[Senate Hearing 117-733] [From the U.S. Government Publishing Office] S. Hrg. 117-733 IMPROVING ACCESS TO CAPITAL IN UNDERSERVED COMMUNITIES: THE COMMUNITY ADVANTAGE PROGRAM, MICROLOANS, AND OTHER SBA INITIATIVES ======================================================================= HEARING before the COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP OF THE UNITED STATES SENATE ONE HUNDRED SEVENTEENTH CONGRESS SECOND SESSION __________ DECEMBER 14, 2022 __________ Printed for the use of the Committee on Small Business and Entrepreneurship [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] Available via the World Wide Web: http://www.govinfo.gov ______ U.S. GOVERNMENT PUBLISHING OFFICE 50-575 WASHINGTON : 2023 COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP ONE HUNDRED SEVENTEENTH CONGRESS ---------- BENJAMIN L. CARDIN, Maryland, Chairman RAND PAUL, Kentucky, Ranking Member MARIA CANTWELL, Washington MARCO RUBIO, Florida JEANNE SHAHEEN, New Hampshire JAMES E. RISCH, Idaho EDWARD J. MARKEY, Massachusetts TIM SCOTT, South Carolina CORY A. BOOKER, New Jersey JONI ERNST, Iowa CHRISTOPHER A. COONS, Delaware JAMES M. INHOFE, Oklahoma MAZIE HIRONO, Hawaii TODD YOUNG, Indiana TAMMY DUCKWORTH, Illinois JOHN KENNEDY, Louisiana JACKY ROSEN, Nevada JOSH HAWLEY, Missouri JOHN HICKENLOOPER, Colorado ROGER MARSHALL, Kansas Sean Moore, Democratic Staff Director William Henderson, Republican Staff Director C O N T E N T S ---------- Page WITNESS PREPARED STATEMENTS Panel 1 Mr. Jon Gaines, Vice President, Business Services & Finance, Wisconsin Women's Business Initiative Corporation, Milwaukee, WI............................................................. 6 Mr. Nick Schwellenbach, Senior Investigator, Project on Government Oversight, Washington, DC........................... 23 Mr. Robert Villarreal, Chief External Affairs Officer, Momentus Capital-CDC Small Business Finance, Chula Vista, CA............ 32 Ms. Annemarie Murphy, Executive Vice President, President of SBA Lending, First Bank of the Lake, Greenville, SC................ 49 QUESTIONS FOR THE RECORD Mr. Jon Gaines Responses to questions submitted by Senators Cantwell and Rosen...................................................... 75 Mr. Nick Schwellenbach Responses to questions submitted by Senators Cantwell and Inhofe..................................................... 87 Mr. Robert Villarreal Responses to questions submitted by Senators Cantwell and Rosen...................................................... 90 Ms. Annemarie Murphy Responses to questions submitted by Senators Cantwell and Inhofe..................................................... 96 ADDITIONAL STATEMENTS FOR THE RECORD Senator Hickenlooper Statement dated December 14, 2022............................ 102 National Association of Development Companies Statement dated December 14, 2022............................ 104 National Association of Development Companies Letter dated December 12, 2022............................... 110 Mission Lenders Working Group Statement dated December 14, 2022............................ 115 IMPROVING ACCESS TO CAPITAL IN UNDERSERVED COMMUNITIES: THE COMMUNITY ADVANTAGE PROGRAM, MICROLOANS, AND OTHER SBA INITIATIVES ---------- WEDNESDAY, DECEMBER 14, 2022 United States Senate, Committee on Small Business and Entrepreneurship, Washington, DC. The Committee met, pursuant to notice, at 2:28 p.m., in Room 428A, Russell Senate Office Building, Hon. Ben Cardin, Chairman of the Committee, presiding. Present: Senators Cardin, Booker, Hirono, Rosen, Ernst, Young, Hawley, and Marshall. OPENING STATEMENT OF CHAIRMAN CARDIN Chairman Cardin. The Small Business Committee will come to order. I just wanted to acknowledge first this will be our last hearing of the 117th Congress, and I just really want to take this opportunity to thank the dedicated staff, both the Majority and the Republican staff, on this Committee for the work that they have done. This Committee, particularly during COVID-19 but as a legacy of COVID-19, handled a lot of responsibilities. Its portfolio increased dramatically, and it has one of the smallest staffs of any of the standing committees in the United States Senate. And I just really want to thank them for their dedication and work and the cooperation that we have received from the Majority and Minority staffs working together to get many major bills to the finish line. I am reminded that the SBIR/STTR programs were not an easy assignment. We have half a dozen bills that have made their way through our Committee and are going to make their way to the President for signature. This has been a very productive Congress for the Small Business and Entrepreneurship Committee, and I just really want to thank my members as well as our dedicated staff. We are continuing today with a very distinguished panel of witnesses, and I am really pleased that Senator Marshall is stepping in to be the Ranking Member for today's hearing. He has been a loyal member of this Committee, very actively engaged during the 117th Congress. So, Senator Marshall, wonderful to have you here today. Today, the Senate Small Business and Entrepreneurship Committee will consider a hearing on ``Improving Access to Capital in Underserved Communities.'' Access to capital is the lifeblood of any business but is especially critical to small businesses. For too long, underserved and underbanked businesses have not had equal access to these resources. It is an enduring problem. While large banks approve 60 percent of the loans sought by White small business owners, minority small businesses have a lower rate of approval. Banks approved just 50 percent of loans sought by the Hispanic small business owners and 29 percent of those sought by Black owners. Inequities like these were made worse during the pandemic, making it significantly more difficult for minority businesses to absorb financial shocks. According to a study by the Federal Reserve Bank of New York, about 58 percent of Black-owned businesses were at risk of financial distress prior to the pandemic as compared to 27 percent of White-owned businesses. This is why leveling the playing field and improving access to capital for underserved communities is a top priority and why I am constantly looking for ways to improve the Small Business Administration's lending program. As many of you know, the 7(a) loan guarantee program is SBA's flagship lending program. Last year, SBA approved over 47,000 7(a) loans totaling over $25 billion. This is an enormous amount of capital going to so many borrowers who would otherwise be unable to access capital elsewhere. However, of those 7(a) loans, only 4 percent went to Black business owners and 15 percent to women business owners. Though this is better than it has been in past years, we must do, and should do, much better. That is why I am a proud supporter of the Community Advantage program. Community Advantage was created in 2011 to address the credit gap in underserved markets. The program allows mission oriented, nonprofit lenders to make 7(a) loans up to $350,000 focusing on economic development for underbanked small business owners. Compared to the regular 7(a), Black business owners received 20 percent of the Community Advantage loans and women owned businesses, 32 percent. Although a smaller, more targeted program, the Community Advantage program clearly does an excellent job of addressing the credit gap and is a key tool to our mission to improve access to capital for underserved small business owners and entrepreneurs. I have introduced legislation to make the Community Advantage program permanent. This will provide stability to enable more lenders to enter the program and ultimately reach more entrepreneurs and small businesses in their communities. I am hopeful that it will become a permanent SBA program in the next Congress. The Microloan program is another SBA initiative that reaches various demographic groups that would otherwise not be served by the private sector or even by the SBA's own 7(a) program, playing an important role in providing credit to the smallest, underbanked small business owners and entrepreneurs. In fiscal year 2022, 45 percent of all Microloans went to women-owned businesses, 14 percent to Hispanic-owned businesses, and 35 percent to Black-owned businesses. Microloan borrowers generally have the most difficult time accessing capital elsewhere. Less than one-third report that they would have been able to find acceptable financing from other sources. These lending programs are critical in addressing the existing credit gap for minority and women small business owners in particular. I look forward to hearing from our witnesses about how we can improve these programs and adopt innovative solutions to provide access to capital to those currently left out of the system. This hearing will also explore two recent rule changes proposed by the SBA. According to the SBA, the purpose of these two changes is to bring more lenders into the market, creating more opportunities for small-dollar loans and reaching more underserved communities. It is clear that lenders must do more to reach the underserved small businesses. We saw too often with the PPP that these small businesses did not have the same financial connections and resources as larger ones did, and they were excluded from the critical relief or had to wait a longer time in order to get their help. It is important that we recognize these inequities in our capital access programs and in the small business ecosystem more broadly and, even more importantly, that we work to address them. I support the SBA's efforts in their work to level the playing field for small business owners and entrepreneurs. I understand that there are many concerns about these proposed changes, and while I fully support the objectives and the goals in mind, I share some of these concerns. We need to ensure that we address these inequities and better