[House Hearing, 118 Congress] [From the U.S. Government Publishing Office] TAKING ON MORE RISK: EXAMINING THE SBA'S CHANGES TO THE 7(A) LENDING PROGRAM PART II ======================================================================= HEARING before the COMMITTEE ON SMALL BUSINESS UNITED STATES HOUSE OF REPRESENTATIVES ONE HUNDRED EIGHTEENTH CONGRESS FIRST SESSION __________ HEARING HELD MAY 17, 2023 __________ [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Small Business Committee Document Number 118-013 Available via the GPO Website: www.govinfo.gov ______ U.S. GOVERNMENT PUBLISHING OFFICE 52-170 WASHINGTON : 2024 HOUSE COMMITTEE ON SMALL BUSINESS ROGER WILLIAMS, Texas, Chairman BLAINE LUETKEMEYER, Missouri PETE STAUBER, Minnesota DAN MEUSER, Pennsylvania BETH VAN DUYNE, Texas MARIA SALAZAR, Florida TRACEY MANN, Kansas JAKE ELLZEY, Texas MARC MOLINARO, New York MARK ALFORD, Missouri ELI CRANE, Arizona AARON BEAN, Florida WESLEY HUNT, Texas NICK LALOTA, New York NYDIA VELAZQUEZ, New York, Ranking Member JARED GOLDEN, Maine KWEISI MFUME, Maryland DEAN PHILLIPS, Minnesota GREG LANDSMAN, Ohio MORGAN MCGARVEY, Kentucky MARIE GLUESENKAMP PEREZ, Washington HILLARY SCHOLTEN, Michigan SHRI THANEDAR, Michigan JUDY CHU, California SHARICE DAVIDS, Kansas CHRIS PAPPAS, New Hampshire Ben Johnson, Majority Staff Director Melissa Jung, Minority Staff Director C O N T E N T S OPENING STATEMENTS Page Hon. Roger Williams.............................................. 1 Hon. Nydia Velazquez............................................. 2 WITNESSES Mr. Tony Wilkinson, President and Chief Executive Officer, National Association of Government Guaranteed Lenders (NAGGL), Frisco, TX..................................................... 5 Mr. Ami Kassar, Founder and Chief Executive Officer, Multifunding LLC, Ambler, PA................................................ 7 Ms. Alice Frazier, President and Chief Executive Officer, Bank of Charles Town, Charles Town, WV................................. 8 Mr. Manuel Flores, President and Chief Executive Officer, SomerCor, Chicago,IL........................................... 10 APPENDIX Prepared Statements: Mr. Tony Wilkinson, President and Chief Executive Officer, National Association of Government Guaranteed Lenders (NAGGL), Frisco, TX........................................ 38 Mr. Ami Kassar, Founder and Chief Executive Officer, Multifunding LLC, Ambler, PA............................... 53 Ms. Alice Frazier, President and Chief Executive Officer, Bank of Charles Town, Charles Town, WV..................... 60 Mr. Manuel Flores, President and Chief Executive Officer, SomerCor, Chicago, IL...................................... 64 Question and Answer for the Record: Question from Hon. Velazquez to Mr. Flores and Answer from Mr. Flores................................................. 74 Additional Material for the Record: American Bankers Association................................. 77 California Association for Micro Enterprise Opportunity (CAMEO).................................................... 82 Credit Union National Association (CUNA)..................... 105 National Association of Development Companies (NADCO)........ 107 National Association of Federally-Insured Credit Unions (NAFCU).................................................... 134 TAKING ON MORE RISK: EXAMINING THE SBA'S CHANGES TO THE 7(A) LENDING PROGRAM PART II ---------- WEDNESDAY, MAY 17, 2023 House of Representatives, Committee on Small Business, Washington, DC. The Committee met, pursuant to call, at 10:03 a.m., in Room 2360, Rayburn House Office Building, Hon. Roger Williams [chairman of the Committee] presiding. Present: Representatives Williams, Luetkemeyer, Stauber, Meuser. Van Duyne, Molinaro, Alford, Crane, Bean, Velazquez, Landsman, McGarvey, Gluesenkamp Perez, Scholten, Thanedar, Chu, and Davids. Chairman WILLIAMS. I now call the Committee on Small Business to order. Without objection, the Chair is authorized to declare a recess of the Committee at any time. The Committee is here today to hear testimony about proposed changes to the 7(a) loan program and how it will affect lenders and borrowers. Thank you all, again, for being here to testify today. I now recognize myself for my opening statement. I want to welcome you all again into today's hearing, which will focus on the Small Business Administration changes to the 7(a) loan program. At last week's full Committee hearing on this vital issue with the SBA, many of our questions went unanswered. So I hope today we can serve as a constructive conversation on how these changes add unnecessary risk and threaten the 7(a) Program's long-term integrity. Just 1 day after our hearing last week, Associate Administrator Patrick Kelly, who testified before us, was dismissed from the agency. While the circumstances around his departure are still not clear, there are two logical suggestions. First, his contempt for the basic congressional oversight was apparent, and the SBA did not think his behavior was appropriate for the agency. Or second, he submitted his resignation months ago and the SBA decided to send someone to testify on these major rule changes knowing that he could be parting ways with the agency shortly after. Kind of a lame-duck witness. Whichever scenario is accurate, both of these are extremely concerning as we do our congressional due diligence over these new rules. Members of this Committee on both sides of the aisle still have unanswered questions regarding these changes and are concerned that the SBA is continuing to move forward without the leadership in place to help make these transitions as smooth as possible. This concern is not only bipartisan here on this Committee, but also is shared by our colleagues in the Senate. Yesterday, I, along with Ranking Member Velazquez, Chairman Cardin, and Ranking Member Ernst joined a pen letter together to Administrator Guzman saying it is our collective belief that, at the very least, it is best to find a new permanent head of the Office of Capital Access before we begin these changes and before they go into effect. Finalizing the proposed rule represents the most significant changes to the program in decades, and I hope that we will be able to have a productive discussion about how the changes to the lending criteria will add more risk to the taxpayer-backed loan portfolio and how these changes will weaken the credit elsewhere test and take the SBA away from being the lender of last resort. In addition, I hope to discuss SBA's capabilities as a regulator and if they are properly equipped to take on this increased responsibility, and also if the proper guardrails have been installed since the agency let billions of taxpayer dollars be stolen from the pandemic loan programs. For decades, the 7(a) program has been operating on a bipartisan basis to help business get off the ground with their capital needs. Unfortunately, I am afraid that these changes will lead to a greater default rate that will rely on the program to continue to be subsidized by Congress in order to remain in existence. I am not alone in raising these concerns. The SBA's Inspector General himself testified before this Committee and noted that there are significant challenges that the agency will face in managing the increased loan volume going forward as well as the significant shortages of staff within the department that oversees this program. So we can not allow the SBA to get these rules wrong. I will once again call on the Biden administration to slow down until we can properly determine how these changes will work in practice. And without objection, I would like to submit statements for the record from ABA, QNA, and NAFCU regarding these rule changes. I want to thank you all again for being here with us today, and I am looking forward to a more constructive conversation today. And with that, I will yield to our distinguished Ranking Member from New York, Ms. Velazquez. Ms. VELAZQUEZ. Thank you, Mr. Chairman, for bringing us back together on this important topic. I would like to start by entering into the record the fact that money from taxpayers was stolen because the Trump administration didn't put in place the guardrails that were needed in order to protect taxpayers' money. I want to be fair in terms of that qualification. In just one week, there have been quite a few developments, so I look forward to our discussion. As we have already detailed, the SBA issued two final rulemakings that have substantial implications for critical lending programs. Not only do the rules make significant modifications, the interplay between them and the programs to which they apply are vast and complicated. Not every program will be impacted in the same ways. Last week, much of our hearing focused on the 7(a) program and rightly so because it is the agency's flagship initiative, providing nearly $15 billion in loans to small firms all over the nation. Today, I am hoping to hear what these rules mean for another program, the 504 CDC loan guaranty program, which is administered through nonprofit CDCs. The 504 program provides long-term fixed rate financing for major assets such as land, buildings, and equipment. Through a 100 percent SBA guaranty venture, the CDC provides up to 40 percent of financing, while a third-party lender provides at least 50 percent, leaving the applicant with at least 10 percent of the financing. Last year, the 504 program delivered over $9.2 billion in capital access, and so far this year, it is needing $4 billion. As one of our own Members has stated in previous hearings, the 504 program can be slow and complicated, making it right for an improved streamline process. The affiliation rule helps bring some improvements that I welcome by the industry and borrowers alike. The disparity between the rulemaking's application to the SBA lending programs highlights just why this committee is taking a deep dive into these policy changes. It is incumbent upon us to look at every aspect of what the details truly mean and their potential consequences, good or bad. SBA instituted these rules to address persistent gaps in access to capital as part of the Biden administration's broader economic agenda. As I have continuously stated, increasing access to capital for underserved entrepreneurs remains my top priority, but I would be remiss in my obligation to borrowers and program integrity if I didn't do my due diligence. And that is why we are here again today--to listen to the industry stakeholders and understand their views of the rules on the programs they participate in. Ensuring the businesses owned by women, people of color, and underserved groups have the resources needed to succeed is an important goal, and I look forward to hearing another perspective of SBA's actions. I remain committed to filling the gaps in the market in a bipartisan and thoughtful way and pledge to work with SBA stakeholders and my colleagues on the House and Senate Committees to find a solution. Thank you, Mr. Chairman. I yield back. Chairman WILLIAMS. Thank you, Ranking Member Velazquez. And I will now introduce our witnesses. I will now introduce our witnesses. And it is my pleasure and privilege to introduce our first witness, Mr. Tony Wilkinson. Mr. Wilkinson has served as the president and CEO of the National Association of Government Guaranteed Lenders in Frisco, Texas for more than 30 years. And prior to joining NAGGL, Mr. Wilkinson spent 13 years with the Stillwater National Bank as senior vice president and was responsible for the bank's SBA lending activities. Mr. Wilkinson is a graduate of Oklahoma State University, home of the cowboys, right? And, Mr. Wilkinson, thank you for being here today. We look forward to the conversation ahead. I now recognize--Meuser is not here, and he was going to introduce you, Mr. Kassar. So I am going to do it in a Texas way, okay? All right. Our next witness is Mr. Ami Kassar. Mr. Kassar is the founder and CEO of MultiFunding LLC located in Ambler, Pennsylvania. Mr. Kassar has dedicated the last two decades of his career to ensuring that businessowners and entrepreneurs get the best possible financing to grow their businesses. He knows far too well the impact that poor financing choices have on the ability for a small business to grow. In his work as a public speaker and as a founder and CEO of MultiFunding LLC, Mr. Kassar has helped thousands of business- owners and entrepreneurs structure their debt to optimize growth and in turn help to create tens of thousands of jobs. Mr. Kassar is a graduate of Brandeis University and the University of Southern California where he received his master's in business administration. Mr. Kassar, thank you for being here today, and we look forward to the conversation ahead. Next, our next witness is Alice Frazier. Ms. Frazier serves as president and CEO of Bank of Charles Town in Charles Town, West Virginia. She also has recently been appointed to the board of directors of the Federal Reserve Bank of Richmond. Including her current position with BCT, Ms. Frazier has over 32 years of local banking experience, including with Cardinal Financial Corporation as executive vice president and chief operating officer, BB&T as senior vice president in Loudoun County, and Middleburg Financial Corporation as chief financial officer and chief operating officer, which is where Ms. Frazier began her banking career. Prior to that, she worked for 4 years in public accounting with a national and regional firm. Ms. Frazier is a graduate of Stonier. Is that how you say it? Stonier Graduate School of Banking and Radford University. Ms. Frazier, thank you for being here today, and we look forward to the conversation ahead with you. And I now recognize the Ranking Member from New York, Ms. Velazquez, to briefly introduce our last witness appearing before us today. Ms. VELAZQUEZ. Thank you, Mr. Chairman. It is my pleasure today to welcome back to our committee Mr. Manny Flores, President and Chief Executive Officer of SomerCor, an SBA Certified Development Company located in Chicago, Illinois. In addition to making 504 loans, SomerCor is an active lender in the SBA Community Advantage