percent during the Trump administration back in 2019, and it was 1 percent last year in the Biden administration. And it went down lower actually, because of PPP and--but even the early default is kind of just returning to where it was before COVID. And the 7(a) loan program is healthy. 99 percent of loans are being repaid despite the short-term increases in the default rate. This rate is actually normalizing back to pre- pandemic levels, which is great. And I just want to go back to Mr. Wentworth at the First National Bank of Malden. I remember sitting there, it looked a lot like you. Well, Mr. Wentworth really didn't look like you, Mr. Lanza-Weil, if you know what I mean. But the earlier generation, those old waspy bankers in New England, in that small city. And my father drove a truck for the Hood Milk company, and my mother was very mad at me for losing the full scholarship. You know, that I should have studied harder, she said, and we are sitting there, and my mother said, take out as much money as you want, Eddie, because you're going to pay it back, not your father. He's not going to take a second job. And I was in Congress at age 30, and because I went to the school at Boston College Law School, I was elected at age 30. Those loans helped; my father's a milkman. And I was paying back the student loans for six years as a member of Congress. I was the poorest member of Congress, all I had was student debt and my car payments. I had no other assets, but he knew his lender. I mean, he knew his customer, he knew who he was loaning to. It was my mother and father, and they would make sure I paid it back. So essentially, that's the essence of who you are. You're giving people who maybe the rest of the world can't quite see as well as they could, but because you know them and you trust them, you make them work at the same level as other businesses that maybe have those pre-existing relationships. So, I thank you so much, Madam Chair. The Chair. And witnesses, stay put. We had one member sneak in before the fall of the gavel. So, Senator Hickenlooper, you are recognized for five minutes. Senator Hickenlooper. Thank you, Chair and I appreciate you allowing the meeting to extend. I appreciate your indulgence. This is something I really care about, but in a previous life, seems like several lives ago, I came in as a new governor in Colorado, and we did a bottom-up economic development plan. We went to all 64 counties, got everyone to write an economic development plan of what did they see in 50 years for their community, what should the state do to get there? And we took all those together and we made something, we called the bottom-up Economic Development Plan. And it was amazing how universal the vision was. Some was obvious, cut red tape and needless bureaucracy. Sometimes it was, get a better workforce training, stop marketing the state for skiers, but for entrepreneurs. But one thing we heard everywhere was to find ways to get better access to capital, for people trying to start small businesses. So, Mr. Lanza-Weil, I guess I'll start with you. This Community Advantage program of expanding access to capital for underserved communities. I mean, it supports so many entrepreneurs in a variety of small businesses and helps them in accessing capital. In many cases, they wouldn't be able to find that capital anywhere, they're not from a community that has a lot of family money or friends and networks already in place. So how has the Community Advantage program made it easier for Common Capital to reach some of these underserved communities? Mr. Lanza-Weil. Thank you, Senator. I recall you were in the brewery business, is that correct? Senator Hickenlooper. I was a brew pub, so it was a really a restaurant, but it had a brewery inside of it. Mr. Lanza-Weil. When three of our 41 Community Advantage borrowers have been micro-breweries. Senator Hickenlooper. Oh, get out. Really. Who knew? Mr. Lanza-Weil. It's true fact. Every single one of our 41 community Advantage borrowers came to us with a weakness that we could not overcome through our standard underwriting. It's almost always a lack of collateral. We have people that have saved money for years to have their 10 percent equity injection. They've gotten the experience they need in their industry. They have a good business plan that's reasonable and achievable. They're buying assets in some cases with their loan, in the case of Mayrena, it was couches and clocks. In the case of a microbrewery, it's some hard assets that have more value, but every small business that forms it starts up needs working capital. And that doesn't act as collateral on its own. So, we've needed the CA program to help bridge the gap when we've had a collateral deficiency. And I want to make clear Senators, that that doesn't cover the whole thing. The guarantees only 75 or 85 percent, or in one exceptional case, 90 percent. We're still taking risk in the formation of that business, as is the entrepreneur who's put everything they have into it. And if it weren't for the Community Advantage Program, we wouldn't be able to make many of those loans. Mayrena expressed already that her business wouldn't exist without it. Senator Hickenlooper. Yes. I appreciate that and I salute you for all that work. I--all of you really, when I read the docket last night, it was really impressive. Mayrena, obviously the small businesses are important, not just for the entrepreneurs and not just for the employees, but for the communities they serve. In many cases, they serve a niche. And one of the wonderful things about small businesses in underserved communities, people live there. They know what the niche is, they know what the community needs. And I think that's an advantage that many businesses don't have. You've talked about how the SBA programs helped you start your business of Colorful Resilience--love the title. We entrepreneurs spend our lives thinking of good titles, good names but I love the notion of Colorful Resilience in terms of mental health. It's a very powerful image. How would you describe the impact of your business on your community? Ms. Guerrero. Well, huge really, because the communities that we serve, the BIPOC, LGBT, first Generation immigrant communities, have just historically been underserved, just forever. And that gap became greater after the pandemic. And so, we all know that there's a mental health crisis. There's a lack of providers for the demand of mental health services. So, our existence and that cultural competency that comes from working with providers that have shared identities, has been huge. It's a huge impact in the community. For example, my marketing budget is $80; $50 for my website, $30 for my Psychology Today directory. Why? Because clients come to me. I don't go looking for them. So that tells you the impact that it has in the community. Senator Hickenlooper. Absolutely. Amazing. Mr. Lanza-Weil. Senator, may I add to that please? Senator Hickenlooper. You have to talk to the chair because I'm out of time. Mr. Lanza-Weil. Madam Mayrena's business is not the only culturally competent and focused mental healthcare business that we financed. And we have, I think, a total of five mental health therapy businesses in our portfolio. But Mayrena's and one other are very much focused on people of color and others that have been traditionally underserved. Senator Hickenlooper. It's a great example. I'm so glad you guys could find time to come here. And I will watch, I've been running around, but I'll watch the videos tonight to catch up. Anyway, I yield back to the chair. Thank You. The Chair. Thank you. Senator Hickenlooper. Okay, we're going to try this again. Thank you very much. To our witnesses, thank you again for being here today, really productive discussion. Thank you for making it in right before the fall of the gavel. So, at this time, I will ask unanimous consent that the record of today's hearing remain open for two weeks for members to submit questions, revise and extend their records, and submit additional information into the record. Without objection. So, ordered. [The information referred to follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] The Chair. And with that, the Committee on Small Business and Entrepreneurship stands adjourned. Thank you all very much. [Whereupon, at 3:51 p.m., the hearing was adjourned.] [all]