serve small business owners without undermining important guardrails. Guardrails are essential. They protect borrowers, the lenders, and the integrity of the programs. We also need to think through these proposed changes and ensure that they will actually increase small-dollar loans and address the credit gap without unintended consequences or harm to small business owners we aim to help. The public comment period on the proposed changes is now open, and I encourage everyone with questions or concerns to make their voices heard. I wholeheartedly agree with the SBA that we must do better in reaching our underserved entrepreneurs. However, I also feel strongly that we must go about this in a transparent and informed way, and I welcome discussion about the impact of these changes. I look forward to working with the SBA, the lenders, underserved entrepreneurs, and the small business community, and other stakeholders on this issue. I want to thank our witnesses for being here today, and I look forward to their testimony. But first, if I might, I am going to yield to the Ranking Republican Member, Senator Marshall. OPENING STATEMENT OF SENATOR MARSHALL Senator Marshall. Well, thank you, Mr. Chairman, and let me also add my thanks to Ranking Member Paul for giving me the honor of sitting in this chair. And let me add my thanks, along with yours, to the Committee staff as we close out the Congress for all their hard work and let me add also my thanks to the witnesses for coming today, taking time out of your day to get here and share your wisdom. It is an honor to serve as Ranking Member for today's important hearing as we examine how the Small Business Administration can best serve small businesses' capital needs, especially for borrowers in underserved communities. Access to capital is always a top issue facing Kansas small business owners and businesses throughout the country. After hosting several roundtable discussions with minority-owned Kansas businesses, it is clear that our entrepreneurs have solid business ideas and plans to grow but often lack the resources or connections they need to get a business off the ground. I frequently hear concerns that the SBA's lending programs are cumbersome for our community lenders and are filled with bureaucratic red tape for the borrowers, who often give up very early in the process. Due to the high-risk status of any new venture and this lengthy application, many banks have decided to stay on the sidelines. Indeed, entrepreneurs need streamlined access to capital so they can focus more on their businesses and not paperwork. But some things must be working as SBA approved a blockbuster number of loans in fiscal years 2021 and 2022. According to SBA's data, in fiscal year 2021, the 7(a) loan program administered more than 50,000 loans for more than $36 billion of which 30 percent of the dollars went to minority owned small businesses. In total, these 2021 numbers represent an increase of $13 billion from 2019 in approved 7(a) loans. These numbers are promising for the lending programs, but more can be done, and I am committed to finding solutions with my colleagues so we can provide more opportunities to entrepreneurs across the nation. This is exactly what will turn our economy around and provide more high-paying jobs for all Americans. However, when changing these programs, we cannot forget to maintain strong due diligence standards while still maintaining simplicity. As these programs are government-backed loans, it is essential that prudent lending standards are in place to ensure taxpayers are not footing the bill on risky loans. The 7(a) loan program has generally operated at zero subsidy, meaning the program administers fees to offset any loan losses. Recently, the SBA announced two proposed rules that would alter the underwriting and standard practices in the 7(a) and 504 programs. One rule would also lift a 40-year moratorium on how many non-Federally regulated lenders the SBA can oversee. While I hope this allows more access to capital, it is concerning to me that the current administration is changing significant lending policies without input from Congress. It is also concerning that the SBA may not be able to adequately provide oversight and examinations of these new SBA lenders through the SBA's Office of Credit Risk Management under these new rules. Many have seen these rule changes as an opportunity to allow fintech lenders into SBA's traditional lending programs. While it is encouraging to see the SBA is attempting to take steps to diversify its lending pool, it is troubling they are coupling it with loosening program standards. Fintechs had the opportunity to participate in the Paycheck Protection Program, but recent reports have shown fintech is responsible for a disproportionate amount of PPP fraud compared to more traditional, local lenders like community banks and credit unions. Many of the fintechs in PPP had not been subject to the Bank Secrecy Act and Know Your Customer compliance requirements, which led to fraudulent PPP applications being processed. These are major concerns that, while automation may streamline certain processes, critical vetting and eligibility checks will be left behind and replaced by a high-volume business model with the addition of fintechs in lending programs. SBA loan procedures can often be improved, but it is the key technical assistance to borrowers that differentiates SBA lending and ensures that the borrower is not in a predatory loan that they will have difficulty paying back. In light of the findings on fintech fraud in PPP, Congress needs to first examine letting fintechs into new Federal lending programs before the SBA implements these very significant changes. Thankfully, we will have the opportunity to start the conversations today. I am looking forward to hearing from our witnesses today, who are experts on the fraud and wrongdoing in PPP loans as well as SBA mission lenders who can speak in detail about how they help underserved communities and the impacts these new policy changes will have on program risk. Again, I believe we can do both. Making the process simpler and streamlined will bring in more lenders. Yet, we must maintain the integrity of the programs. Thank you. I yield back. Chairman Cardin. Thank you, Senator Marshall. I certainly agree with your comments, though. We have to make sure we have accountability, and we have to expand the opportunities to make it easier for small businesses to access the SBA programs. So, thank you very much for your comments. We now look forward to hearing from our distinguished panel. Let me introduce you, and then we will go from my left to right. First, Jon Gaines is the Vice President of Business Services and Finance at Wisconsin Women's Business Initiative Corporation. That organization has become a highly successful Microloan and Community Advantage lender. They do great work in this area, and I look forward to hearing from Mr. Gaines about his organization's experience with these programs and discussing what we can do to make them better. We will next hear from Nick Schwellenbach, a senior investigator at the Project on Government Oversight. He joined POGO in February of 2017 and was previous a communications director at the U.S. Office of Special Counsel, the main Federal agency in charge of protecting whistleblowers. Next we have Robert Villarreal, Chief External Affairs Officer at CDC Small Business Finance. Under his leadership, the organization has become the nation's largest Community Advantage lender. CDC Business Finance also lends in my home State of Maryland. I always mention that. They do excellent work in supporting smaller lenders, and I look forward to hearing your testimony. And then lastly, we will hear from a person I had the privilege of hearing from earlier last week, Annemarie Murphy, who is President of the SBA Lending for First Bank of the Lake, where she directs all facets of government-guaranteed lending. As part of her current role, Ms. Murphy successfully launched a Veterans Initiative Team to target lending activities to our nation's veterans and tripled the volume and space within the first year. Quite a record. We will start with Mr. Gaines. STATEMENT OF JON GAINES, VICE PRESIDENT, BUSINESS SERVICES AND FINANCE, WISCONSIN WOMEN'S BUSINESS INITIATIVE CORPORATION, MILWAUKEE, WISCONSIN Mr. Gaines. Well, good afternoon, Chairman Cardin, Ranking Member Paul, Dr. Marshall. My name is Jon Gaines, and I am the VP of Finance for Wisconsin Women's Business Initiative Corporation. We call it, internally, WWBIC. Thank you for the opportunity to testify today as an intermediary lender of the SBA loan program and on its success of microlenders like our organization in delivering financial services to underserved small businesses. I am pleased to testify on behalf of WWBIC and the Friends of the SBA Microloan Program, an association of Microloan intermediaries that advocate basically for the program. A brief bit about WWBIC. We are a leading, innovative, statewide economic development corporation birthed out of the Women's Economic Empowerment Movement and began operations in 1987, providing business development services to start-ups, micro enterprises, and small businesses, with a primary focus on women, minorities, people of low wealth and incomes, and most recently, veterans and military-connected families. We open doors of opportunity by providing direct lending and access to fair and responsible capital, quality and responsible lending, and one-to-one technical business assistance and coaching to increase financial wellness. In 2005, WWBIC entered the SBA Microloan program, and I will talk a little bit more about that later, but we are certainly excited about the success so far of the SBA Microloan program and certainly what it has done in terms of working with folks within our State as well in terms of fostering economic growth. WWBIC has about 65 employees. We