Pilot Program and a Member of the National Association of Development Companies, or NADCO. Mr. Flores first joined SomerCor as a Board Member in 2016 and was appointed to his current role in 2018. Prior to SomerCor, he held elected office as a Chicago city Councilmember and served as Director and Acting Secretary of the Illinois Department of Financial and Professional Regulation. We are glad to have you with us today. Welcome. I yield back. Chairman WILLIAMS. Thank you, Ranking Member Velazquez. And we appreciate all of you, again, being here today. Now, before I recognize the witnesses, I would like to remind all of you that your oral testimony is restricted to 5 minutes in length. If you see the light turn red in front of you, it means your 5 minutes have concluded, and you should wrap up your testimony. And if you don't wrap it up, I will beat on the gavel, and you will get the idea, okay? So with that, I now recognize Mr. Wilkinson for his 5- minute opening remarks. STATEMENTS OF TONY WILKINSON, PRESIDENT & CEO, NAGGL; AMI KASSAR, FOUNDER & CEO, MULTIFUNDING LLC; ALICE FRAZIER, PRESIDENT & CEO, BANK OF CHARLES TOWN; AND MANUEL FLORES, PRESIDENT & CEO, SOMERCOR STATEMENT OF TONY WILKINSON Mr. WILKINSON. Thank you, Mr. Chairman, Ranking Member Velazquez, and Members of the Committee. Let me start by saying, Mr. Chairman, I agree with your opening statement. In the 36 years I have been NAGGL's CEO, I have never seen changes more sweeping and potentially damaging. SBA is removing long-standing underwriting guardrails that have assured prudent lending in the 7(a) program, while simultaneously adding an unlimited number of nonfederally regulated lenders. Worse, SBA will serve as primary regulator for these new entities, a role that it is not equipped for. SBA's stated intent for these changes is laudable, increase access to capital for underserved markets, and streamline processes. The lending industry wholeheartedly supports those goals, but the recent rules do not achieve what SBA is setting out to do. And the biggest change between the proposed and final rules, SBA removed any mention of underserved markets from the regulatory language. SBA's data shows that in fiscal year 2022 more than 75 percent of all loans are estimated to be small- dollar loans, 68 percent of all loans going to underserved markets, far exceeding SBA's 43 percent goal, and nearly one- third of all loans going to minority-owned businesses. There is always room for progress, but these numbers don't show the market failure that SBA has described. First, on underwriting, the rules remove guidelines that ensure lender behavior and portfolio performance stay at an acceptable level. SBA has described the new standard as ``do what you do'', leaving it up to lenders to determine what is prudent. I fear that removing these guardrails creates a race to the bottom in credit quality. Today's 7(a) loans are not funded by taxpayer dollars because current loss rates assure that the borrower and lender fees cover the cost of loans. Removing the underwriting guardrails mean that losses could increase, and Congress either will have to raise fees on borrowers and lenders or provide an appropriation; otherwise, this program shuts down. A lose-lose. After throwing out the rule book, SBA is telling the new, nonfederally-regulated lenders--presumably fintech--that they can do whatever they think is prudent. SBA said in 2021 rules that it could not be the primary regulator for more lenders because it will lack the oversight capability and cited an increased risk to the agency. Just 22 months and later and with no evidence of changed capacity, SBA has reversed itself. And despite SBA's assertion that it will add just three additional regular SBLC licenses, the truth is, it is just three for now. The rule doesn't have any limits. And SBA is also adding mission lenders currently participating in the Community Advantage Pilot Program as SBLCs, which is more than 100 entities. The capacity and resources of SBA's oversight functions both fall short. Funding has been stagnant for nearly 10 years. There is a failure to even meet current oversight requirements, and the IG identified staff vacancies of 40 percent, just to name a few concerns. But even with more resources, SBA still lacks the regulatory framework necessary to oversee lenders on an enterprise risk level. This is made worse because the final rule removed the restriction that limited SBLCs to only making SBA loans, increasing the oversight burden significantly. Currently, SBA does not regulate for Bank Secrecy Act or Know Your Customer or even the most basic consumer protections. And the rules go even further. SBA now allows a business to qualify as small, even if it is controlled by a large business. It will be the large business, not the small, that will be the primary beneficiary of an SBA loan. SBA also drastically altered the credit elsewhere to nothing more than a check-the-box exercise, inviting fraud like we saw in PPP. And now SBA allows borrowers with significant personal wealth to qualify for loans, flying in the face of the statutory mandate to only give a 7(a) loan to borrowers who could not get credit elsewhere. Finally, politicizing SBA decisions should concern everyone. Under the affiliation rule, the SBA administrator can now reverse a loan denial. This change allows politics to seep into determining SBA loans. And the biggest concern, the harm to borrowers, particularly the underserved, who would be faced with higher fees, the possibility of receiving loans they cannot repay, and lenders who have no federal regulator that ensures consumer protections. This Treasury Department, Mr. Clyburn, House Oversight Committee, the IG community, and more all point out significant concerns with the concepts and the underlying rules, yet SBA has not heeded any warnings. Lenders are not concerned about competition, nor is this about being anti-fintech, but SBA is not inviting fintech into the program we all know and trust. SBA is inviting fintech into a very changed program devoid of guardrails. I am profoundly opposed to imprudent changes that could harm underserved markets and damage the 7(a) loan program. Participating in a government program requires responsible stewardship, especially when the current portfolio is nearly $107 billion in outstanding principal balances with the government liable for roughly 75 percent of that. Congress should require strong guardrails when the federal government is the backstop. While SBA could change course, I see little evidence it will, especially when it has repeatedly ignored congressional and industry concerns. I implore you to legislatively act because the future of this program might very well depend on Congress reversing these rules. Otherwise, the program that fuels mainstream America will be in jeopardy and our most vulnerable small businesses harmed. Thank you. Chairman WILLIAMS. Thank you. Right on time. I appreciate that. Next, I will recognize Mr. Kassar for his 5-minute opening remarks. STATEMENT OF AMI KASSAR Mr. KASSAR. Thank you for the honor of testifying today to share my thoughts on the changes to the SBA program that deeply concern me. My name is Ami Kassar, and I am the founder and CEO of MultiFunding LLC, a loan brokerage and consultancy company based in the suburbs of Philadelphia. Since 2010, my team and I have heard the stories of thousands of entrepreneurs over the years. In our work, we strongly recommend the SBA 7(a) program and have helped borrowers receive nearly $400 million of 7(a) loans nationwide. There are three primary points I want to leave you with today. First, traditional SBA 7(a) lending has few similarities to the EIDL program or the Restaurant Revitalization Fund that we heard about last week. Secondly, when entrepreneurs take loans without a clear path to pay them back, there can be devastating consequences for both the lenders and the entrepreneurs. All of the proposed SBA changes will make it much easier to get a loan, leaving many to take loans before they are ready for them. And finally, if you make wholesale changes to the SBA 7(a) program all at once, it will be impossible to understand the impact of each change. Let's begin with comparing the 7(a) program to the EIDL program and Restaurant Revitalization Fund, which was a common thread of testimony in front of this Committee last week. The Restaurant Revitalization Fund was a grant program. It did not issue loans, and recipients did not have to repay the grants. Therefore, comparing this program to the 7(a) program is nonsensical to me. The EIDL program is a story that requires unpacking. First, 378 billion was lent to 3.9 million small businesses without proof of economic injury. The repayment data has barely started to come in. That said, I suspect we will learn a lot from EIDL loans about what happens when you lend money to businessowners who don't have a clear plan to pay it back. And this is what I fear will happen if we simplify SBA lending. In this spirit, I want to share a story with you. One night during the pandemic, I was asked to teach a virtual SBA class for a female entrepreneurship group at an African American church in Philadelphia. About a dozen women who were trying to get side hustles off the ground attended. As the session began, I quickly realized that the last thing these entrepreneurs needed was a loan. You see, like many entrepreneurs, they thought they needed more money to get started than they did. But in every case, there were far less expensive ways to get their concept off the ground than they thought. One woman wanted to start a business baking desserts for restaurants that didn't offer them. She was convinced she needed to borrow $50,000 to open a kitchen. She had yet to consider that she could prove her concept by baking in her home kitchen or renting a kitchen during off-hours at a local restaurant to get started. But here is the thing. If an unregulated fintech lender offered these budding entrepreneurs an SBA loan that will land in their bank accounts in a few days, every one of these entrepreneurs would jump on the opportunity. Is that what we want for the SBA program? In today's world, borrowers write business plans, build projections, and make business cases for their needs. They have to have their books in order. Now, the SBA wants to throw much of this out of the window. It is a recipe for disaster and will lead to much higher delinquencies, in my opinion. And a delinquent debt to the United States Government is not a good mark on a budding entrepreneur's resume. I am all for change, but you take significant risk if you make too much change too quickly. Broadening access to capital is a worthy goal. But now the SBA proposes changing too much, too soon in an uncontrolled environment. If all these changes go forward as it looks like they will, I predict we will return to this room in 2 years to try to explain the growing default rates. And the problem will be we won't be able to understand the root causes because of all the vast changes being made all at once. I remember some important lessons from science class in high school. If you are going to try and experiment, test one variable at a time. You cannot read the results if you try everything at once. The checks and balances of the SBA system can be exceedingly frustrating, but they help borrowers and lenders in the long run. We are in the business of issuing loans insured by the U.S. taxpayer. This is not a responsibility we take lightly. With these simultaneous changes, we risk blowing up a long-standing healthy program, like the SBA, that positively impacts our economy. I implore Congress to slow down the SBA train that has already left the station and create a more cautious path for the SBA in the future. Let's evolve and grow and try new things but in a measured and thoughtful way. Thank you very much. Chairman WILLIAMS. Thank you. Good job on the timing. And now, I would like to recognize Ms. Frazier for her 5- minute opening remarks. STATEMENT OF ALICE FRAZIER Ms. FRAZIER. Chairman Williams, and Ranking Member Velazquez, and Members of the Committee, I am Alice Frazier, president and CEO of Bank of Charles Town, a $790 million community bank serving the markets of West Virginia, Maryland, and Virginia. I testify today on behalf of the Independent Community Bankers of America where I am Chair of the Bank Operations Committee and a Member of the Board. My bank has been an SBA lender for over 40 years, and I am proud to say that more than half of the SBA loans over the past 18 months were made to minorities or women borrowers. And we share with this Committee the goal of preserving and protecting the integrity of the SBA 7(a) program, while continuing to make prudent loans to smaller and underserved businesses. The new SBA rules, which were rushed through the process without any input from Congress or industry, will undermine this critical goal. And we recommend the agency hit the pause button, convene a working group of existing SBA lenders to determine how we can better align the program with the SBA mission of reaching the smallest businesses and entrepreneurs. Current lenders know where the challenges lie and should be given the opportunity to craft a program that works better. We believe the SBA's new small business lending company rule, which would admit nonbank financial technology companies or fintechs to the 7(a) program, is a serious threat to its integrity. And moreover, the new affiliation rule and revisions to the SOP appear to be specifically designed to accommodate nonbank fintechs. Online-only lending can never be a substitute for on- the-ground community bank lending. The business model of a nonbank fintech that snap approval and rejection of a loan and quick disbursement of funds is often not in the borrower's best interest. We have a client who had previously obtained two quickly- disbursed fintech loans of less than $30,000 each. The fintech provided no counseling on how to put that money to good use. In fact, he was overpaying himself, resulting in losses each year. He won a Navy contract, but couldn't find a lender because