Hearings to examine managing risk for the long-term in the 7(a) loan program, focusing on hearing from lenders.

1[Senate Hearing 119-19]2[From the U.S. Government Publishing Office]34                                                         S. Hrg. 119-1956                         HEARING FROM LENDERS:7                    MANAGING RISK FOR THE LONG-TERM8                        IN THE 7(a) LOAN PROGRAM910=======================================================================1112                                HEARING1314                               before the1516                      COMMITTEE ON SMALL BUSINESS17                          AND ENTREPRENEURSHIP1819                                 OF THE2021                          UNITED STATES SENATE2223                    ONE HUNDRED NINETEENTH CONGRESS2425                             FIRST SESSION26                               __________2728                           FEBRUARY 26, 202529                               __________3031      Printed for the use of the Committee on Small Business and32                            Entrepreneurship3334               [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]3536        Available via the World Wide Web: http://www.govinfo.gov37                                ______3839                   U.S. GOVERNMENT PUBLISHING OFFICE404159-473                     WASHINGTON : 20254243            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP4445                    ONE HUNDRED NINETEENTH CONGRESS4647                              ----------48                        JONI ERNST, Iowa, Chair49            EDWARD J. MARKEY, Massachusetts, Ranking Member50JAMES E. RISCH, Idaho                MARIA CANTWELL, Washington51RAND PAUL, Kentucky                  JEANNE SHAHEEN, New Hampshire52TIM SCOTT, South Carolina            CORY A. BOOKER, New Jersey53TODD YOUNG, Indiana                  CHRISTOPHER A. COONS, Delaware54JOSH HAWLEY, Missouri                MAZIE K. HIRONO, Hawaii55TED BUDD, North Carolina             JACKY ROSEN, Nevada56JOHN R. CURTIS, Utah                 JOHN W. HICKENLOOPER, Colorado57JAMES C. JUSTICE, West Virginia      ADAM B. SCHIFF, California58JON HUSTED, Ohio59                Meredith West, Republican Staff Director60                 Sean Moore, Democratic Staff Director6162                            C O N T E N T S6364                              ----------6566                               WITNESSES6768                                                                   Page69Mr. Timothy Fitzgibbon, Senior Vice President, First National70  Bank, West Des Moines, IA......................................    1571    Prepared statement...........................................    1772Mr. Raymond Lanza-Weil, President, Common Capital, Springfield,73  MA.............................................................    1974    Prepared statement...........................................    2175Ms. Itzel Sims, SBA Director and Senior Vice President, First76  Security Bank, Little Rock, AR.................................    2677    Prepared statement...........................................    2878Ms. Mayrena Guerrero, Founder and CEO, Colorful Resilience, West79  Springfield, MA................................................    3680    Prepared statement...........................................    398182                           COMMITTEE INSERTS8384Ernst, Senator Joni & Williams, Roger, U.S. Representative85    Letter dated April 24, 2024..................................     286Ernst, Senator Joni87    Letter dated January 21, 2025................................     68889                  ADDITIONAL STATEMENTS FOR THE RECORD9091America's Credit Unions92    Letter dated February 26, 2025...............................    5693Ernst, Senator Joni94    Statement....................................................    5995National Association of Government Guaranteed Lenders96    Letter dated February 26, 2025...............................    609798                         HEARING FROM LENDERS:99                    MANAGING RISK FOR THE LONG-TERM100                        IN THE 7(a) LOAN PROGRAM101102                              ----------103104                      WEDNESDAY, FEBRUARY 26, 2025105106                                   United States Senate,107                                Committee on Small Business108                                          and Entrepreneurship,109                                                    Washington, DC.110    The committee met, pursuant to notice, at 2:30 p.m., in111Room 428A, Russell Senate Office Building, Hon. Joni Ernst,112chairwoman of the committee, presiding.113    Present: Senators Ernst [presiding], Hawley, Justice,114Husted, Markey, Shaheen, Booker, Hirono, Rosen, and115Hickenlooper.116117               OPENING STATEMENT OF SENATOR ERNST118119    The Chair. I call the Committee on Small Business and120Entrepreneurship to order. Nearly two years ago, we met to121discuss the reckless new rules the Small Business122administration implemented for the 7(a) loan program. They123removed time-tested underwriting standards that mitigated the124risk of default for American taxpayers who guarantee these125loans.126    These new rules also opened the door to foreseeable fraud127by enabling a potentially unlimited number of unregulated, non-128depository institutions to become