have five regions across the State of Wisconsin, and we are really excited about the work that we do, in quality small business lending and financial training. A little bit about the SBA program. It is the largest Federal program exclusively targeted to support the credit needs of very, very small businesses and self-proprietorships. Through a network of community banks, and nonprofit intermediaries, the SBA program provides small-dollar loans and technical assistance to small businesses that cannot--I repeat, cannot secure credit from conventional lenders or other SBA based programs related to loan guarantees, of which most of those borrowers are, again, ladies, low-wealth individuals, veterans, and minority entrepreneurs. Those entrepreneurs--the intermediaries ourselves, we then leverage those funds with state, local, and other private dollars to basically provide Microloans and business development services and resources to small businesses. You may know, Microloan proceeds may only be used for working capital and the acquisition of materials, supplies, furniture, fixtures, equipment, those types of things. Intermediary lenders participating in the SBA Microloan program receive two streams of funding from the SBA: a direct loan to the intermediary lender that is used to capitalize a revolving loan fund and grant funds to help support the costs of providing technical assistance to business borrowers. As we said before, SBA Microloan intermediaries serve the smallest of the smallest businesses that are out there. The program allows intermediaries to make loans up to $50,000. However, the average SBA Microloan is about a little over $14,400 as of fiscal year 2020. Currently, there are about 150 active Microloan intermediaries serving 49 states, the District of Columbia, and Puerto Rico as well. WWBIC's SBA Microloan program effects began, again as I noted, in 2005. Since we have been a part of the SBA Microloan program, we have deployed a little over 940 loans totaling $20.6 million, with an average loan size in that Microloan pool of about $22,000. So, again, very small dollars there. The small business borrowers of our program provide tangible benefits in the communities that we serve. Our logo at WWBIC--I will say more our mantra--``one team, one mission, one WWBIC,'' our service approach, is we really work to listen, serve, and nurture novice small business owners who are my neighbors and also live in communities we call home. I could talk about more statistics, but I would rather talk about a couple stories if I can. I want to share a brief story about Heather Varney. Heather Varney owns a company called Aeroforce Logistics. It is a start-up veteran- and women-owned business located in Milwaukee. Heather learned to be a resourceful problem-solver and a good communicator at an early age. While in the Marine Corps, she experienced a bad accident and was forced to change jobs due to the injury and began focusing on sourcing aviation parts. She became the parts-finder, if you will, for the Marine Corps and ultimately continues adding growth by serving U.S. Government entities and large corporations, actually, that needed additional aerospace materials and aerospace equipment while really working on her focus to make sure she ensured working around the small business contracting and utilization goals she had in place. How did WWBIC help? We helped directly with her first loan ever, an SBA Microloan for $50,000, which covered a portion of her start-up costs. Her business grew very, very rapidly, and within six months she repaid that loan and graduated to, as we call it, moving to a commercial lender, which we definitely work to extend those parts for businesses as well. Heather shared briefly about WWBIC. This is a quick quote: ``They helped us when traditional banking could not, and they are also very well known in the community and also help with making connections, which again are important facets of the Microloan program.'' My second example I would like to talk briefly about, Lakesha Davis. Lakesha Davis is the owner of Lovingkindness AFH, LLC, which again is a minority- and women-owned business in Racine, Wisconsin. Lakesha fled a domestic violence situation and also homelessness as well and wanted to help other folks facing similar circumstances. WWBIC got directly involved. We lent her less than $50,000 in capital to start her business and provided substantial pre- loan technical assistance, for example, helping her create her business plan, pitching her business idea with other individuals, working to build her confidence, working specifically to help her learn and really use QuickBooks in her business, and certainly last, but not least, finding mentors and connecting with other resources, which we all know are important with any business. Currently, Lakesha plans to scale her business to own 25 percent of the houses in the area where she actually has her current business and then ultimately, once that process happens, expand to other states as well. Lakesha shared a lot: ``When I started my first business with WWBIC, I was a big pile of mush, and that was okay. My head was full of uncertainty, but as I followed the step-by- step instructions you guys shared with me, things began to get a lot more clear. Not only did I learn how business works, but I also learned self-confidence, how to believe in myself, and also how to get others on board with my ideas. WWBIC truly helped me turn my business dream into the reality.'' So, as we say, the Microloan program does help with putting businesses to work. And finishing here, there continues to be a great demand for Microloans and raising the cap on intermediary loans, which will allow high-performing intermediaries to secure additional resources to assist small businesses in their communities. Waiving requirements for technical assistance matching will make more intermediary resources available to businesses. Current law limits to 50 percent the use of TA, technical assistance, grants for pre-loan technical assistance and the use of consultants. We urge the Committee to consider extending or making these provisions permanent. We also strongly support, again, eliminating the 50 percent limit---- Chairman Cardin. If you could summarize the rest of your statement, we appreciate it. Mr. Gaines. I will. In other words, thank you again for your time today and listening to our story. And again, it is important. TA is important; the Microloan program is important to the success of businesses in our community but also across the nation as well. Thank you. [The prepared statement of Mr. Gaines follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Chairman Cardin. Mr. Gaines, thank you for your testimony. Mr. Schwellenbach. STATEMENT OF NICK SCHWELLENBACH, SENIOR INVESTIGATOR, PROJECT ON GOVERNMENT OVERSIGHT, WASHINGTON, D.C. Mr. Schwellenbach. Chairman Cardin, Ranking Member Marshall, and other Senators on the Committee, Senator Ernst, thank you for inviting me today to discuss the role of financial technology companies, also known as fintech companies, and fraud in the Paycheck Protection Program during today's hearing on underserved communities and their access to capital. At the Project on Government Oversight, or POGO, I have investigated fraud and potential fraud in the PPP for over two years, but before I say more, research has shown fintech lenders and associated companies did much to help underserved communities access PPP loans. According to one paper, fintech lenders made a larger share of their loans to Black-owned businesses compared to traditional lenders. POGO does not currently have a position on proposed rules from the SBA, one of which would give fintech lenders opportunities to participate in agency lending programs beyond the PPP. But as a general proposition, it may benefit historically disadvantaged and underbanked communities if nontraditional lenders, such as fintechs, can participate. But at the same time, fintech companies did not always facilitate lending to those the PPP was intended to serve. Many set on defrauding the program successfully used fintechs to divert money. The SBA must have sufficient safeguards to ensure fintechs and other lenders do not enable high rates of fraud. Fraud can reduce the amount of funding available for legitimate businesses seeking access to capital. All that said, fraud concerns should not stop the government from trying to access the very real equity issues that impede underserved communities' access to capital. Now let me talk more about the fraud work that I and others have done looking at fintechs. In October, 2020, POGO highlighted that a disproportionate number of PPP loans that the Justice Department had alleged were fraudulent were processed by fintech lenders. Specifically, we identified 97 PPP loans that were allegedly fraudulently obtained up until that point in time--this is late 2020--and many cases have been brought since then. About half of those approved loans involved seven fintech companies and banks working closely with fintechs. Those seven processed disproportionately fewer PPP loans even though their loans were disproportionately among those that the DOJ was alleging were fraudulent. POGO's work was also informed by a whistleblower inside a fintech lending company, who I cannot divulge their identity, who told us that her company did not have ``much incentive to do oversight'' because the funds were coming from the government, the rules governing the PPP were lax, and each loan processed benefitted lenders who collected a fee. In short, they did not have any skin in the game. It was not their money, it was the government's, and there were a lot of financial incentives to process many loans quickly. In addition to POGO's work, University of Texas researchers earlier this year found that PPP loans processed by fintech lenders were much more likely to be accompanied by suspicious indicators than loans