of his losses. And we worked with him to help him understand what lenders look for in reviewing a credit application. And ultimately, we were able to secure for him a $150,000 SBA loan. You see, the community bank model is really quite different. We partner with our small business borrowers and are vested in the long-term growth and success. The reality is that once the loan is funded, that relationship has really only just begun. We provide practical, real-world business counseling and networking opportunities, particularly for start-ups, in a way that can never be matched by an online-only lender. The best thing for an underserved borrower is to work with a lender that is committed to their success. A small African American 8(a) government contractor applied to us for a $150,000 loan. She had recently won a couple contracts, but her low credit score made it impossible for us to approve her loan application at that time. And rather than just turn her away, we worked with her for over a year and a half to increase her credit score and then celebrated when we were able to give her an SBA loan. I cannot imagine a nonbank fintech lender standing by a loan applicant for a year and a half. We are committed to working with this Committee and the SBA to ensure the 7(a) program is reaching the smallest underserved borrowers. But I also think we should appreciate what the program is already achieving. For example, according to the SBA's own data, 68 percent of the loans in fiscal year 2022 were made to underserved borrowers. This far exceeds the agency's target of 43 percent. And also in fiscal year 2022, one in three 7(a) loans were to minority-owned businesses. I fully expect nonbank fintech loans to have a higher default rate and higher incidents of fraud, similar to the results of the Paycheck Protection Program. The cost associated with more defaults and fraud will drive fees higher and make the program more costly and less accessible. We urge this Committee to exercise robust oversight on the 7(a) program with the goal of safeguarding its integrity. Thank you, again, for this opportunity to share my perspective, and I am happy to answer any questions you may have. Chairman WILLIAMS. Thank you very much, Ms. Frazier. Good job. I now recognize the witness, Mr. Flores, for his 5-minute opening remarks. STATEMENT OF MANUEL FLORES Mr. FLORES. Chairman Williams, Ranking Member Velazquez, and distinguished Members of the Committee, thank you for having me today. My name is Manuel Flores, and I am the president and CEO of SomerCor, a Certified Development Company based in Chicago, Illinois, a Member of the National Association of Development Companies. I am honored to represent the CDC industry to discuss rule changes affecting the lending programs at the Small Business Administration. CDCs are nonprofit organizations certified by the SBA who meet our economic development mission through the delivery of the SBA's premier economic development program, the 504 loan program, as well as the 7(a) Community Advantage Pilot Program, the microloan program, and other federal and state initiatives. My comments today will focus particularly on the affiliation and lending criteria as it relates to the 504 program. The 504 loan program is a prime example of the successful public-private partnership with a loan structure that pairs the CDC--which provides up to 40 percent of the financing for an eligible project through 100 percent SBA- backed venture--with a banking partner, typically, which provides 50 percent of the financing, thus requiring only a 10 percent down payment from the small business borrower. The program finances commercial real estate, including construction costs and equipment, with terms of 10, 20, and 25 years at a fixed below-market interest rate. An important cornerstone and differentiator of the 504 loan program is its economic development mission. To be eligible for a 504 loan, the project must create jobs or meet a public policy or community development goal. The result is a zero-subsidy program that has served more than 175,000 small businesses, provided more than $100 billion into ventures, and leveraged private sector financing for an estimated total investment of more than $250 billion in local economic development, all at no cost to the taxpayers. In addition, the 504 programs have a collective performance of a 0.5 percent charge-off rate over the last decade. This is in part a result of the multi-stop underwriting and approval process that includes loan review by the CDC, a third-party lender, and the SBA. Combine the extensive oversight of CDCs by the SBA with the underwriting and approval process of the 504 program, and it becomes clear why it performs so well. Unfortunately, despite some of the program's successes, the 504 program can be weighed down by a complex approval process that can adversely affect the borrower. The CDC lending industry has advocated for regulatory changes to create efficiencies in the approval process for over a decade, including many of the adjustments to affiliation and underwriting included in the recent final rule. Now, NADCO largely supports the intent of these changes, which will provide CDCs the flexibility to be reasonable while continuing to use prudent underwriting practices that focus on ensuring repayment ability. As you consider congressional action in response to these rules, I offer the following recommendations. First, there are several lending programs that the SBA impacted by these rules who operate differently, and a one-size-fits-all approach is not the best way to expand small business lending. It is important to continue differentiating the programs and approaching their implementation through this lens. Second, while Congress continues to weigh the rules and their impact, the CDC lending industry and our banking partners need time and open communication with the SBA to understand these changes. Trainings, open dialogue, and a collaborative approach is integral for industry participants to understand and adapt to the rule changes without fear of being penalized. Finally, I would like to also draw attention to a program change initiated by Congress, but for which the SBA has not yet published a final rule. The Economic Aid Act enacted in 2020 made integral changes to the 504 Debt Refinance Program. It is critical the SBA remove administrative barriers that restrict borrower access to the program and release a final rule as soon as possible. These changes made in the Economic Aid Act are particularly important in the current interest rate environment where the lower fixed rate of the 504 program can provide enormous cost savings to small businesses. The CDC lending industry cares deeply about maintaining our role as a trusted partner for small business success. We will continue to focus on our collaboration and communication with the SBA and Congress to meet our collective goal of making lending programs like the 504 easier, faster, and more secure in support of a strong small business ecosystem nationwide. I appreciate the opportunity to testify this morning. I look forward to answering any questions. Chairman WILLIAMS. Thank you very much. Good job. Plagiarism is an evil thing. Mr. FLORES. I was inspired, Chairman. Chairman WILLIAMS. Well, I thank all of you. Good job. And we will move now to the Member questions under the 5- minute rule, and I recognize myself for 5 minutes. Mr. Wilkinson, given your extensive experience with the SBA programs, I wanted to start off by asking you to quickly clarify a few statements that former SBA official Patrick Kelly made at our hearing last week. He said that the changes to the 7(a) lending program are not terribly new but would simply put the program in line with the SBA's Express loan program. So, Mr. Wilkinson, can you describe why this comparison by the SBA is not accurate? Mr. WILKINSON. Until recently, the SBA Express program has been limited to $350,000 in size. The expansion of doing what you do up to a $5 million loan size is a vastly different approach. I would also add that we would have a little bit of a concern about the loss rate that has been seen in the Express portfolio. It has got a 50 percent guaranty, so you would intuitively think you would have a lower loss rate, and that has not been the case. It is running about two times the loss rate that the regular 7(a) program is. Chairman WILLIAMS. Okay. He also claimed that as part of their oversight of small business lending companies, they give lenders guidance on how they should be compliant with the Bank Secrecy Act and other anti-money laundering laws. So have any of your Members received guidance on how to fulfill these requirements from the SBA? Mr. WILKINSON. No. Chairman WILLIAMS. Okay. And finally, Mr. Wilkinson, can you clarify what would need to happen to keep the program operational if loan defaults were drastically increased? Mr. WILKINSON. Well, we are hopeful that this Committee will address that through legislation, putting back in the guardrails that have been there for decades to make sure that the underwriting guidelines stay in place and we keep lenders between the lines. Chairman WILLIAMS. Don't try to fix what is not broken. Mr. WILKINSON. Correct. Chairman WILLIAMS. Thank you for those answers. I also sit on the Financial Services Committee, as several of us do here, and for the last few weeks, we have been discussing the recent wave of bank failures. So, Mr. Kassar, can you describe the similarities you see with the fall of Silicon Valley Bank to what the SBA is attempting to do by increasing access to capital to small businesses that might not be ready for prime time? And you have talked about that. Mr. KASSAR. I have seen a lot of term sheets from Silicon Valley Bank over the years. And for the life of me, I don't understand how they make the loans that they do. I don't know other lenders who could match them. So a loose credit culture, I believe, is part of what the problem was, that cultural program at Silicon Valley Bank, and I am concerned that a loose credit culture at the SBA will lead us sadly to think about SBA and SVB in the same sentence in a couple years if we completely loosen so many of the guardrails. Chairman WILLIAMS. All right. Now, yesterday, the Ranking Member and I sent a letter along with Chairman Cardin and Ranking Member Ernst in the Senate to the SBA asking for them to pause on attempting or implementing these rules until a full-time head of the Office of Capital Access is installed. Ms. Frazier, you touched on that. But do you think this would be a good idea given the expected--unexpected departure of the former associated Members who sat in that seat last week? And can you describe outstanding questions you still have about the new rules? Ms. FRAZIER. Thank you. Well, given that the new rules were rushed and just recently put out, many of us as lenders are still trying to absorb what is in them and how would they be affected. So the pause--not only a pause would be necessary, but I think also gathering existing lenders together that have experience with the current SBA rules and reflect upon what could be changed to make it simpler, but maintain prudent lending standards. And I would also recommend not only the pause, but should the changes go into--any changes go into effect, give it time for the current lenders to process and absorb them and see the impact before we allow any more small businesses lending companies into the program. Chairman WILLIAMS. Thank you very much. I now recognize the Ranking Member for 5 minutes of questions. Ms. Velazquez. Ms. VELAZQUEZ. Yes. Mr. Flores, your testimony demonstrated it is important to differentiate the 504 and the 7(a) loan programs, which are both impacted by the rules we are discussing today, and you yourself stated that in your opening statement. The 504 loan program is an economic development program with job creation goals. Can you walk us through the 504 underwriting process and why you believe the changes in the affiliation rule will benefit 504 loan borrowers? Mr. FLORES. So, Ranking Member Velazquez, thank you for your question. Thank you for your question. The 504 loan underwriting process is unique because it includes three different parties and multilayers of underwriting and examination, all with a goal of ensuring borrower solvency. So you have the Certified Development Company with staff who has expertise in underwriting also governed by policies and procedures, risk weighting, and concentration tracking, all which have to meet SBA requirements, which also includes independent loan review by a loan committee as well as the board. In addition to the CDC, you have a lending partner, typically a bank, that will also have to follow its own loan procedures, safety and soundness, prudent lending. I need not remind this Committee here that banks are also regulated by banking regulators. I was a former banking regulator for State- chartered institutions. And then you also have the SBA that also reviews the loans for the purposes of, again, underwriting and then also eligibility requirements. Ms. VELAZQUEZ. I have a lot of questions, so please be brief. Mr. FLORES. Oh, apologies. So a very thorough process, Ranking Member. Ms. VELAZQUEZ. Okay. Thank you. As lenders, borrowers, and even those of us here in Congress try to get up to speed on the details of these two rules on the SOP, I understand mistakes will be made. What has your interaction with the SBA been like? Have they tried to explain the details of the rules to your organization in order to help you comply? Mr. FLORES. So a lot of the changes that we are seeing, frankly, have come from years of communication with the SBA in engagement with the CDC industry. And just as recently as last week, we had a number of meetings with the SBA leadership and other Members to reflect upon some of the changes. That being said, I do believe, Ranking Member Velazquez, that it is prudent that the SBA continue to gauge the industry. I agree with the notion of openness, transparency, and collaboration in making sure that all of the stakeholders understand the changes so that we can