permanently licensed SBA129lenders, as small business lending companies, or SBLCs. The130last administration's 7(a) rules were the most drastic changes131to the program in decades, which is why members on a bipartisan132basis voiced their concerns. Unfortunately, those concerns fell133on deaf ears.134    I aggressively sought to understand how the SBA was135selecting and approving these new SBLCs to participate in 7(a).136The types of lenders the SBA was looking to license, fintechs,137were responsible for facilitating widespread financial fraud138and improper payments in the Paycheck Protection Program. I ask139unanimous consent to enter into the record an April 24th, 2024,140letter that I sent with House Small Business Committee Chairman141Williams, to the SBA requesting information on the SBLC142selection process.143    Without objection, so ordered.144    [The information referred to follows:]145146    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]147148    The Chair. Two years later, we still have little insight.149Even the recent SBA Inspector General's report on the subject150was woefully inadequate. The IG report stated the SBA followed151its own procedures, but they failed to evaluate whether those152procedures were adequate. The IG didn't bother to investigate153whether there was collusion between SBA officials and one of154the largest applicants for a lending license, Funding Circle155U.S., nor did the report answer why the SBA and the IG156concluded the cash position of Funding Circle U.S. was157sufficient despite the fact that it was losing millions.158    The Biden SBA's dangerous loosening of the underwriting and159eligibility rules weren't the only efforts to undermine the160financial soundness of the 7(a) loan program.161    A year before the rule, the agency started to cut the fees162charged to borrowers and lenders--fees meant to protect the163taxpayer from having to subsidize bad loans. For three years164straight, the SBA cut these fees, inexplicably allowing loans165of up to $1 million to be made without the borrower or lender166having to pay for the guarantees the American taxpayer167provided.168    As I said in a letter to President Trump on January 21st,169the looming 7(a) fee increases are entirely due to the previous170administration's incompetent management of the program, which171has harmed taxpayers and the small businesses saddled with debt172they can't manage, while irresponsible lenders get paid no173matter what. I ask unanimous consent to enter this letter into174the record.175    Without objection, so ordered.176    [The information referred to follows:]177178    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]179180    The Chair. We are seeing the impacts of these rule changes181with the 12-month default rate more than doubling to roughly1823.2 percent since these rules went into effect, and defaults on183loans less than 18 months old nearly tripling to almost one and184a half percent over that same period. While the Biden Harris185SBA tried to blame this on rising interest rates, defaults on186SBA loans have been increasing faster than those in the private187sector, which is evidence of poor policy decisions.188    It should come as no surprise that for the first time in 12189years . . . [emphasis] 12 years, the 7(a) program lost money.190This negative cash flow must be immediately addressed by191reversing the misguided decisions of the past administration.192This program was designed to operate with zero subsidy and I193worry we are on the cusp of forcing taxpayers to foot the bill,194something we should avoid at all costs.195    I want to commend Administrator Loeffler for her196recognition of these problems in her day one memo released this197week, and her willingness to hit the ground running. It is198clear that the solvency of the SBA's lending programs is a199major priority for the Administrator, who is committed to doing200what's necessary to ensure their zero-subsidy status is secure.201    Today's hearing provides an opportunity for us to speak202with SBA participants to understand their concerns about the2037(a) program's financial stability. It also allows the204committee to gather concrete suggestions on ways to reduce the205risk faced by taxpayers while ensuring the program continues to206be a resource for entrepreneurs who need assistance accessing207capital.208    I'd like to thank our witnesses for being here today, and I209look forward to your testimony. I now recognize Ranking Member210Markey for his opening statement.211212                  STATEMENT OF SENATOR MARKEY213214    Senator Markey. Thank you, Madam Chair, very much and thank215you for hosting this hearing to discuss the government's role216in connecting entrepreneurs with the funding which they need.217Access to capital is always a top concern for small business218owners.219    For 70 years, the small business administration's flagship220lending program, the 7(a) program, has provided government-221backed loans to small business owners who are not eligible for222a conventional loan. Without government backing, traditional223banks would only lend to the biggest, safest businesses in town224while deeming loans to the smallest as too risky.225    Innovative ideas that benefit communities across the United226States would never have come to realization. Ideas that start227in a garage would be thrown away before they