processed by traditional banks and credit unions. There are some notable exceptions, though. The UT researchers found that PPP loans processed by some fintech lenders actually had particularly low rates of potential fraud. So this points to varying underwriting practices by fintechs and other lenders participating in the PPP. Some fintechs appear to have engaged in rigorous underwriting practices, resulting in lower potential fraud rates, while others did not. Why the wide variance? That is because of the lax rules governing the program, such as relying on loan applicants' self certification and a lot of confusion about what the program's requirements entailed, including compliance with the Bank Secretary Act and Know Your Customer requirements. Given that some fintechs are not associated with high rates of fraud, it does not appear that there is an inherent flaw within fintechs as a group, but it appears that the government did not do enough to ensure that all nontraditional lenders and all lenders participating in the PPP had sufficient anti-fraud controls either in house or through their service providers. Earlier this month, the House Select Subcommittee on the Coronavirus Crisis issued a report that I urge the Committee to review that examined fintechs and their role in fraud in the PPP. If the PPP goes forward with its proposal, it has an opportunity to learn lessons from 2020. Unlike those chaotic days, the government can take deliberate steps now to get this right or get a better balance before the next big disaster strikes. The SBA should be commended for seeking ways to expand access to capital, but the Committee should also exercise its oversight to ensure that there are not high rates of fraud. I have included more details and considerations in my written testimony, and I am happy to take any questions you have. [The prepared statement of Mr. Schwellenbach follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Chairman Cardin. Thank you very much for your testimony. Mr. Villarreal. STATEMENT OF ROBERT VILLARREAL, CHIEF EXTERNAL AFFAIRS OFFICER, MOMENTUS CAPITAL--CDC SMALL BUSINESS FINANCE, CHULA VISTA, CALIFORNIA Mr. Villarreal. Thank you, Chairman Cardin, Ranking Member Paul, Senator Marshall, Senator Ernst. I am honored to testify before you today on behalf of Momentus Capital--CDC Small Business Finance as well as the Mission Lenders Working Group. I want to thank the Committee for convening this hearing and for the opportunity to discuss how we can work together to ensure underestimated communities can access the capital and support they need to thrive. CDC Small Business Finance is part of the Momentus Capital Family of organizations, a mission-driven financial services firm which provides a continuum of social knowledge and financial capital. We are proud of our track record and in 44 years have delivered over $22 billion in capital under commercial real estate and small business lending, supporting 240,000 jobs. I am here also representing, as I mentioned, the Mission Lenders Working Group, which advocates and provides a voice for SBA Community Advantage lenders, a program I am here to talk about today. The SBA Community Advantage Pilot Program, or CA, as we call it, was launched in February of 2011, and for the first time SBA's flagship 7(a) program expanded the points of access that small business owners had for getting loans from mission-focused financial institutions with experience lending in economically underestimated markets. Now there are a number of requirements Community Advantage lenders must follow, and in the 11-year history of the program there has been a number of changes. Most recently, the SBA worked with the mission lenders in revising the Community Advantage Participant Guide, our standard operating procedure-- our SOP--which included increasing the maximum loan amount from $250,000 to $350,000 and streamlining lending requirements. We thank and applaud SBA, particularly the current leadership, for making these improvements to the program, and they have made a difference. Now overall, in the 11-year history of the program, since 2011, there has been a billion dollars of lending under Community Advantage, helping 7,000 small businesses. Our organization, CDC Small Business Finance, has done 1,200 of those loans for $178 million and, yes, Senator, about a dozen for about $1.2 million in the great state of Maryland. More important, one of the successes of Community Advantage has been its reach into the Black and Latino small business community. As the Senator mentioned, in 2022, 20 percent of Community Advantage loans went to Black entrepreneurs as opposed to about 4 to 7 percent on the traditional 7(a), and for Latino entrepreneurs it was 16 percent under Community Advantage versus 10 percent under the regular 7(a) lending. For start-ups, Community Advantage lends almost three times more than the traditional 7(a), and that is the engine of the American economy. So we are really financing those new small businesses and those start-ups under Community Advantage. That is why I am happy and I am here to thank Chairman Cardin for the introduction of the Community Advantage Loan Program Permanency Act of 2022. This legislation not only seeks to codify and strengthen the Community Advantage loan program; it also recognizes the need to institutionalize mission lending as part of SBA's overall mission to aid, counsel, assist, and protect the interest of America's small business concerns. While the bill creates permanency for the Community Advantage program, it also expands the program to cover both economically and socially disadvantaged small businesses. As I mentioned before, the great work we have done in reaching Black and Latino small businesses, that was not even a target market. Senator Cardin's bill makes that a target market, and we think that and other key provisions will really allow Community Advantage lenders to drive deep into communities that are underserved and underestimated. Senator Cardin, Congresswoman Chu, who have been a strong advocate of Community Advantage, both understand that Community Advantage is a critical SBA program enabling small-dollar lending that is intentionally targeted to small businesses in underserved communities, and we thank them for their leadership and encourage members of this Committee to support the bill. In my last minute, I do want to make at least one comment on the SBA's proposed rule on small business lending companies. As mentioned, this rule is going to lift, or proposes to lift, the 40-year moratorium and add more than the 14 current small business lending companies, or SBLCs, and the SBA is doing this per the proposed rule to drive deeper and to reach capital market gaps. We applaud them for that. We want more capital to small businesses in underserved communities and rural communities. They plan to do this by introducing two new types of SBLCs, or at least one new type, and then opening it up. One is a mission SBLC, and that will allow a Community Advantage lender, like ourselves, to now become an SBLC. They also propose to allow, at the start, three new for-profit SBLCs. Now in the proposal, they are stating that the mission SBLCs will have a lot of requirements to make sure we reach underserved communities. Remember, these are organizations that already have been doing this for decades and for years. On the other hand, for the new for-profit SBLCs, there are no--I think the mention was guardrails. There are no guardrails for these new SBLCs. So we urge the SBA to really take a look at this, and if they really want to reach the underserved and to make this work, there needs to be some stronger guidelines ensuring that these new SBLCs reach the underserved communities that are identified. Thank you very much, and I am happy to answer any questions. [The prepared statement of Mr. Villarreal follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Chairman Cardin. Well, thank you for your testimony, particularly the nice things you said about my bill. I appreciate that very much. Ms. Murphy. STATEMENT OF ANNEMARIE MURPHY, EXECUTIVE VICE PRESIDENT, PRESIDENT OF SBA LENDING, FIRST BANK OF THE LAKE, GREENVILLE, SOUTH CAROLINA Ms. Murphy. Chairman Cardin, Ranking Member Marshall, and members of the Committee, my name is Annemarie Murphy, and I am President of SBA Lending for First Bank of the Lake, a small community bank. Lenders can, and need, to do more in reaching underserved markets, but let us look at some facts. Because of the program's statutory ``credit elsewhere'' mandate, every 7(a) loan serves a borrower that would otherwise be left behind by banks conventional lending policies. We are inherently a mission program. Let us look at stats from last year in 7(a). Roughly 50 percent of all loans were $150,000 or smaller. More than two thirds of all loans were $350,000 or smaller. One-third of all loans were to minority borrowers, a number that has been steadily on the rise. Twenty-five percent of our borrowers did not identify their race or ethnicity, so the actual percentage of loans to minorities is likely higher than the statistics indicate. African Americans are the fastest growing demographic in the program, with nearly $1 billion in loans last year alone, with nearly a 60 percent increase since FY '17, and so far this year, loans to African Americans are up 52 percent in units and 72 percent in dollars compared to last year. Hispanics totaled $1.5 billion, more than a 27 percent increase since FY '17, and so far this year, loans to Hispanics are up 91 percent in units and 98 percent in dollars compared to last year. Our loans in rural areas totaled roughly 20 percent of all loans. Into this success story, SBA is proposing to change the 7(a) program with the stated intention to aid underserved markets. We agree with this intent. Increasing mission lending and welcoming more lenders into SBA is good. Our concerns have nothing to