do our jobs in helping small businesses access these amazing programs. Ms. VELAZQUEZ. Thank you. Thank you. Mr. Wilkinson, I am sure you are aware I have been advocating for more small-dollar loans, those from 50- to 150,000. There has been a decline, about a 50 percent decline in those type of loans. My question is, why is it that lenders are not making these loans? Mr. WILKINSON. Well, I think from where we sit, you know, 50 percent of our loan approvals by number of loans are $150,000 or less. So those are small-dollar loans. In any given year, based on economics or lender business models, those numbers changes. They fluctuate. And if you go back 5 years, we had a couple of major SBA Express lenders exit the program, so you saw a decline in small-dollar loans at that point in time. But if you go look today, you'll see our small-dollar loans are coming back up. I think the fee waivers are playing an important role. Ms. VELAZQUEZ. We have issues with the data, right, that is coming to us from SBA itself. What would you say to those that say that this is simply about market competition? How do you respond to that? Mr. WILKINSON. It couldn't be further from the truth. Banks can enter this program today, leave tomorrow. We get banks entering all the time. Ms. VELAZQUEZ. In terms of myself as Ranking Member of this committee and as Chair of this committee for 30 years now, I have been advocating for the smaller of the small businesses. And for those small loans from 50- to 150,000, the truth of the matter is that there is a decline. I want to make this effort a reality to get loans to underserved businesses who need it the most. My question is, how can we achieve this goal using the rules as a framework? Mr. WILKINSON. Well, first of all, I was starting down the path of--the fee waivers are working right now. We are seeing an uptick in small-dollar loans. We are seeing an increase in $150,000 and under. We are running ahead of last year's pace by--goodness, we are 25 percent ahead of last year's pace on loans of $150,000 and under. So we are making progress. We could expand the microloan lender network because they are specifically focused on loans of $50,000 and under, and they add the technical assistance component. And then perhaps if we gave lenders some credit in their PARRiS reviews if they did a specific percentage of loans under 150,000. Ms. VELAZQUEZ. Thank you. I yield back. Chairman WILLIAMS. Thank you very much. Next, I now recognize Mr. Luetkemeyer from the great State of Missouri for 5 minutes. Mr. LUETKEMEYER. Thank you, Mr. Chairman. Welcome to the panelists. Mr. Wilkinson, let me start with you this morning. I have got in front of me this morning a copy of the Federal Register which publishes rules and regulations that are promulgated by different agencies. The particular pages I have in front of me are with regards to the Small Business Administration, and they say--and I quote, the SBLCs are nondepository lending institutions authorized by SBA only to make loans pursuant to section 7(a) of the Small Business Act and loans to intermediaries and SBA's microloan program, which says only those kind of loans. But then it says later on that SBA agrees with the previous paragraph, which mentions that they are going to do away with that, and it says, we will revise the paragraph by removing the word ``only'' to make it clear that SBLCs and Community Advantage SBLCs may participate in other lines of business in addition to 7(a) lending or making loans to intermediaries. Mr. Wilkinson, what is the impact of that? Mr. WILKINSON. Well, I have huge concerns about that because this change--as you note, there is now nothing in the regulation to prohibit an SBLC from making other types of loans or engaging in other business products. More importantly, this change significantly would add to the SBA's oversight burden, since when it is evaluating institutional safety and soundness, they would now have to be up to speed on all the other related lines. Mr. LUETKEMEYER. What is the mission of an SBLC? Mr. WILKINSON. Mission of an SBLC? Mr. LUETKEMEYER. Yeah. Mr. WILKINSON. Well, currently, the SBLCs are standalone separate corporations that only do 7(a) loans. Mr. LUETKEMEYER. Okay. So what they are going to do is they are going to make these mini-banks. Is that where we are going to be? Is that another way to frame it? Mr. WILKINSON. That is another way to frame it. Mr. LUETKEMEYER. So, Ms. Frazier, you are a banker. Do you like this competition? Having the SBA be the new bank lender in your community for small businesses, when they are supposed to be the lender of last resort, and now they are your main competition. How do you think about that? Ms. FRAZIER. I don't think very highly of it, quite frankly. As I testified before, when the direct lending was being proposed from that perspective--is that what you miss and what many--what many of us are saying here is the relationship and the coaching and the counseling many of these borrowers need in this process--and they need the education towards their financials--and to create an online process that scored, and the decision is made against a few metrics or factors, you don't achieve what I believe is what everyone desires as a successful entrepreneurship and business. So I am not excited about that kind of competition, only because I think it diminishes really what the SBA is trying to achieve. Mr. LUETKEMEYER. Well, it would seem to me that what would happen is you will turn somebody down because they are not creditworthy or they have got a problem, and they are going to run across to an SBLC who now has no criteria. Last week, we talked about this with Mr. Kelly. And they don't have Know Your Customer stuff. We don't have all these other things in place that, during the PPP program, really differentiated between the banks and the fintechs and how they were able to get the funds out the door and be able to do this. We found that the fintechs were basically the problem children with the PPP program with the way that they did not do the oversight that they really needed to do with regards to their customers. So it looks to me like we have got a real problem with direct lending here, especially when at the SBA--when the EIDL program was fraught with fraud. And so now we are going to make them a direct lender in multiple areas. Ms. FRAZIER. Right. Not a good thing because the relationship isn't long-standing. It is, package up a portfolio, sell it, service it, and you miss the opportunity to really develop business and help with economic success. Mr. LUETKEMEYER. Mr. Kassar, would you like to elaborate a little bit on that? I think you said a minute ago something about loose credit culture. This, to me, is our whole problem. It is that SBA does not know how to do direct lending. It is proven by the programs that they have, the losses they have sustained. They don't do their due diligence on underwriting. And now, suddenly, they want to expand those programs and be in direct competition with the banks who we already know do it right. And so now, it looks to me like we are going to wind up putting a big burden on the taxpayers to underwrite this whole situation. Would you like to comment on that? Mr. KASSAR. Absolutely. In addition to the prior point you are making, if these new SBLCs can do any other kinds of loans, if for whatever reason a borrower does not qualify for an SBA loan, they can quickly move the mover to a high-interest, very expensive loan that many--not all, but many of these fintechs are doing that creates a high-speed debt treadmill, which is-- -- Mr. LUETKEMEYER. One more quick question. Where are the SBLCs going to get their funds to loan? If they are going to expand their loan program, where do they get the money for that? Mr. KASSAR. They might get them from private lines from banks. Mr. LUETKEMEYER. I yield back. Thank you, Mr. Chairman. Chairman WILLIAMS. Next, I now recognize Mr. McGarvey from the great State of Kentucky for 5 minutes. Mr. MCGARVEY. Thank you, Mr. Chairman. Thank you all for being here today and talking about this incredibly important issue. Last Congress, after an extensive investigation into the Paycheck Protection Program, the House's Subcommittee on the Coronavirus Crisis found that fintech and other nondepository institutions failed to establish systems that would stop obvious and preventable fraud and profited off of processing fees for each loan they completed, leaving little incentive to find the fraud. The Subcommittee issued a report in December recommending that, quote, any plans by SBA to again open 7(a) to fintechs and other unregulated, nondepository institutions must be accompanied by a well-defined, more rigorous, and better- resourced initial review process, and that such entities should be subject to continuous monitoring to confirm their adherence to SBA rules. Mr. Wilkinson, you talked a little bit about this in your opening statement. I just want to go a little bit more in depth with you on it. Do you feel that the rule changes proposed by the SBA are just that: Well-defined, more rigorous, and provide a better- resourced initial review process? Mr. WILKINSON. No, they're not. They are devoid of any guardrails. SBA lacks the capacity to be the prudential regulator for the new SBLCs. So, no, I disagree that they have done a good job here. Mr. MCGARVEY. What do you think should be happening? Mr. WILKINSON. Well, there is a whole long list. First of all, many of the guardrails should remain in place. I would tell you that when the fintech group came to lobby us, they asked for higher interest rates. They asked for the ability to charge higher fees. They got that. It is in the new SOP. They asked for the ability--and I am sorry. Mr. Luetkemeyer just left--they asked for the ability to sell 100 percent of the loan, not just the guaranteed piece. So there is a program underway at SBA to allow fintechs to sell a significant portion of the loan. That is where they are going to get their funding. And they asked for us to help them get rid of the credit elsewhere test. And at that point in time, we knew we were not going to be on the same page with these folks. So the fintech groups that are trying to get in right now have a vastly different idea of what this program should look like than we do. Mr. MCGARVEY. And tell me, what is the practical effect of that, to people looking for SBA loans? Mr. WILKINSON. Well, I suspect that there will be more folks that will get the loans, many of whom probably shouldn't. It is going to be down to an algorithm that is done online. And the practical effect for us sitting in this room is you are going to see significant increases in loss rates, which is going to put an upward pressure on the cost of the program. And we will all be right back in here talking about how we are going to raise fees on borrowers and lenders, or are we going to be able to come up with an appropriation, with the discussion being--you are doing riskier lending. Why should you guys appropriate money? And that is going to be a hard one to defend. But rest assured, losses are going to significantly increase with these rule changes. Mr. MCGARVEY. I appreciate your input and insight into that. And obviously one of the things I am concerned about--you have heard Ranking Member Velazquez talk about this--is making sure that people who need these loans, particularly the smallest of the small businesses, the people who are underserved, the people who have not had access to capital get that type of access to capital. It is clear that fraud was an issue with the fintechs. So we have established that. I don't think you are seeing a debate in this Committee. But we also know they did reach more women and minorities than traditional lenders did. So, Mr. Flores, what changes do you think are out there that you would propose to current rules to allow for lenders to serve more diverse and underserved populations while also protecting borrowers? Mr. FLORES. You know, that is what makes the Certified Development Company network very unique, is that we are about economic development. So our charge is to make sure that not only are we informing and educating the public about small business lending, but in particular, also providing technical assistance and partnership with other organizations. And our mission is to make sure that we not only promote the SBA lending programs, but that we do it in a way where the borrower is able to actually derive the whole benefit of that loan. So a lot of work goes into engagement and communication, and it is done in partnership with the Small Business Administration and individual CDCs, other economic development organizations. I just--again, I would hearken back to the comments that I made as a former banking regulator as well, is that the Small Business Administration working with the industry is critical in making sure that we are able to track the performance of these programs objectively and also to not lose sight that, at the end of the day, while we may have deep concerns about, you know, whether or not the new guidelines may impact certain types of loans, that we not forget about the need--the gap that exists with regard to access to capital for minority-owned businesses and rural-based enterprises. We have small businesses that need this access to capital, and I think we can balance both prudence with increased access to groups that have been historically left behind in terms of access to capital. Mr. MCGARVEY. Thank you very much. I would love to ask more questions. I appreciate the conversation that we are having here today. But I am out of time. So, Mr. Chairman, I yield back. Chairman WILLIAMS. Thank you very much. I now recognize Ms. Van Duyne from the great State of Texas for 5 minutes. Ms. VAN DUYNE. Thank you very much, Mr. Chairman, and thank you for holding this important hearing highlighting how this proposed rule change will be detrimental to small businesses across the country and will lead to an increased risk to the American taxpayer. Just 4 weeks ago, we had the SBA Inspector General in this room, where he shared the same concern we are