can ever get off228the ground. This is especially true for underserved229communities, entrepreneurs of color, and women who have an even230harder time historically getting funding as a result of231historic discrimination. It wasn't until 1974 that a woman was232able to get a loan at a bank without a male relative signature.233    Unfortunately, as we all know, discrimination still exists234today. Black owned businesses are more likely to be denied235loans or received less money than other borrowers.236    In fact, according to the Fed's small business credit237survey, in 2023, only 32 percent of black small business owners238with employees received the funding they applied for, compared239to 54 percent of white small business owners. This is why SBA's240lending programs are so critical. They fill gaps. They level241the playing field. In particular SBA's program, the Community242Advantage program which is a subset of 7(a), utilizes community243centered nonprofit and mission-based lenders.244    The program makes small dollar loans with a focus on245reaching underserved small business owners. While the program246does not define underserved by race, gender metrics, it reaches247certain populations better than the traditional 7(a) program.248For example, in fiscal year 2024, the Community Advantage249program made 53 percent of its loans to startups, and 43250percent to entrepreneurs of color. The traditional 7(a) program251in comparison made only 32 percent of its loans to both groups.252    SBA has a responsibility to address the inefficiencies in253private lending to support true competition. It is the254government's responsibility to make sure that there is capital255for all entrepreneurs regardless of their background. The Biden256administration understood this. They doubled the amount of257small dollar loans, maintained a healthy 7(a) loan program, and258ensured a 99 percent repayment rate, a 99 percent repayment259rate.260    My witness here today from Massachusetts, Ms. Guerrero, is261a clear example of an entrepreneur who just wanted to serve her262community, but struggled to get the funding to do so. She was263unable to receive funding from her community bank, who is also264an SBA lender, and she did not have generational wealth to rely265upon.266    That's where Common Capital, a Massachusetts-based lender267and SBA's Community Advantage program stepped in. So, thank you268Ms. Guerrero for taking the time to share your experience with269the committee. Your story is just one example of why SBA270programs like the Community Advantage program is so important.271And I look forward to hearing from our witnesses about their272experiences with SBA's lending programs.273    And I also want to acknowledge the committee's efforts last274Congress to codify the Community Advantage program. And I'm275hoping that we can work together, Madam Chair, on a bipartisan276basis, not only to maintain the integrity of SBA lending277programs, but also to ensure that they serve small business278owners from all backgrounds across our country. Thank you,279Madam Chair.280    The Chair. Thank you very much, Ranking Member Markey. And281now I want to extend a warm welcome to all of our witnesses.282Thank you for joining us today. I want to introduce the two283witnesses who are testifying today on behalf of the majority. I284am thankful that these two accomplished community bankers made285the trip to Washington DC, to share their expertise and insight286into the SBA's 7(a) loan program with this committee.287    And so, we'll start with my Iowan first, and thank you.288It's Mr. Timothy Fitzgibbon, who is the Senior Vice President289at First National Bank from West Des Moines, Iowa. Mr.290Fitzgibbon started and built the SBA lending business at First291National Bank, where he has worked since 2017. Previously, Mr.292Fitzgibbon was the senior vice president at the National293Council of Higher Education Resources for 12 years.294    And prior to that, he was the director of the Guaranteed295Student Loan Program at the Iowa College Student Aid Commission296for more than 14 years. Mr. Fitzgibbon holds a bachelor's297degree from the best university, Iowa State University.298    And next is Ms. Itzel Sims, and she is the director of SBA299lending at First Security Bank, headquartered in Searcy,300Arkansas. Ms. Sims has a 24-year background in SBA lending and301previously worked at Simmons Bank and Regions Bank. Ms. Sims302obtained a Bachelor of Business Administration from the303University of Texas at Dallas. Thank you, again. And I now304recognize Ranking Member Markey to introduce his witnesses.305    Senator Markey. Thank you, Madam Chair. And I'm pleased to306introduce our two witnesses who have a business relationship307and can explain how it works for all small businesses. And I308would like to add, though, I'm kind of shocked that Mr.309Fitzgibbon did not go to the finest Jesuit College in Iowa,310Loras. [Laughter.]311    Senator Markey. I think that Fitzgibbon, somehow, I don't312know how much they welcomed you home when you didn't go to the313Jesuit school. Mr. Raymond Lanza-Weil is the president of314Common Capital, which is a nonprofit community development315financial institution located in Springfield, Massachusetts.316Common Capital provides SBA micro loans and community advantage317loans, as well as technical assistance to small businesses in318Western