428A Russell Senate Office Building, Washington, DC 10:00 a.m. EDT
Chairman David Vitter
Good morning, and thank you for joining me today for the Senate Small Business and Entrepreneurship Committee Hearing on oversight of the Small Business Administration’s (SBA) 7(a) loan program and efforts to reform and strengthen it.
As everyone gathered here today knows, small businesses are the driving force in our economy, accounting for over half of all employment and nearly two-thirds of all employment growth in the United States. Small businesses are among the most dynamic in the economy, often responding to local needs and demands more quickly and more effectively than larger firms, and also creating new jobs in the process. That dynamism has a clear cost, as nearly a quarter of small businesses will fail in their first year, and nearly half will not make it past their third. Access to capital is the major constraint limiting the creation, growth, and expansion of small businesses, and it is the main contributing factor to their failure.
It is a fact that our vibrant small business sector is dependent upon adequate access to capital, and without it, we would see the historical growth we are used to disappear.
We saw this during the 2008 recession. While much of the focus was on the failure of large financial institutions, it was the small and medium businesses that experienced disproportionately larger layoffs and failure rates compared to large firms and businesses. This was primarily driven by contraction in the credit markets and heightened collateral requirements.
Ensuring America’s small businesses have the resources they need to start, grow, and thrive is where the SBA’s 7(a) Loan Program comes in. With the 7(a) program, small businesses can find the capital they need by SBA guaranteeing loans for the purchase of everything from the land the business operates on to short-term operating expenses, such as payroll and salaries.
In this effort, the program has seen a great deal of success, growing by nearly 200% since the depths of the recession, with 60% of that growth coming in the last three years. This growth has come even as the SBA has lowered or eliminated fees charged to small businesses and eliminated any taxpayer subsidy of the program. In the process, the program has helped nearly 56,000 small businesses and, by SBA’s estimates, supported over 632,000 jobs in FY 2015 alone. The 7(a) program has worked so well, in fact, that it is one of the few programs I can think of that has such tremendous and bipartisan support in Congress.
However, the steady and dramatic growth of the program has required regular authorization increases, year after year, and two emergency increases in 2014 and 2015. The 2015 emergency increase, in particular, only came after the program had reached its authorization cap in July 2015 and was required to temporarily shut down.
Fortunately, Senator Shaheen and I were able to pass an increase to that cap by unanimous consent. However, the emergency action concerned some of my colleagues. The rapid pace of growth in the program raised questions as to whether SBA had the necessary tools to conduct oversight of both their current portfolio and a potentially much larger loan portfolio, if and when the authorized cap were to increase.
My colleagues on the Senate Appropriations Committee have also regularly been in touch with this committee, expressing both interest in and concern over the growth of the program and whether it will, in the future, continue to need the increases that it has in the past. If it does, it is vital that we institute reforms to strengthen SBA’s ability to effectively conduct oversight, both to garner the support of Senators and Congressmen, and to protect the American taxpayer.
Now is the opportune time to act, as forecasts predict that this will be the first fiscal year since 2013 that the 7(a) program will not need a mid-year increase in its authorized cap. We must strengthen SBA’s ability to effectively conduct that oversight and also put in place requirements that keep Congress informed as to what oversight actions SBA does take.
Yesterday, Senators Shaheen, Risch, Ayotte, Peters, and I introduced legislation to do just that. Our bipartisan legislation would bolster the enforcement authority of SBA’s Office of Credit Risk Management (OCRM), which is responsible for managing program risk of SBA’s outstanding portfolio and making enforcement recommendations. Specifically, and most notably, it would provide OCRM additional, graduated options for enforcement, including civil penalties, based on the frequency and severity of program violations. Right now, they don’t have that ability and are limited to a single, nuclear option when dealing with lenders: barring the lender from participation. This is clearly a disproportionate response to many of the violations OCRM and SBA identify and correct with lenders. That’s why our bill would give SBA and OCRM these tools and expand their flexibility when addressing issues within the program.
It would also address lending industry concerns by ensuring that OCRM is sufficiently staffed with auditors who are qualified to conduct oversight. Additionally, it would more clearly define standards related to what credit is available to a borrower from non-governmental sources. These reforms would be funded by a minor increase in the current lender oversight fees charged by SBA, freeing much of the currently appropriated funds for alternative uses by the SBA, should appropriators choose to leave that funding in place.
Lastly, this legislation would also institute reforms that reinforce the general soundness of the program and manage overall risk. This includes lowering the threshold for secondary market sales of SBA-guaranteed loans that triggers profit-sharing with SBA. The funds raised by this split are vital to SBA’s efforts to minimize and eliminate taxpayer subsidies to the program and, as the portfolio grows, it is important for SBA to have the funds necessary to cover any potential shortfall. Finally, to help in managing overall program risk, it will put in place limitations for large lenders on industry concentration and the number of loans they may make that are 100% financed.
Taken together, these reforms are a targeted attempt to put the program on a sound footing for the future. SBA has done a commendable job in managing the 7(a) program and conducting oversight in the face of unprecedented growth. It cannot be stressed enough, though, that as the program grows, resources dedicated to oversight must keep pace. All it could take is one major violation of the program’s rules by a lender to make Congress question or halt continued increases in the program’s authorizations. This committee would like to give the SBA the resources and tools it needs to continue that important work and to ensure that violation does not occur.
We believe this legislation will do that, and in that belief we are supported by the American Banking Association, the National Association of Government Guaranteed Lenders, and the Independent Community Bankers of America. All three organizations have written letters of support for this legislation, which I will now submit for the record.
I look forward to today’s discussion and thank everyone for being here today. With that, I’d like to turn it over to my colleague, Senator Shaheen.