hearing today. It is clear that the SBA is in no position to take on additional responsibilities. From allowing fraud to run rampant in pandemic relief programs to this unprecedented weakening of lending standards in the 7(a) lending program, I am deeply worried by the Small Business Administration's pattern of incompetence and seemingly disdain for taxpayers. One major concern with this rule is the change to credit available elsewhere, which requires that a lender look elsewhere for credit before looking at the SBA for funding. As for this proposed rule, SBA eliminated the requirement of providing the reason and is instead moving towards a loan volume over loan quality. So, Mr. Wilkinson, I appreciate you being here, and I appreciate the testimony that you have provided so far in your answers to a number of questions. But I am the Co-chair of the Congressional Franchise Caucus, and I am particularly concerned by the impact of this rule on our franchised small businesses, which are a vital part of our economy, especially in North Texas. Seeing as the SBA is going to stop publicizing the franchising directory that allowed lenders to quickly reference whether an entity qualifies for an SBA loan, are you concerned that this will make lenders more hesitant to lend to franchisees? Mr. WILKINSON. It absolutely will. And you are correct that the Franchise Directory is no longer being maintained on the SBA website. We instructed our lenders to download the latest list of approved franchisors the day before they discontinued it so lenders could still review--go back to that Directory to see who would still be eligible. But correct. There is going to be a lot of lenders who are going to be very hesitant based on the new rules to engage in franchise financing. Ms. VAN DUYNE. I appreciate that. In the recently-issued SOP, which takes effect on August 1, SBA revised the requirements regarding what a lender has to do to prove that the loan complies with what the statute requires, which says a borrower can't get a 7(a) loan if they can obtain credit elsewhere. Mr. Wilkinson, what did SBA change about credit elsewhere, and why do we need to know about these changes? What do we need to know about these changes? Mr. WILKINSON. Two important changes. First of all, every time you make an SBA loan today, you have to have a narrative in the credit file to specifically say why that borrower cannot obtain credit elsewhere. It has got to be detailed out. The rule change has been made, in my opinion, to benefit the fintech group, who wants a computer-driven algorithm low- touch program, so they have made this a check-the-box exercise. So all you have to do is, as the lender, is check a box, and it is done. Secondly, they have changed the personal resources test. Beforehand, if a borrower had significant personal wealth, that would be a source of funds that we would say had to be tapped first before borrowing through a SBA loan. That has been changed. So personal wealth is no longer an issue. So, yeah, rich people can get 7(a) loans. Ms. VAN DUYNE. I appreciate you saying that. Mr. Kassar, you had mentioned earlier that not everybody who applies for a loan needs a loan. If we are going to turn to basically just checking a box now, do you think that the SBA or that these fintech lenders are going to able to provide the same type of quality of service that you can by walking through everybody who applies for a loan, whether or not they need it, the level that they need it, and whether they can pay it back? Mr. KASSAR. Absolutely not. Remember that SBA lending, it is a work of passion, often more art than science. So it is underserved or served borrowers across the spectrum. The first thing you have to really ask them and understand is, what is this money for? What do you want to do with it? What is your plan? How do you propose to make more money with this loan than it is going to cost you to service? Ms. VAN DUYNE. So you are saying you don't treat everybody the same? Mr. KASSAR. I am not saying you don't treat everyone the same. What I am saying is that you have to have a thoughtful conversation with a borrower to begin to understand what is the root of their ask. Do they have a good reason for not needing this money? And if they don't, you have to counsel them to take some time and do some planning and some thinking, and then come back to the table when they are ready. Ms. VAN DUYNE. So you think that the personalized service is of a greater value than just checking the box---- Mr. KASSAR. 100,000 percent. Ms. VAN DUYNE. Do you think that actually helps people not have to borrow beyond their means? Mr. KASSAR. 100,000 percent. Ms. VAN DUYNE. Do you think that actually helps them to be better small businessowners? Mr. KASSAR. 100,000 percent. If you borrow too much money too quickly or without a plan, you get into trouble. Ms. VAN DUYNE. And do you think that the SBA is actually providing that with this change in service? Mr. KASSAR. Absolutely not. They are trying to streamline it and make it quick, fast, and automated. Ms. VAN DUYNE. I appreciate that. I have one quick question. During my Oversight hearing with IG Weir, Mr. Weir shared his concerns with self-certification, and now the SBA is moving forward with self-certification for the credit elsewhere test. Mr. Wilkinson, how do you think this effect will--how do you think this will affect lender behavior? Mr. WILKINSON. Well, it is going to make it much easier for fraud to enter the program. I think--we are instructing our lenders to--when SBA says ``do what you do'', we are telling them do what you should do because there is going to be a point in time in the future---- Chairman WILLIAMS. Time is up. Ms. VAN DUYNE. All right. Thank you very much. I yield back. Chairman WILLIAMS. I now recognize Ms. Gluesenkamp Perez from the great State of Washington for 5 minutes. Ms. GLUESENKAMP PEREZ. Thank you, Mr. Chair. Mr. Flores, thank you for being with us today. I know this is a hearing nominally on the 7(a) program, but I want to first address the 504 lending program. So before I came to Congress, I actually own a small business and got a 504 loan. It took me a year to do. It was about the size of a phonebook. I know you share of my goal of creating efficiencies in the 504 program to streamline the process for small businessowners. The affiliation rules changes the underwriting criteria for both the 7(a) and 504. So am I correct to say that there are multiple layers of underwriting and examination of the 502 program? Mr. FLORES. So, Congresswoman, if you recall from the process, you were dealing with a certified development company, a third party lender, and also the SBA. The SBA actually had to review all the work that was done and then ultimately decide whether or not it was a worthy loan. So there are multilayers just by virtue of the structure of the program, which is very unique. And, again, I want to reenforce the differentiates--the 504, it is a differentiator between the 7(a). But beyond that, as you recall, and I do want to reference, you know, you referred to just the process that there are certain complexities built in that we believe that with some of these changes, it will make it easier for that borrower to access this amazing program without, again, compromising any level of integrity or oversight over the loan program. Again, we want to make prudent loans. It is everyone's best interest to make sure that the 504 loan program continues to succeed as it has and to provide greater access to capital for small businesses. Ms. GLUESENKAMP PEREZ. So how exactly do the affiliation rule reforms fit into the multiple layers of the 504 program approval process and streamline it for small businesses? Mr. FLORES. So a couple of things. I reference one particular story where you had relatives who were given the opportunity to own a couple of the restaurants--actually, the father started. Ultimately, then, a couple of the siblings wanted to move forward on a particular project, and the third sibling did not want to share particular financials that were required under the SOP. And it ultimately led to a particular situation where the project couldn't go forward because one of the siblings did not--who was not involved in this other new venture wanted to put forth financials. Ultimately, the family got together and cooperated. But, again, that was a situation where you had this very unique complex process that didn't really apply to that particular situation. It almost deprived that family from being able to access the 504 loan. With regards to franchises, again, one of the challenges that a lot of franchisees have to manage is getting--showing, demonstrating that the franchise is not going to have some level of ownership in the particular business going forward. So now where you have that removal, there is no issue with regards to control. Now, it makes it easier for that small business to move forward if it is a franchisee. So the whole notion here is to make sure that we are providing guardrails, but guardrails that apply to what is really happening with regards to the small business needing the capital for their particular business need and moving forward. Again, I would say that the process in place with CDC working in partnership with a third party lender and the SBA, you have layers of oversight to protect the integrity of the program. Ms. GLUESENKAMP PEREZ. Thank you. Mr. Wilkinson, it is go to see you again. Could you speak to how the 7(a) programs structures differ from the 504 program? Mr. WILKINSON. So our structure is a guarantee program. So the lender makes the loan with a percentage of that loan guaranteed by the SBA. But the lender actually funds the entire loan. Ms. GLUESENKAMP PEREZ. So is it safe to say that the reforms that benefit one SBA program may not work for another SBA program? Mr. WILKINSON. They may not. Ms. GLUESENKAMP PEREZ. Yeah, and thank you for that insight. I agree that we should not being painting these with an overly broad brush. In this last minute, I would love to hear some insight on what we can do to streamline the 504 and make sure that those dollars are getting to small businessowners that need it. Ms. Frazier, if you have thoughts on that. Ms. FRAZIER. Thank you. I think the reference to the phonebook is quite adequate. And I think it is overwhelming at times from borrowers who are maybe not as sophisticated and have borrowed money for commercial real estate and their property before. So I think anything we can do to help streamline but not lose prudent underwriting standards in the process would be helpful. Even the documentation, getting that down to something that folks can absorb and understand, and it is simplified, and I think those types of things would be helpful from the process. Ms. GLUESENKAMP PEREZ. Thank you. Mr. Chair, I yield back. Chairman WILLIAMS. Thank you very much. I now recognize Mr. Bean from Florida, the great state of Florida for 5 minutes. Mr. BEAN. Thank you very much, Mr. Chairman. Good morning to you. Good morning, Small Business Committee. Good morning, panelists, we are glad to have you here. I have only been here 22 weeks. I am a new guy, 22 weeks, and I have discovered that this place is crazy town. It is crazy town. Because only in crazy town can a government agency come and have an abysmal record of losing taxpayer money, and then come and say, Hey, we want more money, and we want to ease the standards of giving it away more frequently. Yesterday, in crazy town, I was on a committee and spent 4 hours listening why it is a great thing that we would give away taxpayer moneys in the form of student loans; why that is a great thing. And then even finding out--and this was in crazy town--a big sizable part of those student loans didn't even go for tuition, they want for trips and cars and stereos. How about that? But that is what happened in crazy town. So and as a former banker--I know there is some bankers up there--it is just unfathomable that we would ever forgive a loan after the person agreed this is the terms of the agreement without even trying back. So it is a toss-up for the panelists. Are we in crazy town? Who wants to answer that question? Are we in crazy town? Is this crazy town? Mr. WILKINSON. I would love to take that question. Mr. BEAN. Jump in, my friend. Welcome to crazy town. Mr. WILKINSON. Well, thank you for that question. I would tell you that over the last several decades that I have been involved with this program, we have taken steps as we have seen lender behavior--and borrower behavior as well--to put guardrails in place at SBA to make sure that this program operates on a sound basis. We view this as a three-legged stool with the lenders, the borrowers, and the federal government representing the taxpayer. We need it to work for all three of us. And so I would say over the last, especially the last two decades, you can go look at our performance, and it has been really, really good. In the last probably five fiscal years, our charge-off rates have been running under a half a percent. I think it is a very well-managed program. It is working for the taxpayer, it is working for the borrower, and it is working for the lender. So I think in this being particular case, the 7(a) program, as the Chairman said, it is not broken. It is working just fine. Mr. BEAN. So to make these moves, we wouldn't be going to crazy town? Is that your testimony today before we are going to crazy town making these changes? Mr. WILKINSON. I believe these changes will lead to significantly higher losses in the 7(a) program. Mr. BEAN. Very good. Mr. Kassar, you have been sitting there. I want you to jump in. I want you to jump in because it used to matter, criteria used to matter. And I made loans myself a small bank in northeast Florida. And it used to matter, could the customer pay us back? That was the number one question my boss and my committee--can they pay us back? That was important. I had to answer that. But it seems the SBA is less concerned about getting paid back, but is that what they do in crazy town? Mr. Kassar, welcome. Mr. KASSAR. Thanks for having me. Listen, one of the