Massachusetts.319    Mr. Lanza-Weil's work provides entrepreneurs from320underserved communities with financing to start and grow their321business ventures. His team works with borrowers in a holistic322manner to ensure the success of these small businesses.323    Ms. Mayrena Guerrero is a mental health counselor, and the324owner and founder of Colorful Resilience, a business that325provides mental health services to all, but especially to326people of color, the LGBTQ community, and immigrants. She has327operated Colorful Resilience for three years. And as a result328of her entrepreneurial spirit the community advantage loan, she329now runs a thriving small business with 15 employees, and has330provided vital mental health services to over 3,000 clients.331    So, it's a perfect example in Springfield of these two332institutions being able to work together to make sure that we333have a thriving small business. I thank you Madam Chair for334welcoming these witnesses.335    The Chair. Yes. Again, thank you to all of our witnesses336for being here and thank you Ranking Member Markey. Briefly,337I'd like to take a moment to explain our lighting system there338in front of you, the little boxes. There are three lights in339front of you. Green means go. Yellow means you're running out340of time, and red means to go ahead and quickly wrap up your341remarks.342    I ask unanimous consent that the witness's full statements343be included in the record. Without objection, so ordered. As344your written testimony has been made part of the record, the345committee asks that you limit your oral remarks to five346minutes. And with that, Mr. Fitzgibbon, you are recognized now347for five minutes for your testimony.348349       STATEMENT OF MR. TIMOTHY FITZGIBBON, SENIOR VICE350    PRESIDENT, FIRST NATIONAL BANK, WEST DES MOINES, IOWA351352    Mr. Fitzgibbon. Chair Ernst, Ranking Member Markey and353distinguished members of the committee, thank you for the354opportunity to appear before you today to discuss managing risk355in the SBA 7(a) loan program.356    My name is Tim Fitzgibbon, I'm a senior vice-president with357First National Bank, a $1.1 billion community bank based in358Ames, Iowa, and founded in 1903. I'm testifying today on behalf359of the Iowa Bankers Association and First National Bank. My360responsibilities include managing two specialty loan programs-361SBA and student loan refinance, and I'm also a licensed362investment advisor.363    I'm here today to share my viewpoint, not just as an SBA364lender, but also a 40-year participant in government backed365loan programs, including home mortgages and student loans where366I've spent a good part of my career, helping borrowers manage367their debt, improve their credit, and avoid default.368    Risk in any loan program is primarily managed through sound369underwriting policies. Prudent underwriting ensures equitable370treatment for all applicants and is intended to be a good371predictor of a borrower's future success. In short, good372underwriting protects the consumer along with the lender, and373in the case of the government backed SBA program, the taxpayer374as well.375    In 2023, new rules were written for the SBA program with376the admirable goals of streamlining the application process and377increasing access to funding for small business owners,378particularly those in underserved communities. Major379underwriting changes included removing the applicant's personal380financial resources from the ``credit elsewhere'' test, waiving381equity injections, reducing insurance requirements, and382permitting lenders to ``do as you do'' in underwriting SBA383loans.384    Reducing underwriting criteria to increase loan access is385not a new idea in federally backed loan programs, but it has386not always proved wise. A similar approach was used in the3871990s to increase home ownership through lowered credit388standards for private market and FHA loans, which contributed389significantly to the subprime mortgage crisis of 2008.390    A more recent example continues today with the Federal391Parent PLUS Student Loan Program. Already low underwriting392standards were further diluted in the early 2010s, to allow393more families to access the Parent PLUS program, which has394resulted in countless older Americans becoming buried in debt395they cannot afford. Originating government-backed loans for396borrowers who can never repay them is predatory in nature. It397is imperative that the SBA closely monitor the impact of its398reduced underwriting standards on the borrowers it serves.399    To that end, early indicators suggests that there are400already signs of credit stress for SBA loans made under the new401rules. For example, according to a recent risk assessment by402the SBA, ``The Small Business Administration's Flagship 7(a)403program lost hundreds of millions of dollars in 2024 as agency404fee reductions combined with an increase in loan defaults to405result in negative cash flow''. Similar analysis done by third406party service providers, show loans made under the new rules407are defaulting at a much faster and higher rate than loans made408in other years, particularly those originated by non-bank409lenders.410    I'd like to end my statement with a cautionary observation411based on testimony provided just last year by Administrator412Guzman in hearings before this committee, where she suggested413the SBA should