do with competition. Our concern is about the unintended consequences of harming underserved borrowers and damaging program integrity. SBA proposed two new regulations. The affiliation rule proposes to remove the specific, longstanding, prudent credit criteria, and the SBLC rule would invite an unlimited number of non-Federally regulated entities, including fintechs, into a program that would then be devoid of lender guardrails. Rather than test these new concepts in a gradual fashion or invite fintech to take part in 7(a) using current prudent lending standards, SBA has veered in the opposite direction, morphing the 7(a) program to fit the fintech business model. SBA did not include any specific mission requirements for these new lenders to make any loans to underserved markets even though that was the stated intent. SBA did not include any framework for these non-Federally regulated entities that would mirror Federal regulatory standards like anti-money laundering or Bank Secrecy Act to protect against fraud. SBA proposes the removal of well-established underwriting standards that protect taxpayers from excessive losses. Past experience indicates that without these underwriting standards losses would rise. As a result, Congress may have to increase fees on the very borrowers we are trying to help or provide appropriations to cover increased losses from risky underwriting. SBA says it will approve three new non-mission lenders right now, but the actual rule allows an unlimited number and unlimited loan volume. SBA says it has the capacity to monitor these additional entities, but lenders know SBA's oversight resources are already stretched too thin. And, SBA would permit political appointees to decide critical program requirements. Over the past seven months, Treasury, OCC, CFPB, the House Financial Services and Senate Banking Committees have all expressed serious concerns about fintech in financial activities without oversight. Most explosive is the Select Subcommittee on the Coronavirus Crisis report released this month, which revealed how fintechs' inexcusable misconduct resulted in tens of billions of dollars of fraudulent loans. SBA wants to duplicate the perceived successes of PPP and 7(a). These fraud results are the last thing we should recreate. Congress and this Administration have valid and substantive concerns with fintech. So why is SBA rushing to invite fintech into 7(a) without limitations of any kind while simultaneously eliminating many of the program's lending standards? If ever there was a need to press pause on an issue that raises more concerns than answers, it is now. Let us reach more borrowers by exploring innovative solutions, but SBA should not be making changes to the detriment of borrowers or the integrity of the 7(a) program, and they should not be ignoring valuable resources that already exist in Community Advantage. Congress should make it permanent, and SBA should be leaning into their existing mission lenders who have mission requirements and let the rule changes from May take effect that would further aid mission lending. Over the past two years, the 7(a) loan program delivered almost $62 billion to almost 100,000 borrowers, with over $19.3 billion going directly to minority borrowers. Let us preserve that impact. Thank you, and I will take any questions. [The prepared statement of Ms. Murphy follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Chairman Cardin. Let me thank all four of our witnesses, very constructive testimony, appreciate that, on the existing programs as well as the two proposed rules by the SBA. And I appreciate the testimony in regards to the Community Advantage program. It clearly is reaching--doing a better job in reaching the underserved communities and with smaller small businesses. What is the advantage of it being made permanent? The Administration did expand its reach by action earlier this year. What additional advantage would there be if this is a permanent program, Mr. Villarreal? Mr. Villarreal. Thank you for the question, Senator. So the first and foremost thing is, while SBA did extend the program-- at that time, I think it was 28 months, so now it is less than 2 years. And we have heard the words ``prudent lending'' go around a lot. And if you are a mission lender and see that a program has a sunset of now 22 months or 23 months, it does not make any sense to make that investment to become an SBA Community Advantage lender because it takes a lot of resources to do that and it takes time to ramp up. Even in the SBA's proposed rule change, they talked about the ramp-up period for SBLCs. So the most critical one is that it gives security to a lender in that it knows the program is going to be around, so that is the primary one. So then it can start to build a team around that and start to build a marketing strategy to get to those. I think the other one, particularly as it is proposed, Senator, is it allows a greater guarantee for loans under 150, to 90 percent, and then for loans from 150 to 350, of 80 percent. And why is this important? A lot of the Community Advantage lenders are smaller lenders that can be capital restrained. So the ability to take that guarantee and sell it in the secondary market and recapitalize and get back--if you do a $100,000 loan and you get back $90,000, you can continue to recycle that money in your community, and these smaller Community Advantage lenders are not in that wheel of having to go and continuously fundraise and get more money. So those are two critical things that permanency will do, particularly the way it is written. It will allow Community Advantage lenders to not have to go out and fundraise as much and really make an impact in their community. Chairman Cardin. Several of you have mentioned the progress we have made in the 7(a) programs in reaching the traditionally underserved communities, and we have made progress. But one trend line appears to be just the opposite: that is, the size of the loans. Over the years, the average size of a 7(a) loan has grown in dollar amount, not gotten smaller. And, as we know, the smaller small businesses are the ones who are always more challenged to have the capacity to get a loan. What can we do to target the program more to the smaller small businesses in traditionally underserved communities? Mr. Gaines, do you have some thoughts on that? Mr. Gaines. Well, thank you again, Senator. Appreciate that question. I think there are certainly a few ideas we can certainly think about right off the bat there because again we are dealing with--I am going to say small ``micro businesses'' is probably the best term I would use. I would say right off the bat, in regards to making it easier, of course, we all know there is importance to have regulation. But the process that we go through in terms of really underwriting the loan, to really make it simpler from the standpoint of actually making it easier to underwrite the loan, makes it quicker for the borrower but also makes it quicker for the lender to basically do the work they need to do to get those funds out to the borrower. So I would say one thing right off the bat would be simpler. I do not want to say simpler regulation, but I want to say simpler documentation from that standpoint to make it easier to happen. What other things we could probably--or, other recommendations that could be out there to make it easier for smaller business loans? I think we need to continue to further the outreach that we do as well in regards to working with small businesses just so they know because we are sometimes challenged by language barriers. Speaking briefly, in terms of Wisconsin, you know, two-thirds of our business owners are ladies. We want to make sure that we are doing everything we can to really kind of bridge those cultural divides and really work hard to communicate with folks from a marketing perspective so it makes it easier for small businesses to understand who we are, what we do, and, just as importantly, work with us. Chairman Cardin. Thank you. Ms. Murphy, I want to give a shout-out to what you have been able to do in the veteran community. It shows that if you really want to make a difference, if you do the outreach, you can reach a community that has had a challenge in reaching services. So tell us your secret. How did you get those good results in the veteran community? Ms. Murphy. Thank you, Chairman Cardin. So what we did was recognize that many of our underserved borrowers want to work with somebody that they feel that they have a shared experience with, someone that they have something in common. And when we looked at it--I come from a longstanding military family tradition. I will give the shout-out to my daughter who is currently serving in Guam. What we realized was that when we started putting teams together of veterans and then started doing outreach to veteran organizations, having that common experience, all of a sudden our veterans were willing to check the box, to say, ``Yes, I am a veteran. Yes, here is my DD214. Yes, I now have the advantage of the no fee for my veteran loan'' because they felt comfortable with that person. So we have expanded that to now include veteran underwriters. We are looking at other operations positions at this point and training veterans who are now separating from service and training them up in SBA lending. And, we are looking to replicate this since we had that success this year. We launched this on January 1st of 2022. So we are not even a full year into it and tripled it. So now we are looking to replicate what we did and start doing that with other underserved markets. Chairman Cardin. Thank you. Mr. Schwellenbach, I just really want to compliment you on your testimony as to the way you framed it. I look forward to your specific recommendations in regards to modifications of the proposed rule to deal with the guardrails and concerns that you express. You seem very positive