things I have loved about SBA lending, being involved in it for the last almost decade and a half is that it hasn't felt like crazy town until now. So to the point, we have had a balancing act, and it has worked for all the parties involved. And it has helped tens of thousands or hundreds of thousands of businessowners and entrepreneurs. But it feels like crazy town when you say we are going to throw it all up, we are going to change it all up all at once. That feels like crazy town to me. Mr. BEAN. And then you got to add this to the mix. After their horrible report card, and it is just--they do it with a smile and say, okay, we have done such a horrible job, give us more, and let us ease the standards so we can get more taxpayer funded programs out the door. And then, like I said, in the committee yesterday, let's just forgive all debt. But that is what they do in crazy town. Mr. KASSAR. I think it is super important to note, though, the conventional SBA 7(a) lending that has been around for decades is not the EIDL program, we are not the PPP, we are not the restaurant revitalization fund. And that is starting to get a little crazy town when you are comparing them, because you are comparing dramatically different programs. And you have to be really careful to separate those guardrails. Mr. BEAN. Gotcha. Typically, Ms. Alice, it would matter if the borrower could pay us back, but we are in crazy town. So should it matter that the borrower could pay us back, Ms. Alice? Ms. FRAZIER. It should always matter. And one of the things that you know as a former banker that you are looking for some skin in the game from the borrower as well. And that is part of the new rules is there is no necessary reason to show any skin of the game from that perspective. And that is part of paying it back from that perspective. I would also say to become a preferred lender, you have to prove yourself trustworthy and to be trusted with what the government is allowing you to do on their behalf. And in that point we all take that very pridefully. And to remove these rules, it is not the same anymore. Mr. BEAN. Amen. Ladies and gentlemen, thank y'all so much for coming forward. And welcome to crazy town. Mr. Chairman, I yield back. Mr. MEUSER. [Presiding.] The gentleman yields back. I now recognize Ms. Scholten from Michigan for 5 minutes. Ms. SCHOLTEN. Thank you so much, Mr. Chair. And thank you to all of our witnesses for coming today. We truly appreciate your testimony. I said this last week to Mr. Kelley, but, of course, it bears repeating today, that these rules are nuanced. And now that the SBA has finalized them, it is up to Congress to do the necessary oversight of the SBA to make sure that they are implemented correctly. And we do have concerns, as you have heard today. So my first question is for Mr. Frazier. In your testimony, you state that the best thing for an underserved borrower is to work with a lender that is committed to their success. I completely agree. I have seen this first hand. I have heard from financial institutions in my district about their concerns regarding Fintechs that may become authorized SBA lenders under this new finalized rule. One of the top concerns I have heard about. What services does your bank offer underserved borrowers that a Fintech cannot? And what guardrails do you think the SBA should have in place to ensure predatory lenders are not allowed to participate in the SBA program? Ms. FRAZIER. For our bank, I will speak for us, is we are involved with a number of initiatives locally. Through chambers, there are typically some programs focused on women and minority borrowers to help educate them. We also work closely with the NAACP organizations, et cetera. And then we also have education programs that we hold for our, you know, local clients and the prospects. But I don't think that I am unique in that. I believe most of our community banks across the nation do the same thing because we are committed to the communities we serve overall. And I am concerned from the Fintech perspective, it is not about what you are doing to actually help the economics and help the businesses grow, and help them use the money appropriately and to get the right size loan that is appropriate that they don't go too far into debt. And in that situation, this is where the banker becomes more of a partner to them than necessarily just a place to get money. And that partnership lasts for a long time and can serve all very well. Ms. SCHOLTEN. Okay. Thank you. I apologize for saying ``Mr.'' at the outset. Or maybe you didn't hear me. Ms. FRAZIER. I will just let that slide. Ms. SCHOLTEN. Good for you. I get called ``Mr.'' all the time, actually. I don't mind. So I have a second question, another concern that I have heard from financial institutions in institutions in my district is changes to the underwriting criteria the SBA is making in the affiliation rule. This is also a topic that Mr. Kelley discussed at length last week. Ms. Flores--I am kidding--Mr. Flores, my question is for you. In your testimony, you express support for the intent behind the SBA's changes to the underwriting standards. From your perspective, how significantly do you think the underwriting standards will change because of the affiliation rule? How will these changes to underwriting criteria impact the level of consistency in local evaluating and processing? Mr. FLORES. Thank you. So from our perspective, we are going to continue to use our prudent lending practices. We have guidelines, we have policies and procedure that we have to vet from our own internal loan committee board of directors as well as the SBA. We are still going to be using the five Cs of credit, capacity, capital, collateral, conditions, character. And, frankly, the three, you know, there has been discussions of moving from nine to three various credit factors. But if you take a look at the actual SOP, the language of the SOP. And I quote: Lenders and CDCs must use appropriate and prudent generally acceptable commercial credit analysis, processes, and procedures consistent with those used for their similarly sized nonSBA guaranteed commercial loans. Lenders, CDCs, SBAs may use the business credit score model. When we read that, we are looking at, okay, also our banking partner has to make sure that they are following their rules and procedures. They can't run afoul those procedures because they will get in trouble or banking regulator. The SBA itself, OCRUM. We are going to have to be--we are going to be measured and gauged by whether or not we are following our own policies and procedures, and if we are also being prudent in our lending. Now, the streamlining here is to, in my opinion, and the opinion of many in the CDC industry here is how do we make it easier and less burdensome on the small businessowners so that they don't have to come in with a telephone book, as it was just described earlier, and where it frankly doesn't have to take a whole year? Think about what happens in the real world. You have small businesses who want to make investments. And sometimes--and at the end of the day, time is money, and time is opportunity. But here with the 504 program, it is not just about what is in the best interest for that small business, it is also about the impact that we have in creating more jobs, bringing the local investment. So it is in everyone's best interest to make sure that the 504 loan program gets in the hand of the small business borrower in a shorter timeframe responsibly. And then the benefit here is you are also seeing more investment in our communities and greater access to minority-owned businesses and rural-based enterprises. Ms. SCHOLTEN. Thank you. I appreciate that testimony. I yield back the reminder of my time. Thank you. Mr. MEUSER. The gentlewoman yields back. I now recognize myself for 5 minutes. I thank you all again for being here. Chairman Williams mentioned the letter earlier that was just sent, I believe in the last couple of days, also signed by Ranking Member Velazquez and the Ranking Member and Chairman from the Senate to the SBA stating that this program needs to be needs to be delayed due to the lead person on this Patrick Kelley no longer being with the SBA. We are all sitting here stating, and your concern is that potentially unworthy businesses will be receiving loans and will increase your subsidy rate for the program, and among other things, obviously. So clearly this is a bipartisan understanding that they are moving forward in real serious haste, which could have real serious ramifications on taxpayers as well as yourselves. Is there anything about this that you find reasonable? Is there anything about this initiative that could work for you that you think actually can be a positive thing? Anything at all? I am going to ask you, Ms. Frazier. Ms. FRAZIER. Well, certainly. Thank you for that question. But certainly there are pieces in there that could help smooth the process, make it easier to get credit there. But I think taken as a whole---- Mr. MEUSER. Right. Ms. FRAZIER.--it is too much risk. Mr. MEUSER. Okay. Ms. FRAZIER. And so it needs to be dissected. You need to get--I really recommend as part of the ICBA, bring lenders in and dissect it---- Mr. MEUSER. Right. Ms. FRAZIER.--and pick the best parts---- Mr. MEUSER. Right. Ms. FRAZIER.--so that we remain prudent. That we keep--safe the monies that are put out there and do the right things for the borrowers. Mr. MEUSER. Good. Absolutely. Then and I am absolutely favorable to that, and that is exactly how we should proceed. Mr. Kassar, good to see you. Thanks for making the trip down from Pennsylvania. I make that route quite a bit myself. You stated that the SBA is focused on a misguided solution in your testimony, broadening access to capital, and burdening future generations of taxpayers with the fallout. You seem to have some existential concerns about the 7(a) program due to this initiative. Could you expand on that? Mr. KASSAR. Sure, again, I think there are many elements that could be terrific. I think there should be some role for Fintech. It is very careful to put Fintech in one category. Fintech is a broad industry with different players, with different philosophies. Better use of technology in the program at different stages is good. What is dangerous here is doing it all at once. Mr. MEUSER. Yeah. Mr. KASSAR. And because--I don't know if the SBA has produced any forecasts about what will happen to default rates---- Mr. MEUSER. Right. Mr. KASSAR.--as a result of these changes, and if they have one, I don't know how they did it. So if we say we are going to try this for this quarter, and then we will be able to measure it, and then we will add this element next quarter, and this element next quarter, you will start to see and understand what is working or not. To say that the SBA program shouldn't evolve and innovate and change or leverage technology---- Mr. MEUSER. Sure. Mr. KASSAR.--I think is irresponsible. But to do it all at once---- Mr. MEUSER. Right. Mr. KASSAR.--like the big crazy science experiment---- Mr. MEUSER. Right. Mr. KASSAR.--I think creates a lot of risk. Mr. MEUSER. And as businesspeople and entrepreneurs, I can understand that you all would have that sentiment. Mr. Wilkinson, let me ask you this, the 7(a) loan program statistics looked like for smaller dollar loans and underserved market loans, the SBA stated that the 7(a) program does not succeed in underserved market lending. Do you want to comment on that? Is the 7(a) program working as effectively as it should be right now. Mr. WILKINSON. Well, you know, we can always do more, but we have got just over 50 percent of our loans and loans under $150,000, and with SBA's new definition of small-dollar loans being at $500,000, about three-quarters of our units. That is a significant portion of our portfolio are in small-dollar loans. You also have to keep in mind that it is the larger transactions that pay the cost for the smaller ones. And so we got to have a pretty good mix of both. Mr. MEUSER. Right. Okay. And last week the former Associate Administrator Patrick Kelley told the committee that all the concerns amounted to a lot of fuss that has been made about banks being upset about three Fintech companies being included in the program. What do you have to say about that comment. Mr. WILKINSON. Well, we welcome in lenders to this program all the time. We would be happy to have quality lenders who are capitalized, who understand the rules and regulations of the SBA program, and who are appropriately regulated. Mr. MEUSER. Sure. Mr. WILKINSON. What we don't want is lenders who don't know what they are doing that aren't appropriately regulated abusing program. But I would echo Mr. Kassar's comments about Fintech. We have a number of Fintechs that work with our lenders today. We have a Fintech who is a lender. They went out, and they bought a bank. They are capitalized, they are regulated by OCC, and they are a good corporate partner. Mr. MEUSER. Thank you. Mr. Flores, I want to ask you something quick. Your testimony described the 504 program as successful public, private partnership. What did you mean by that, and you have got one second to elaborate. Mr. FLORES. Banks, private lenders, CDCs, SBA with a support of Congress. That is winning calculation. Mr. MEUSER. All right. Thank you very much. I yield back. I now recognize Ms. Chu from California for 5 minutes. Ms. CHU. Mr. Flores, I want to make it clear that I share many of the concerns raised today particularly around unregulated entities being able to make loans when there is still questions regarding fraud and PPP. But I also want to ensure that a response to these rules is nuanced and recognizes the positive impact these rules will have on lending in underserved communities. For example, you testified that the affiliation and lending criteria rule implements some welcome changes to the 504 Community Development Program. And, in fact, CDCs had specifically asked for these changes to be applied to the 504 program after they were first applied in April of last year to Community Advantage Lenders. As a CDC that makes both 