restart its direct government lending program. I414urge committee members to study the current condition of the415Federal Direct student loan program before considering such a416move.417    History has shown that direct government lending can lead418to expensive loan modifications and even debt forgiveness to419mask non-performing loans. Loan forgiveness does not manage420debt, it simply passes the cost onto the taxpayer.421    Iowa banks are committed to providing access to SBA422financing to our small business communities. While we applaud423efforts to streamline SBA loan processing and expand in a safe424and sensible manner, the number of small businesses the SBA425program can assist, we urge Congress and the small business426administration to restore prudent underwriting standards and427ensure proper oversight for all of its lending partners.428    I look forward to your questions, and I thank you again for429the honor of participating in this hearing. And Senator Markey,430I'm proud to tell you that my daughter's a Loras graduate.431[Laughter.]432    [The prepared statement of Mr. Fitzgibbon follows.]433434    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]435436    Chair. Thank you, Mr. Fitzgibbon. Now we will recognize Mr.437Lanza-Weil, and you are recognized, sir, for five minutes of438your testimony.439440      STATEMENT OF MR. RAYMOND LANZA-WEIL, PRESIDENT,441        COMMON CAPITAL, SPRINGFIELD, MASSACHUSETTS442443    Mr. Lanza-Weil. Thank you and good afternoon, Chair Ernst,444Ranking Member Markey, and distinguished members of the445committee. I appreciate the opportunity to speak with you446today.447    I am Raymond Lanza-Weil, recovering banker and president of448Common Capital, a 35-year-old nonprofit CDFI loan fund based in449Springfield, Massachusetts. Common Capital makes loans to small450businesses that can't get the financing they need from451conventional lenders, such as banks and credit unions. We make452loans up to $300,000 and we provide no-cost business education,453and training to our borrowers; Our business assistance program454is primarily funded by annual grants from the SBAs microloan455program.456    Common Capital serves a four-county region with 820,000457residents. Our annual operating budget is just shy of $2458million. Even though we're a small organization serving only a459fraction of the state's geography and population, Common460capital is the leading SBA Microlender and SBA Community461Advantage lender in the Commonwealth of Massachusetts.462    Since our founding in 1990, we've made over 900 loans463totaling more than $35 million to small businesses in western464Massachusetts. All sorts of loans, not just SBA loans, loans465that have helped create or retain 2200 jobs. At the end of4662024, Common Capital's loan portfolio totaled $9.4 million, a467little smaller than First National Bank's. 54 percent of our468loan receivable were SBA Micro Loans or Community Advantage469Loans. And by itself, the CA loans, the Community Advantage470Loans, make up 34 percent of our portfolio.471    Common Capital's lending is high impact and that includes472our CA loans. 87 percent of our CA portfolio dollars is loaned473to businesses owned by people with low to moderate income or474located in LMI census tracts. 73 percent is loan to startup475businesses, 47 percent to woman owned businesses and 17 percent476to veteran owned businesses.477    Common Capital was one of the original Community Advantage478lenders. Since making our first CA loan in 2012, we've made 41479CA loans totaling $5.3 million with only one loss. The480Community Advantage program helps us fulfill our mission of481creating economic opportunities for people with low to moderate482income by increasing access to capital for the small businesses483they own.484    For example, here's a story about one of CA loans. Alan had485worked in construction in rural western Massachusetts for over48635 years, when in 2018, he had an entrepreneurial seizure and487decided to open his own timber frame construction business.488After three successful years, significant supply chain issues489and higher prices on construction materials resulted in losses490on a large fixed price contract. But demand for Alan's491craftsmanship continued to grow, so the business sought492financing for new equipment and working capital from their493bank, which was unable to help them due to their recent losses,494Alan turned to Common Capital.495    The path to Yes, was challenging because the business'496assets available as collateral were well short of our497underwriting requirements. Common Capital was able to offset498the shortfall with an 85 percent Community Advantage guarantee.499And today, this rural business has retained its six employees,500hired new ones, and is thriving.501    As you know, and as this story illustrates, regulated,502financial institutions can't help every business that applies503for a loan and nor should they. Banks necessarily say ``no'' to504some applicants in order to protect their depositors and505shareholders and to contribute to the safety and soundness of506our financial system.507    Yet, banks and credit unions are our primary source of508referrals. We don't compete with banks; we support and augment509their customer relationships. Referring banks keep their510customers as depositors and continue to provide other banking511services to these