about SBA expanding competition but raise an issue we are all concerned about, and that is having adequate protection and accountability. So we look forward to your specific recommendations in that area. Mr. Schwellenbach. Right. So there is a bit of a gap here. And thank you for the question, Chairman Cardin. So many of the participants in the PPP were traditional depository institutions Federally regulated by the Treasury Department, OCC, and on and on, with ample experience complying with Bank Secrecy Act, Know Your Customer Act--Know Your Customer requirements. And the PPP was a big experiment in expanding participation to fintech lenders, and to their great credit, you know, they played a major role in helping a lot of underserved and minority-owned and other businesses that had trouble accessing capital get PPP loans. The big downside is a lot of these fintechs just kind of opened the floodgates to fraud. And many of these fintechs and their supporting companies, companies like Blue Acorn and Womply, they really had no experience or very little experience complying with the Bank Secrecy Act and Know Your Customer requirements prior to the PPP, and suddenly they are processing tens of billions of loan applications. And I will not go into great detail, but the House Select Subcommittee report is very disturbing. But, really, what it points to is that the SBA was not doing its own due diligence at the front end in allowing many of these companies to participate. So one thing I did lay out in my testimony is that we need to have sufficient criteria when evaluating companies that want to participate in these programs. Do they have a track record of complying with the Bank Secrecy Act or have they demonstrated that they can comply with the Bank Secrecy Act? And, does the SBA have the capacity to vet them at the front end and then continually monitor them over time to make sure it was not--they are not just passing the test at the front end and then throwing away all their anti-fraud resources to save a buck later on? And the Select Subcommittee's report goes into great detail about how some of these companies, when they started to flag a number of loans as suspicious and potentially fraudulent, cut back on their automated systems for processing loans. Some of them were throwing reviewers into processing loans without any training at all and looking for signs of potential fraud. So at the SBA side, you need to have sufficient criteria so that these companies that are not regulated by the Treasury Department or OCC or other Federal entities can meet the standards that traditional banks and credit unions have to meet when it comes to knowing your customer. The SBA itself flagged hundreds of thousands of loans as potentially fraudulent because it found signs that they were not active businesses before February 15th, 2020. If these lenders were doing their Know Your Customer requirements properly, they would know if these loan applicants existed, you know, before February 15th. It is a very basic thing. So you know, a lot of this is SBA making sure that the lenders who participate and their supporting companies--that is a really key part of this--comply with these standards and that the standards are high enough. Chairman Cardin. Thank you. Senator Marshall. Senator Marshall. Chairman, I will yield my time to Senator Ernst if that is okay with you. Senator Ernst. Okay. Great. Thank you, Chairman, and thanks, Ranking Member, very much. And, Mr. Schwellenbach--did I say it correctly? Mr. Schwellenbach. That is pretty good. Schwellenbach, yes. Senator Ernst. Schwellenbach. Thank you. I appreciate it. No, I do appreciate you talking about the role that fintech firms--financial technology firms--played in distributing funds to our small businesses during PPP. So many of us were involved with the Paycheck Protection Program during COVID-19. I think largely in part it was a great success for our small businesses, but of course, we did run into issues when it came to fraud. And so I am glad that you have had the opportunity to do investigative work in these areas. We did have unprecedented levels of fraud within the program, which I hate that we have to report that, but that is the way it is. And we need to make sure that there are appropriate guardrails. I think it was close to an estimated amount of a hundred billion dollars of fraud, and so that does have to be corrected. It is very important that we make sure our underserved communities have equal access to SBA lending programs, but as we are looking at this, we also have to make sure that our taxpayer dollars are being adequately protected from fraud and waste caused by a lack of oversight. So I appreciate you outlining for Chairman Cardin some of those changes that you would like to see and certainly would love to work with you in the future just so that we can strengthen some of those anti- fraud protections, so I just wanted to start off with that. But then, Ms. Murphy, I would like to go to questions with you, and I really appreciate you talking about our veterans community as well. There are a number of underserved communities, especially as we look at some of the SBA lending programs. I will start with a priority that I have been working on, and then we will move into more of the veterans and some of those underserved communities. But one of the longstanding priorities that I have had is to expand access to child care for small businesses, especially those that are in the rural and underserved areas that have little or no access to quality child care services. And because of the inability to access child care, it has created these economic barriers for so many people out there, these families that want to return to work, maybe do what they were doing pre- pandemic, but some of their child care is gone. So earlier this year, I introduced the Childcare DESERTS Act, and that would allow for small businesses to use SBA loans to provide child care services to employees. And I am also a co-sponsor of the Small Business Child Care Investment Act, which would allow for nonprofit child care providers to access those SBA 7(a) loans, and I am glad you talked about those 7(a)s, really appreciate that. How could the SBA provide further assistance to eligible SBA lenders to help provide small businesses with access to quality child care in rural or those underserved communities? Ms. Murphy. Thank you, Senator Ernst. It is a great question. So the bill would actually need to pass in Congress because the way the SBA program is structured right now it is ineligible for nonprofits. Senator Ernst. No nonprofits, mm-hmm. Ms. Murphy. Mm-hmm. So we would need that to pass, but we would absolutely look forward to sitting down with you and putting something together and seeing what we can do because it is so important, especially for our working families, to have reasonable child care. Senator Ernst. Mm-hmm. And it is important because in many of our rural areas there are a lot of churches and other nonprofits that really want to expand availability of childcare, but they just lack that access to loans and other types of programs. So I would love to work with you on that. So I would like to dive in as well to assisting our veterans, of course. I have a daughter who is active duty, serving right now. I am a veteran. We have lots of veterans that live in our communities and are engaging in small business activities. What more can we do? I know checking the box is great, but what more can we do to get veterans engaged through SBA loan programs? Ms. Murphy. A lot of it is the continued outreach. SBA is doing that, and we have been working with many of the Veteran Business Outreach Centers to get in front of veterans and talk to them from a lender perspective of what exactly we need to put together and how we can best serve what they are looking to do as an entrepreneur. Senator Ernst. Very good. And my time is expired, so I will yield back, but thank you very much. Thank you, Ranking Member. Chairman Cardin. Thank you. Senator Hirono. Senator Hirono. Thank you, Mr. Chairman. My focus is on the smaller loan programs that target the minority-owned businesses; that would include women-owned businesses. And I met with--every time I go home, I meet with those businesses who benefitted from the PPP program, and one of the really interesting things is last time when I was talking with two women-owned businesses was that they both started their businesses during the pandemic. They decided that they would start their businesses. So it was a really interesting kind of timing that I had not heard, that people would actually start a business during the pandemic, when businesses were having such a hard time. So I think that they would definitely have benefitted from some of the smaller programs that we have. So for example, the Community Advantage loan program, about $104 billion was lent through that program nationwide, and we did not have any of that going to any businesses in Hawaii. However, the Microloan program, with $63 billion lent out, there was at least one entity, nonprofit entity, in Hawaii that lent something in the order of close to $500,000 in very small loans. The idea of increasing the money available for these kinds of really small loans, is that in the cards? I should ask you, Mr. Gaines. Mr. Gaines. Yeah, thank you, Senator. Definitely a good question there. I certainly think it is important to note that it is always a couple things. I call it trust and then also access to capital, and those are very, very critical when we are talking particularly small loans. I would say certainly the trust factor is so critical because, again, I am a person that has no idea. I have nowhere to turn. I do not know how to get started. How can we help them really kind of bridge that gap in terms of moving forward? So we have to continue to work on that piece, and I think we all, as microlenders, are really working