504 and community advantage loans, can you discuss how the changes to the affiliation in lending criteria will help lenders like you better fulfill your mission of reaching underserved businesses? And, in fact, you have an example in your testimony about a specialty food brand that you had loaned to for the property, and then 10 years later they sought additional financing, but they had grown and had 40 affiliates. And the burden of providing documentation on 40 different affiliates, many with no direct ties to the business seeking financing was too arduous to close a loan. So how would it be different with these rules? Mr. FLORES. What it does is it makes it, it loosens up. Again, not loosens it--it makes it easier in a more streamline efficient way for us to determine whether or not the borrower is meeting the spirit of being able to access the 504 loan program. Knowing that we are providing some very favorable terms to that borrower; to provide that access to capital; to create job to make local investments. And the particular story that you just referenced, it was sad to see here a very successful business operator who had a dream. We provided an SBA 504 loan. That individual continued to grow their business, meet other unrelated investments. But because of those older rules had to--was asked about all of these other unrelated essentially entrepreneurial endeavors. And then now, the individual said, you know, I just simply have no time to comply with all these requests. I am talking away. I do not have time in order to be able to make additional investment. And that was a real lost opportunity. I just want to reinforce, again, that we are talking about--you know, that is why it is important to differentiate between the 7(a) and the 504 loan program. And I want to make that clear here. And that differentiation is important so that as we are thinking through of how to apply the rules, we have to look at them from the perspective of the difference between the two programs. Again, I want to also reinforce just the customer service experience and how critical that is. If you have customers who don't have faith in the program, they are not going to come to the SBA for the 504 loan. They are going to say, hey, I am going to look for a more expensive, more--a different option because it is easier. You know, and what does that mean? It also has a negative effect, frankly, on our lending partners. If our lending partners or the bankers or other private lenders believe that it is too onerous to do a 504 loan, they are not going to help us promote the 504 loan. They are going to say to their borrower, hey, you should do something else because it is going to be easier and faster for you. Ms. CHU. Mr. Flores, your testimony also urges sufficient time and communication from SBA so that lenders could understand and implement all the changes to the two rules. As we know, since the final rules came out in April, the SBA has released a number of agency notices laying out various lender and program requirements in a piecemeal fashion. There has been a lot of twist and turns in this. And then last week the SBA released a 400-plus page SOP, which lenders have to review and comply with by August 1. So that takes only 2 months away. So do SBA lenders, particularly, smaller mission-based lenders like CDCs, which may have fewer resources to navigate various program changes, do they need more time from SBA to implement these new rules? And what specific additional resources do you need from SBA as you seek to become compliant with these new rules. Mr. FLORES. So as a former regulator, when I dealt with banks and other financial service institutions that were impacted by changes that we were making as an agency, engagement with the industry was always part of the process. I do give the SBA some positive remarks in terms of some of the already engagement that they have undertaken with us. However, I do think that we still need a continuous open dialogue. I think we need to continue to have actual meetings, technical assistance, and providing that a reasonable on-boarding ramp-- and not just for certified development companies, but also for our lending partners. Ms. CHU. Thank you. I yield back. Mr. MEUSER. The gentlelady yields back. I now recognize Mr. Alford from Missouri for 5 minutes. Mr. ALFORD. Thank you, Mr. Chairman, and Ranking Member Velazquez for holding this important hearing today. And thank you to our witnesses for coming in today. I really appreciate it. One of this committee's core functions is to conduct oversight as a small business administration. I am glad to be hear today with my colleagues to continue that and discuss the Biden-Harris administration SBA's disastrous rules that really compromise the soundness of the 7(a) program and puts taxpayers and small businesses at risk. Like many of my colleagues, I am worried that the SBA is not able effectively regulate this space and this activity. As a previous small business owner, I know how important capital is to small business, and I also understand access to capital can be a challenge especially in districts like mine which really has banking deserts. So let me be clear, I am not anti-Fintech, but I am against the rules that decrease standards and increase risks threatening the integrity of the current system and leaving taxpayers on the hook when something goes wrong. The SBA released procedural notices about these rules the night before last week's hearing, the night before, leaving us zero time to review them. I am here to tell you today, Americans deserve better than that. They deserve better than the fly-by-night Biden-Harris SBA, which is why I am pleased to learn that the departure of the SBA official chiefly responsible for these rules who is with us last week. Mr. Kelley's blatant disrespect to this committee and its Members last week showed a disregard for Congress, and it showed a disregard for small businessowners. It also underscores the importance of congressional oversight. So and unelected bureaucrat cannot shamelessly advance an agenda. Now, with no one at the helm of the SBA's Office of Capital Access, adding to the vacancy the offices already have, which are many, the Biden-Harris administration must put a pause on these rules and do it today. Mr. Wilkinson, if you Google federal financial regulators, the SBA does not show up, nor does the SBA show up in a March 2020 congressional research service report titled: Who regulates whom, an overview of the U.S. Financial Regulatory Framework. The SBA is not a financial regulator. But if a Fintech only participates in a 7(a) lending program, you will be sole federal regulator. Fintechs facilitated so much PPP fraud as well. Mr. Wilkinson, given your experience and perspective with 7(a), should this committee and taxpayers trust the SBA as the sole federal regulator of Fintechs in this program, why or why not? Mr. WILKINSON. At this point in time, no. I am a fan of the job, the effort, the folks in the Office of Credit Risk Management at SBA are doing, but they are understaffed they are under-resourced. They are 40 percent understaffed right now. They have got so many vacancies. It will be hard for them to catch up. I think the will is there to be a regulator, but they are not given the resources to do so. But they also don't have the framework to be the prudential regulator like an OCC or FDIC. SBA is really good at looking at transactional risk, looking at the loan, but they are not looking at the capitalization and the interest rate risk and the other interest bucket that will be looked at by a prudential regulator. Mr. ALFORD. Mr. Wilkinson, we have been told that this is a Biden-Harris administration effort. But Joe Biden said he wants to increase regulations for banks while at the same time this rule removes most underwriting and prudent lending standards. What reason is the FBA giving for saying something that directly conflicts with the White House. Mr. WILKINSON. That is an interesting question, because most of the other warning signals are coming up are warning to go slow with the addition of Fintech. Yet SBA is, I guess, hanging their hat on the PPP program where they are saying that Fintechs were able to reach down into more underserved markets. But the PPP program was not a loan program; it was a grant program. It was very--there was no underwriting to it. It was if you made your payroll, you got your loan forgiven. End of story. This is a vastly different program. You have got to underwrite it to see whether the borrower can be paid and then service it going forward. Probably not something that would be high on the Fintech list. Mr. ALFORD. Thank you. Mr. Frazier, I am greatly concerned SBA is not prepared to handle this. The Inspector General report published March 21 just a few weeks ago noted oversight staffing levels in the Office of Credit Risk Management decreased from 42 to 26 employees, 38 percent. This staff reduction could affect SBA's fiscal 2023 goals for oversight reviews which helps ensure lending compliance with program requirements. How do questions surrounding the SBA's competency affect what lenders do and the small businesses that rely on these loans? Ms. FRAZIER. As we talked about many times already today, there is a necessity to gain that access to capital for the businesses in a timely fashion, but not at the risk of prudent underwriting and not at the risk of doing things. But, however, if their office is not appropriately staffed, it does put the whole process into great risk. Mr. ALFORD. Thank you. We are out of time. Again, I call on the Biden administration to put a pause on these rules today. Mr. Chairman, I yield back. Mr. MEUSER. The gentleman yields back. The Chair now recognizes Mr. Thanedar from Michigan for 5 minutes. Mr. THANEDAR. Thank you, Chairman. According to Federal Reserve Bank of Chicago, the small businessowners in my district are routinely denied loans due to lower credit scores, lack of sufficient collateral, and lacking access to banking services. In 2022, two out of three businessowners who sought credit did not receive the full amount they requested. To that end, I believe small businessowners should have access to more responsible lenders. My question to Mr. Flores is the SBA has spoken at length about the need to increase lending opportunities for underserved small businesses as the reason for these two rules. But nowhere in either of these rules does it state a requirement to lend to small businesses in underserved markets. How do you guarantee that smaller loans are being made and targeting the small businesses in the communities we are all trying to reach? Mr. Flores. Mr. FLORES. Thank you. Again, I reference the Certified Development Company and its framework and its mission as an economic development set of organizations is our commitment to ensure access to capital, and not only to work with businesses that had been operating for a few years and have a track record, but also for those who are trying to get there. And so what that means is being very proactive and engaged, working with the small business development centers that are also part of the SBA network--organization such as score--and also local chambers of commerce and other units of government, locally, that are focused on providing programs that help grow that small business ecosystem. The Community Advantage Loan Program is one such program, as well as others. So, you know, a number of Certified Development Companies, our community advantage lenders, we are committed to continuing that program in our organization, and we believe that there is an opportunity here to continue to grow that initiative. We are obviously open to other ideas. And, obviously, there is a very robust debate here and concern. And I appreciate that. I think that there is a way for us to balance risk and at the same time prioritize that access to capital to folks who had been historically left out and also rural-based enterprises. There are folks in central and southern Illinois, for instance, who have less opportunities. How do we make sure that those entrepreneurs aren't left behind? We think programs like the premier advantage program can be effective. Mr. THANEDAR. Thank you. Now, most of the fraud that offered during the PPP loan scheme undertaken by the SBA came from Fintech companies. I feel without strong oversight regulations, bad actors might fraudulently take advantage of small businessowners seeking loans. Ms. Frazier, in your testimony you state nonbank Fintech lending is no substitute for community bank lending. Can you expand on the statement? What services does your bank provide that a Fintech cannot? Ms. FRAZIER. Well, on the basis of a Fintech is through the web and through the internet. And, oftentimes, there may not be even someone to speak to. Answers are given all electronically. As noted by many of us here, you know, it is about the business plan; it is about being able to sit with the borrower and to speak with them about what are the plans; how do you see this growing; what happens if you don't reach those goals; how will you pay the loan back? And I think that those elements are missing. And I believe, in a community bank world, that personal relationship is there and is guiding them. And if things go south for a business, and they do, the bank is able to work with them to really help them through those troubled times. And I think that is where the difference belongs. Mr. THANEDAR. Thank you, and I yield back. Chairman WILLIAMS. Next, I now recognize Mr. Crane from the great state of Arizona for 5 minutes. Mr. CRANE. Thank you, Mr. Chairman. Thank you all for coming today. Last week I asked Mr. Patrick Kelley, I raised a concern that these rule changes would leave taxpayers on the hook to bail off the SBA. Along those same lines, Mr. Kassar, you mentioned default rates to Mr. Meuser. Do you believe these rules will lead to more or fewer defaults on government-backed loans? Mr. KASSAR. It is hard to imagine a scenario where these would lead to significantly higher defaults because of the complete loosening of controls. And the danger is we won't