businesses. When we provide a loan to a512bank's customer, it's a win-win-win.513    Before I conclude, I want to tell you another story.514Celeste and Jessica had a combined 30 years of experience515working as nurses in and around Springfield when in 2021 they516recognized the growing need for home healthcare in their urban517communities. They responded by starting their own home518healthcare agency. Celeste and Jessica could not obtain519financing from a bank due to being a startup and a lack of520sufficient collateral.521    Once again, common capital turned to the SBAs Community522Advantage Program to overcome these challenges and help two523entrepreneurs start a business that is providing essential524healthcare services and creating jobs.525    Senators, as I wrap up, I want to tell you that too many526small businesses and business owners that hear ``no'' from a527bank successfully search online for easy money. It's available,528it's expensive, and it's harmful to our business community. To529combat this, CDFIs like Common Capital and other community loan530funds try to fill the gap. With our help, these small531unbankable businesses are creating jobs, generating economic532activity, and paying taxes.533    These small businesses continue to be bank customers and if534they do well enough, they'll become bank borrowers as well. We535accomplish this work with support of the SBA. Our continued536success and the success of the small business community in537western Massachusetts depends upon the availability of SBA538microloans and the CA program.539    I urge you to continue supporting the Community Advantage540Program, to expand it so that more mission-focused lenders like541Common Capital can increase access to capital, for low to542moderate income and low wealth entrepreneurs. Thank you.543    [The prepared statement of Mr. Lanza-Weil follows.]544545    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]546547    The Chair. Thank you, Mr. Lanza-Weil, and we will move next548to Ms. Sims. And you are now recognized for five minutes of549testimony.550551     STATEMENT OF MS. ITZEL SIMS, SBA DIRECTOR, AND SENIOR552     VICE PRESIDENT, FIRST SECURITY BANK, LITTLE ROCK, AR553554    Ms. Sims. Chair Ernst, Ranking Member Markey, and members555of the committee. Thank you for the opportunity to testify at556today's hearing. My name is Itzel Sims, and I am the director557of SBA lending for First Security Bank, which is headquartered558in Searcy, Arkansas. I'm testifying today on behalf of American559Bankers Association, Arkansas Bankers Association, and First560Security Bank.561    Small businesses are the backbone of American economy. The562SBA 7(a) program helps small businesses that might not563otherwise have access to capital obtain loans so they can grow564and create jobs. In my 26th year of making loans to small565businesses, I'm very proud of the work we do at First Security566Bank, to assist businesses across Arkansas with 7(a) and other567small business loans. First Security is a privately held568community bank with a 1.5 billion in total capital, 8.13569billion in assets and 1,000 employees throughout Arkansas.570    After holding several SBA lending positions, I joined First571Security Bank and started an SBA lending platform for 7(a),572504, and express loans. First Security is right now topped at573top 10 SBA lender in Arkansas. This is in a very important time574for 7(a) program. Two years ago, SBA lifted the moratorium on575the number of non-bank lenders that could participate in the5767(a) program while simultaneously loosening underwriting577standards for these loans.578    It has experienced increased defaults since those changes,579particularly in loans originated by non-bank lenders. This580committee can play an important role in strengthening the581program so that all lenders make 7(a) loans in a safe and sound582manner, that helps small business gain access to capital.583    Here are recommendations for improving the program: in5842023, SBA lifted the moratorium on the number of non-banks that585can participate in the 7(a) program, granting six new non-banks586to participate in the program. At the same time, the agency587also loosened underwriting standards for loans of $500,000 or588less. This has contributed to rise of default rates.589    Data compiled by Lumos Technologies show that 7(a) loans590originated by non-bank lenders in 2023 had a default rate of5918.1 percent in 2024, which is more than double the default rate592of 7(a) loans originated by banks in 2023. SBA should return to593the more robust criteria for underwriting 7(a) loans that had594been in place prior to 2023.595    Moreover, the agency should focus on increasing the number596of banks that participate in the 7(a) program instead of new597non-bank entrants. SBA should also reinstate the loan598authorization as a required document for 7(a) loans. It should599also reinstate the requirement that 7(a) small business owners600provide a 10 percent equity injection when a borrower is a601startup, or when the borrower was purchasing an existing602business.603    To increase efficiency, SBA should reinstate the franchise604directory, a valuable resource that assisted lenders with605determining the eligibility of a franchise for a 7(a) loan606before it was discontinued in 2023. Although the focus today is607on strengthening the 7(a) program, the small business