hard to--how do we figure out a way to use trust to build those connections, to get folks much more involved and focused in regards to that. But certainly, I would go right back to, as you would say, Senator, I think it is important. We need to continue to increase the funding available, the capital available. It could be Microloan intermediaries but also other partners as well because, again, there is no way with 150 Microloan intermediaries we can loan all the funds that are needed out there in regards to the communities at large. So it is still critical. So I would say, yes, we need to increase capital, and we certainly need to use things like trust and other resources to build that out. Senator Hirono. So while there is approximately $100 billion in fraud under the PPP program, do you know if there was this kind of a percentage, kind of fraud, in these smaller Microloan programs? Mr. Gaines. That is a good question. I do not know the answer to that, Senator. Senator Hirono. Anybody? Ms. Murphy. Ms. Murphy. I do not know the answer to the Microloan question. However, what I can say is that the guardrails we already have in the 7(a) loan program, they really prevent a lot of fraud. It is never going to be 100 percent perfect, and I cannot tell you what the percentage would be. But we verify the tax returns with the IRS that we receive from the borrower, and right there that stops quite a few people when they find out we are verifying with the IRS themselves. Senator Hirono. Are there those kinds of guardrails in the Microloan program and the Community Advantage loan program? Mr. Gaines. Yes, definitely. Certainly, Senator. Senator Hirono. Okay. Mr. Gaines. Yeah, there are definitely reviews of those. Senator Hirono. To me, as I focus on the targeted--these kinds of targeted loans, these programs can use a lot more funding if you already have these guardrails. So we are not going to see the kind of massive fraud that we saw in PPP. And it is astounding to me that the kind of fraud in PPP totals $100 billion when you have these other small programs that do not total much more than what was fraudulently acquired under PPP. So it seems to me that we can do more. Mr. Villarreal. So, Senator, if I can add, as both a microlender, like Jon--and he is also a Community Advantage lender, like ourselves--SBA is our regulator, and we have heard some negativity--a bit about SBA. But they are our regulator, and they are looking at the loans because a lot of them are going through the loan processing center. Not on the SBA Microloan, but for us, every year or every other year, SBA staff does come out and look at our portfolio. So there is some strong oversight. And in regards to the funding, we think that Senator Cardin's bill, as proposed, would really help. And we would really like to talk about this continuum of capital from SBA microlenders to Community Advantage lenders and then on to traditional financial lenders. So I think that is what this bill could do, and some of the reforms that Jon talked about and the permanency of Community Advantage, I think, would strengthen this ecosystem of support for small businesses. Senator Hirono. So I think that makes a lot of sense. And at the same time, if I can complete my thoughts here, regarding the Microloan program, I did have a nonprofit entity in Hawaii that found this program to be generally, while challenging, very useful. But the one concern they had was the complexity of the reporting requirements from SBA. So when you are dealing with these really small kinds of loans, we can probably make the reporting requirements and maybe other kinds of requirements, while still maintaining the guardrails, much more user-friendly. Thank you, Mr. Chairman. Thank you. Chairman Cardin. Senator Marshall. Senator Marshall. All right. Thank you, Mr. Chairman. Ms. Murphy, your business model was built upon trying to get to ``yes'' for your customers. People apply online. They come into your bank. You would like to help them--within, of course, the rules--get to ``yes.'' What are some of the major reasons people are unsuccessful qualifying for this loan? Is it credit score, is it they do not have a financial statement or they kind of just drop out because they are overcome with the process? Ms. Murphy. That is a great question. So we generally do not have people dropping out because they are overwhelmed with the process. We do focus--as a government guaranteed lender, we do have dedicated resources for the borrower on our team. Where we find the turndowns is usually, you know, the lack of repayment ability. It comes back to, the core of what we have to do in SBA is the borrower has to be able to repay the loan. So when they send in their financials and the projections and they cannot repay the loan on their projections, or historically, then unfortunately we have to tell them right now ``No. We need you to be able to repay this loan.'' When a borrower cannot repay and then there is a default, effectively, they now have a debt collector of the U.S. Government until that is paid in full. When we look at these two proposed rules, the affiliation rule removing the guardrails around underwriting, around the repayment, the basic premise well-established of how we underwrite, there is a fear that that is where we would have increased program cost because of increased defaults, which hurts the borrower. Senator Marshall. Eventually, it would. One of the big advantages of a community bank or a credit union is really knowing your customer and being able to--you know, a reputation is still worth something, and you get this, are they hardworking, some of those things. And as you figure out their ability to repay that loan, certainly there are objective measurements. But if you are a fintech program, do you think that they will be able to assess the ability to repay the loan in the same fashion you will? Ms. Murphy. I think it comes back to, again, the well established rules that are already set that the SBA is proposing to remove. With those guardrails down, we just do not know on how these borrowers are going to perform; we do not know what their repayment ability is going to be. And the reality is, as a Federally regulated lender, as a bank, we will still be doing those things. Our regulators expect us to do those things. So all of a sudden, our borrowers do not have an equal playing field depending on what lender they are talking to. The rules would be different because the rules are not set by SBA anymore. Senator Marshall. Mr. Schwellenbach, as you look at these rules for fintech, do you feel like that they are being held at the same level as community banks and credit unions? Mr. Schwellenbach. I am not sure exactly how to answer that question, but I will echo my fellow witness. The rules of the program are absolutely critical. If you look at some of the internal correspondence by some of these fintech executives, talking about these high rates of fraud that they were internally seeing during the Paycheck Protection Program, a lot of them were very dismissive of these high rates of fraud because they said ``Look, this is on the SBA. The rules are lax. It is on the government.'' So if you have lax or nonexistent rules, you know, how can you expect companies that are participating to stop this? Senator Marshall. So an SBA loan, just by definition, is going to be more risky than a PPP loan for a business that has been open for 5 or 10 years. What would we need to add to beef up the rules that we have seen to try to bring fintech to a level playing surface and to try to make sure we do not have more fraud? What needs to be added? Mr. Schwellenbach. So I want to start off by saying that there are some really unusual things about the Paycheck Protection Program, and that may be the understatement of the day. Senator Marshall. That is really not my question. Mr. Schwellenbach. Obviously, it was a huge program. In many ways, it was more of a grant program since such a high percentage of loans were just forgiven. So at the front end, you know, there was sort of this expectation---- Senator Marshall. I am sorry, my question is about the PPP rules. I am saying, going forward, what needs to be added to give us some less rate of fraud and less rate of failure? Mr. Schwellenbach. Oh, in the PPP rules or the 7(a)? The 7(a). Senator Marshall. The new 7(a) rules for fintech. Mr. Schwellenbach. So I think you want to keep a lot of the rules in the 7(a) program and not weaken them. You do not want to take them too much in the direction of what you had with PPP. You want to know if the borrower can repay. You want to make sure that the lender who is processing the loan actually verifies that the company seeking the loan actually exists and is an active business and is not someone who is just going to buy a Rolls Royce with the money and flee to another country. So these lenders, or potential lenders, SBA needs to make sure that they have their ducks in a row, that they have their systems in place, to know their customers. Senator Marshall. Okay. I yield back. Thank you. Mr. Schwellenbach. And, just one more thing. Even pre- pandemic, the SBA's Inspector General has found that the SBA's Office of Credit Risk Management was not conducting enough oversight over participating lenders, and this is all pre-PPP. Chairman Cardin. Well, there is a history about the SBA regulating lenders, and we recognize that. One of the reasons they put the moratorium in effect was because of capacity issues to regulate the number of lenders. The PPP. We need to understand the challenges that were created, but the Paycheck Protection Program was aimed at getting money out quickly in order to save not only small businesses but our economy. It was--and I agree with you, Mr. Schwellenbach. It was more of a grant program than a loan program. Although, for smaller small businesses it was a loan, and they had to report it as a loan. And that was, for many, a