understand what levers created them. Because so many levers are being pulled and changed at the same time. Mr. CRANE. Yeah, you mentioned that a couple of minutes ago. If that is the case, sir, who will eventually be on the hook to bail out the SBA? Mr. KASSAR. The taxpayers or the small businesses we will levy heavier fees against them to continue the program. Mr. CRANE. Mr. Frazier, how would you rate the SBA's customer service? Is it easier to get in contact and receive answers from them when a problem arises? Ms. Frazier, I am so sorry. We are not playing some sick joke on you, ma'am. I apologize. Ms. FRAZIER. All good here. Mr. CRANE. There are long weeks up here. Ms. FRAZIER. I completely understand. Thank you. You know, I believe that having the right relationships within the SBA helps facilitate quick and easy answers, but it can be difficult at times just given the current staffing situations. Mr. CRANE. Thank you, ma'am. Mr. Kassar, finally, are you concerned these rule changes could allow lenders to focus more on maximizing their own fees by increased loan volume rather than focusing on quality of loans given? Mr. KASSAR. Absolutely. Mr. CRANE. Thank you. You know, Mr. Kassar, you said a second ago, you are talking about this crazy science experiment if we are doing this smartly as an entrepreneur would do it, we would take one step at a time, and then we would evaluate it. Is that correct? Mr. KASSAR. Yeah, though, sometimes entrepreneurs are crazy scientist. Mr. CRANE. That is true. We are. But I think the reason that we take one step at a time if we are being wise and smart and a little bit of cautious is so that we don't sink the boat. Is that correct? Mr. KASSAR. A hundred percent. Lending is a carefully--you have to think very carefully. There are a lot of levers. Mr. CRANE. You know why they don't care how many elements we take on at one time, right? Mr. KASSAR. I have my theories. Mr. CRANE. Because it is not their money. It is the American people's money. They don't care. It is obvious. That is one of the things I have noticed since I have been up here, they could care less. It is so easy to spend somebody else's money. That is why this administration just put out a budget, it was another, close $7 trillion. And that is the thing that bothers me about this. My colleague over here, Mr. Thanedar, we just came from Homeland Security together, and he was talking about, hey, some of my constituents, they don't have enough capital or collateral. Well, maybe they don't need a loan then. Maybe they need to be working on their business, their business plan to get to a point where they can actually have enough capital, enough collateral where they can actually secure a loan. Because that is one of the things going on in this country, we live in such an entitlement country now where it is like people don't feel like they need to pay anything back. And who is always on the hook for it. Mr. KASSAR. There is another element to this program which is part of the vicious cycle, which is many borrowers today, particularly, underserved have opportunities on the internet to get money in their bank in 24 to 48 hours. And it is so enticing. Many of them come from Fintech lenders. We have to be careful not to call Fintech all at once. And so sometimes they will get one, and they will get another, and they will get another, and it becomes a vicious cycle. And then they come to us because--and it is--often it is too late to help. So some of the issues that has to be thought about in my opinion by Congress about serving entrepreneurs is what is happening on the other side of the coin? Where are they getting their money today, and often times are going to the other side because it is simpler and faster. And that also leads to devastating consequences. Mr. CRANE. Well, what I will tell this panel is I represent Arizona's Second Congressional District. It is a very rural district. We have a lot of hardworking folks in my district. You know, so I know that they probably don't have the same access to capital that some of these more metropolitan districts do. But all I will say is as a country when you are $32 trillion in debt, there needs to be a return to fiscal responsibility. And I just don't see that with this program. I don't see that with these rules changes. And for that reason I don't support it. Thank you Mr. Chairman, I yield back. Chairman WILLIAMS. Thank you very much. I next recognize Mr. Molinaro from the great state of New York for 5 minutes. Mr. MOLINARO. Thank you, Mr. Chairman. Thank you all for being here. I am happy that I was here for Mr. Crane's comments because it does, in fact, set up what I think is ultimately the problem. I am old enough--although I may not look it--to remember when we were all living fat and happy and encouraging access to capital for home purchasing to underserved communities. A noble and important goal that led to a mortgage crisis that we have not rebounded from since. And I couldn't think of a less apt organization than the SBA to manage a less restrictive and more irresponsible set of new rules. And this is not me being political. I spent the last 12 years as a county leader, lived through COVID and PPP, and I can absolutely say, local chambers of commerce, local business organizations, they all share the exact same concerns that we are voicing today. The SBA, despite its relationships, despite partnerships for not for profits and partners in the community just is inadequate to do and to manage what they are proposing in those rule changes. And so I want to start, in fact, with the underserved populations. Because I think actually the SBA does a reasonably good job partnering to provide access to capital to underserved communities. And so, Ms. Frazier, you spoke a little bit about the 7(a) lending program demonstrates strong lending patterns already to underserved borrowers. One in three 7(a) loans were to minority-owned businesses. So with the SBA's complete overhaul of the program, would you give us some idea how these rules could negatively impact what we already do somewhat successfully to serve those underserved populations? What is the risk that we open with these rule changes? Ms. FRAZIER. Thank you. And I am going to go back once against that oftentimes another loan or a loan is not what the borrower needs or what the new businessowner needs. Oftentimes, they need coaching, they need counselling, they need to have a better business plan and work through that. And I don't believe unleashing very loose credit standards is going to be effective to ensuring the integrity of the program, but also ensuring economic viability for the underserved. Mr. MOLINARO. And so despite coming from New York State, meaning most people think it is an urban place--I represent rural communities all throughout upstate New York, and access to capital is a concern. And we do have difficulty, small businesses, accessing. So your point what the SBA is doing is eliminating all of or basically throwing out the guide rails that would protect us in the case of fraud and abuse. And, Mr. Wilkinson, you and I spoke yesterday. So thanks for that conversation. To avoid what we know or to help avoid the circumstances of fraud and abuse here, what protections or rules should the SBA keep in order to provide the appropriate integrity 7(a) lending? And I kind of asked this of you yesterday. What are some of the rules that do make sense that this should not be thrown out. Mr. WILKINSON. Sure. There is a list of eight or nine criteria that were in regulation that have been taken out. We would suggest that those be put back in statutorily. But I want to go back to the previous question and just note that year to date we have got about 24 percent of our borrowers who do not note on their loan application a particular race. So our loans to minorities are most likely underreported. We probably have a much better track record than the numbers present. Mr. MOLINARO. So SBA doing a better job in recording, report, and then transparency. I know Mr. Chairman believes, as we do as a committee, the SBA should be more forthcoming with much of its data. And, by the way, I would say out loud the SBA should be more forthcoming in its interaction with the industry and the development of these rules, which does lend us to some concern and certainly frightens us. Mr. WILKINSON. A conversation just like this before the rules were implemented would have been very helpful. Mr. MOLINARO. Yeah, I am concerned about the conversation that the SBA may have had with the folks who benefit from the rule changes before the rule changes. But I am just saying that as a happenstance. Perhaps it may or may not have occurred. Before I finish up, Mr. Kassar, is it a fair assessment to say that without the appropriate regulations and clear defined requirements, it will ultimately be extremely difficult to determine if borrowers are acting in good faith or not? There are bad actors. They will act badly. That is a known fact in humanity. Mr. KASSAR. A hundred percent. Mr. MOLINARO. Thank you, Mr. Chairman, I yield back. Chairman WILLIAMS. Thank you. Next, I want to recognize Mr. Stauber from great state of Minnesota for 5 minutes. Mr. STAUBER. Thank you very much, Mr. Chair. I want to thank the panel for joining us today as well as for the important role that you play in supporting our small businesses. Like you, I have serious concerns over the misguided 7(a) loan program rules that the Biden administration has put forth. As I shared during last week's hearing, the 7(a) loan program has been instrumental in helping to grow small businesses, which I believe are the engines of innovation in our economy. I am committed to upholding the integrity and fiscal solemnness of this program. Information shared by the SBA and the supplemental guidance and its final SBLC rule indicated that the SBA only intends licences to three new SBLCs, and that it expects these three new SBLCs to make a total of 425 loans over the next 4 years. However, the final SBLC rule does not contain any limit on the number of new SBLCs that can receive a license. Mr. Wilkinson, how many license for nonfederally regulated lenders do you think the SBA will actually grant? Mr. WILKINSON. Well, that is unknown. In the narrative, they said they were only going to do three, but in the actual regulatory language, there is no limit. Mr. STAUBER. What do you expect these new lenders, loan activity to be? Do you think the figures provided by the SBA are accurate? Mr. WILKINSON. No, sir, I do not. I think they are low by a significant amount. Mr. STAUBER. Thank you. Ms. Frazier, approximately, how many financial industry regulators oversee the operations of a community bank like the Bank of Charlestown. Ms. FRAZIER. I actually have three. I will speak for myself. We have the state regulator, West Virginia and the FDIC. And then our holding company also has the Federal Reserve. So for most community banks, two to three. As well as aside from that, the SBA does come in and do their own oversight and regulation of what we have done by looking at the loans. Mr. STAUBER. Do you believe the Small Business Administration has supervision and regulatory expertise and bandwidth on power of the comptroller of the currency, FDIC, or Federal Reserve? Ms. FRAZIER. No, I don't believe they are prepared for that. Taking on not only just reviewing the credit files for whether or not they agree with the SOPs, but understanding the whole processes, controls, and the way, the company, the capital, and the things related to any company and nonbank Fintech would have. Mr. STAUBER. You know, during our hearing last week, when I pressed Mr. Kelley, he tried to explain that the SBA will have the ability to provide the necessary supervision and oversight to the nonfederally regulated Fintech companies that will flood the 7(a) program under the Biden administration's new rules. This is even as new loan activity far outpaces the unrealistic figures the SBA has provided. Just yesterday, I sat down with a group of small community bankers from across northern Minnesota who shared their concern that the SBA is not capable of overseeing these Fintech companies in the 7(a) program, particularly given the SBA's track with PPP. And you all know it is approaching $900 billion in fraud and counting. I trust my local community banks to be responsible 7(a) lenders due in part to the layers of supervision and scrutiny that they face from several different financial industry regulators. They also live and work in the communities they serve and have deeply personal relationships with the small businesses they help grow and support. I, unfortunately, cannot say the same of Fintech companies. I agree with my local lenders in Minnesota and worry that the uneven lax oversight of Fintech sector entering the 7(a) program will put the entire program at risk. And I want to thank the local community banks who kept us afloat during the pandemic. Had it not been for our community banks, I believe this nation will be in dire straits today. Thank you. Mr. Chair, I yield back. Chairman WILLIAMS. Thank you very much. And while we have a minute to go, I just want to reinforce what my colleague said about the community banks. We have talked about this, but I compare what you all did to what our bomber plants did and our manufacturing plants did in World War II. They turned it around overnight and got our country going. Y'all did the same thing, getting money injected in the economy that actually brought a return on investment back to America. So I want to thank you for that. I also want to thank the witnesses, all of you today, for being here and appearing before us. Without objection, Members have 5 legislative days to submit additional materials and written questions for the witnesses to the Chair, which will be forwarded to the witnesses. So I ask the witnesses to please respond promptly when that happens. And if there is no further business, without objection, the committee is adjourned. [Whereupon, at 11:55 a.m., the committee was adjourned.] A P P E N D I X [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] ______