lending608landscape continues to be threatened by the CFPBs609implementation of Section 1071 of Dodd-Frank. Section 1071610requires financial institutions to collect and report detailed611data on each application for small business credit, including612the race, sex, and ethnicity of the business owners.613    The CFPB Rule expanded the 13 data points required by614Congress to 81 data points for each applicant for credit. This615will significantly increase the cost of credit, decrease the616availability of credit, and make it harder for us to serve617small business customers. Congress should repeal section 1071.618    In conclusion, we strongly support the committee's goal of619strengthening the 7(a) program and facilitating small business620lending more broadly. We urge Congress to ensure that the SBA621reinstates previous underwriting standards on 7(a) loans, not622grant additional non-bank licenses without a demonstrated need623and proof that the agency can effectively supervise new624entrants, take the actions to improve the efficiency of the6257(a) program provided in our testimony, and repeal Section 1071626of Dodd-Frank.627    This would help strengthen small business lending, and628enhance the ability of banks to make critical loans that drive629economic growth in our nation's communities. I really630appreciate the opportunity to testify and I look forward to631your questions.632    [The prepared statement of Ms. Sims follows.]633634    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]635636    The Chair. Thank you very much, Ms. Sims. And now, Ms.637Guerrero, you are recognized for five minutes.638639     STATEMENT  OF  MS. MAYRENA  GUERRERO,  FOUNDER  AND640      CEO, COLORFUL RESILIENCE, WEST SPRINGFIELD, MASSA-641      CHUSETTS642643    Ms. Guerrero. Thank you. My name is Mayrena Guerrero. I'm a644licensed mental health counselor and entrepreneur in645Massachusetts. I am honored to be here and talk about my646experience with the SBA Community Advantage Loan through Common647Capital.648    My business is Colorful Resilience, a mental health clinic649that provides outpatient mental health services to Black650Indigenous People of Color, Lesbian, Gay, Bi, Trans, and others651with various sexual and gender identities, immigrants, first652generation people and our allies.653    What sets us apart, is that our team members represent the654communities we work with. These brings about cultural655competency that comes not just from education, but shared lived656experiences with our clients.657    I hold a Bachelor of Science degree from University of658Catlica Santo Domingo in Dominican Republic, and a Master of659Science in mental health counseling from Fitchburg State660University in Massachusetts. Go Falcons.661    After graduate school, I worked in community mental health662for three years providing outpatient services. After completing663the necessary hours and passing the licensing exam, I obtained664my license to practice mental health counseling independently665in Massachusetts.666    In 2016, I established a private practice marking the667beginning of my entrepreneurial journey as a solo practitioner.668My practice filled up quickly as clients discovered me through669the PsychologyToday.com providers directory. In my published670profile, I discussed my therapeutic approach and comfort in671working with immigrants, people of color, and members of the672LGBTQ plus community like myself. I quickly noticed clients673sought me out primarily because of our shared identities.674    In 2020, due to the mental health crisis resulting from the675pandemic and the Black Lives Matter movement, inquiries for676services increased from two a day to 20. My practice was packed677and I wondered where to refer individuals seeking support based678on identity affinity. I realized then that there was a niche in679the market that was not being addressed, and that is when the680idea for Colorful Resilience was born.681    If I were going to do this, it will be done right. My682company will have multiple practitioners and be the work683environment I always dreamed of. The humanity of the clinician684will be front and center because happy and healthy clinicians,685produce better therapeutic outcomes.686    I will do things differently and go against the industry687standard. My clinicians would receive a guaranteed bimonthly688paycheck with a salary that exceed the living wage for our689county, based on the MIT living wage calculator. A yearly690inflation raise will be essential to prevent a pay cut and an691annual productivity raise would incentivize meeting692productivity goals. Both part-time and full-time Employees will693have access to health and dental care. Additionally, the694company will reimburse continuing education credits as 15 CEs695are required annually to maintain our licenses and now, we're696in year three and in this year, we're able to offer 401k to our697employees.698    Burnout is a significant issue in the mental health field699leading to frequent turnover and a mass exodus from the700profession. I recognize that establishing reasonable and701sustainable productivity expectations is crucial.702    Furthermore, supporting and encouraging clinicians to703attain their private practices is essential for maximizing704their earnings and increasing representation from these705communities in the field. In other words, my team members were706not