factor that slowed them down in requesting the help because they did not know whether they could handle it on their books. So, yes, we have to learn from the experiences under the Paycheck Protection Program, but I think your point about where we were pre-pandemic and what we need to have now that we have a little bit of time to understand what we are doing is to put into the program the proper mission requirements and accountability and oversight. And, yes, this regulation, these two regulations, are aimed at a limited number of new lenders, but the regulation as written does not restrict it to just a few new lenders. So this could become a model moving forward for competition for lenders, and we have to make sure it is done right. It could far exceed this Administration in its implementation, so we have to make sure we have the proper protections as we start this new program. I want to--I have been told there is another member that is two minutes away, and I want to tell you this: I know this member. And he told us one time he was close by for a vote, will we hold the vote open, and sort of indicated he was at an airport coming in. What he did not tell us is that he was in an airport in New Jersey coming in. So we will give Senator Booker a few minutes to see if he is here. We do have a hard stop in about 10 minutes. There is a ceremony in the Rotunda for Speaker Pelosi that I know some of us want to attend. Senator Marshall. Chairman, I want to go hear one of our members speak as well---- Chairman Cardin. Oh, that is right. We have Senator Shelby speaking. Senator Marshall. Exactly. So, thank you again to all of our witnesses. We do appreciate it. This is a great program and whatever we can do to make it better, so thank you. Chairman Cardin. I will take a moment to see if Senator Booker arrives. If not--he said two minutes. We will give him four minutes. Well, let me--I will follow up on a few other points while we are waiting for Senator Booker. We talked about the Microloan program. We talked about the Community Advantage programs. It really does get smaller loans out there. So, as I asked Mr. Gaines, how do we encourage smaller lending within the 7(a) program? Banks like to give out larger loans. They would rather give out one large loan than two smaller loans that equal the size of a larger loan. So what can we do to provide additional incentives for our traditional 7(a) program to be more useful to the smaller of the small businesses? Ms. Murphy. Was that to me? Chairman Cardin. That is to you. Ms. Murphy. Okay. Well, there are a few things we can do. So what Congress can do is make Community Advantage permanent. That gets more lenders in, knowing that the program will still be here. Have SBA press pause on these rules and let us get it figured out on the best way to reach more of these underserved borrowers. SBA pull back on the proposed rules, and they can lean into CA. But specifically, as a lender, what would help is codifying small-dollar loans and keeping those no-fee for our borrowers. That is powerful, especially for our underserved borrowers. Like I said, with the success we have seen with veterans, when they all of a sudden find out that, ``Oh, wait, if I do check that box, there is no fee for me,'' all of a sudden we are getting more. And I did want to give you an updated stat on veterans. We are up 47 percent year-to-date in 7(a) with veterans. Chairman Cardin. As I said, lenders like you have made a huge difference in that regard. So, really, congratulations to you. Ms. Murphy. Thank you, Mr. Chairman. Chairman Cardin. We have been joined by one of the most distinguished members of the United States Senate and this Committee, Senator Booker. Senator Booker. I want to say that is a low bar, but. [Laughter.] I am really grateful. I literally ran over here just to hope to ask you this one question. I just want to say to you again, my staff--every time in my notes, they always say, thank Senator Cardin for the justice-involved entrepreneurs and all the work that we have done together to make things better. Chairman Cardin. Yes. Senator Booker. So I am just continually grateful for the leadership of Senator Cardin. Hello, everybody. So I just appreciate the SBA's incredible efforts on proposed rulemaking to simplify and streamline all the lending applications. I am sure that has been discussed. Too often, entrepreneurs face an overwhelming, bog-down sort of a process that really makes it difficult for them to apply because of the burdensome nature. But I just want to hone in on one of my issues, which is this deep concern I have for some of the unintended consequences of paring down the affiliation rule and how it could impact the lending market for truly small businesses. So to be specific, in 2018, the SBA's Office of Inspector General found that the 7(a) lending program was facilitated with a widespread abuse in the poultry industry, with huge multinational poultry corporations pushing small growers into abusive contracts, with funding provided by the 7(a) loan program. These are awful tournament systems. They are living in-- these farmers are living in horrific debt. They are small growers. They are independent on paper but were found by the SBA to have little control over their operations. The larger scale poultry integrators oversaw and dictated every aspect of their functions, from where and how to walk through the houses, the frequency and timing of inspections, and how to record the results. They provided detailed construction specifications for growers' broiler houses, site grading equipment, signage, and other attributes, really down to the smallest aspects of their business they worked at. So SBA OIG concluded that these practices were so egregious that it was inappropriate for the taxpayer dollar to be subsidizing the poultry industry at all. And across the Federal Government today, from USDA's Proposed Rule on Competition and Market Integrity under the Packers and Stockyards Act, and the Department of Labor's efforts to address worker misclassification in the industry, the Biden administration, I am grateful, is working to crack down on these efforts. So I guess for the panel, I just--for the SBA, do you think it is appropriate for large corporations to be benefitting from a small lending program? Really, what they are subsidizing is this god-awful process. And then do you think the proposed rule which would eliminate the requirement to consider control of a company, providing adequate guardrails to ensure these large corporations are continuing to siphon this 7(a) lending program from high growth small businesses and start-ups really to these multinational poultry organizations that are so abusive? Ms. Murphy. The simple answer is ``no.'' Senator Booker. That is a great answer. All right. Thank you very much. Ms. Murphy. The affiliation rules, as written right now, that we all do have, just like we talked about the well established underwriting requirements that are also as part of the affiliation rule, proposing to be removed, these all were put in there for exactly that reason. There was something that has happened in the past, and we are now trying to prevent that behavior. SBA, in this rule, is proposing to take all of these out. Now affiliation was simplified under the Community Advantage Pilot Program back in May, and we are looking to see how is that working. Senator Booker. Okay. Ms. Murphy. But Community Advantage loans are limited to $350,000 and under. So what this does is it would remove affiliation requirements right down to--and we did not talk about it, is the franchise directory. The franchise directory. Right now, the SBA has provided the lenders with a list of all the franchise concepts. They have reviewed the documents and said: Yes, this is not affiliated. This loan is eligible. So you, as a lender, your borrower has control over their own business. They do not have a multinational corporation. Yes, they tell them what the sign says. Yes, McDonalds is not making hot dogs; they are making burgers. But at the end of the day, SBA is even taking that away now, something that is working really well, and that is being removed as well as part of the proposed rule. Senator Booker. Did you want to comment? Mr. Villarreal. No. I just wanted to say, as Ms. Murphy said, we are a Community Advantage lender, and so SBA is our regulator. But we are capped at $350,000. We were at 250 until earlier this year. So while it may work under the Community Advantage, which is a smaller loan program, very targeted to entrepreneurs of color, start-ups--half of our loans are to pure start-ups--I think we do need to be cautious about expanding this at this current moment and let us see how it works within the way we are working it with Community Advantage. Senator Booker. I appreciate that because the poultry industry is so abusive to these so-called small, independent businesses and they are preying upon a lot of these programs designed to help independent, small businesses and they have created a system that really is not that. Sir, thank you. Chairman Cardin. Senator Booker, you always add to the hearing. So I appreciate you being here and your questions, and I appreciate your friendship and your service in the United States Senate. Senator Booker. Thank you. Thank you very much, sir. Thank you very much. Chairman Cardin. The Committee record will remain open for one week in case members have additional questions that they would ask you to respond to. We really thank you all, but we are not dismissing you without a request that we will be seeking your guidance as we continue to work on ways to improve the tools available at the SBA as well as responding to the rulemaking that the Administration just recently announced. And with that, the Committee will stand adjourned. Thank you. [Whereupon, at 3:45 p.m., the Committee was adjourned.] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] [all]