leaving Colorful Resilience because we were a lousy707employer, but because they were ready to self-actualize708professionally.709    So, the idea was there and it was a good one, but I needed710capital. So, I went to talk to my community Bank of 15 years. I711sat down with a person from Commercial Lending, business plan712hand, he listened to me and told me it was an excellent idea,713but that they didn't fund startups. For them to lend me the714300K I needed to start my business, I would need to have715assets, assets that amounted to that much, which I didn't. It716was the bank who told me about Common Capital.717    I went to Common Capital's website and filled out a simple718form. Then with a business plan in hand I met with them. They719supported my idea and told me they would work with me to secure720the funds I needed to make it a reality. Common Capital helped721me secure an SBA Community Advantage loan for $250,000 and a722$50,000 microloan at a six-year term and a 7.5 interest rate.723    In addition to the loans, Common Capital helped us get724marketing and technical assistance help from a third party,725contributing to our recruitment efforts. From the very726beginning, Colorful Resilience has submitted monthly profit and727loss and balanced sheet reports to Common Capital, helping keep728us accountable as we go. Common Capital invested in Colorful729Resilience and we continue to experience and support to this730day.731    On February 23rd, 2022, Colorful Resilience, LLC became a732registered business entity, and in August of that year, we733started seeing clients. Today, according to the Boston Business734Journal, Colorful Resilience is the 27th largest LGBT owned735business in the state of Massachusetts.736    We're a profitable company currently employing 15 people737and on track to hire three more full-time clinicians this year.738    We have about 550 active clients and 3000 people have had739access to care because we exist. Outpatient mental health is740primary care. Clients who are adequately supported and at741outpatient mental health level rarely need to access higher,742more expensive levels of care like partial hospitalization,743inpatient, or like a residential program. We keep the cost of744mental health care down. We don't depend on government grants745to function and we pay taxes.746    Businesses like Colorful Resilience keep the American747economy going in the right direction. The SBA Community748Advantage Loan changed my life and the lives of many others. I749am grateful that this program exists and was lucky to have750access to it. Please continue to support organizations like751Common Capital so that they can make businesses like mine752possible. Thank you.753    [The prepared statement of Ms. Guerrero follows.]754755    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]756757    The Chair. Thank you, Ms. Guerrero, and thank you for your758work in mental health, we really do appreciate that as well. So759now we will move on to the question-and-answer portion of the760hearing, and I will recognize myself for five minutes for761questions, and I will start with Mr. Fitzgibbon.762    So, Mr. Fitzgibbon, as you know, the Biden administration763significantly weakened underwriting standards in the SBA's 7(a)764loan program. Since those changes were implemented, the 12-765month default rate has more than doubled and the early default766rate has almost tripled. How important are strong underwriting767standards to the long-term stability of the 7(a) loan program?768    Mr. Fitzgibbon. Thank you, Senator. I think prudent769underwriting provides the foundation for long-term stability.770There are other factors like guarantee fees and so on, but771they're not as important as underwriting. It's truly the772cornerstone of managing debt.773    The Chair. Yes, that's good. And Ms. Sims, thank you for774being here today. The previous administration allowed775additional non-banks, including fintech firms to participate in776the 7(a) loan program. So as a community banker, how do your777underwriting processes differ from those that are non-bank778lenders, such as fintech firms, and how do these differences779affect the loan performance in the 7(a) loan program?780    Ms. Sims. Community bankers, we live and we dine and we use781the services that business owners have. So, we see people, when782we provide loans, we're not just providing loans to paper,783we're providing loans to people. So, we try to find financial784solutions and complement our banking needs through SBA785programs, depending on how much assets they have, how much786capital they need.787    And so having that availability through the SBA program is788imperative for us. The credit underwriting is the same for SBA789lending. We still have to make sure that the loan can be repaid790back, but a lot of times our entrepreneurs need education. They791need to know how much debt they need to have; they need to have792a budget. I like to say the saying, if you don't plan, you plan793to fail.794    And a lot of times these business owners need guidance from795us as a community banker to be able to either say, hey, you796need to start with us, or they may need to start with a797Community Advantage lender just to get started. So just being798there to educate the client makes us very different than799fintech, which is where my concern is.800    Fintech is more about a predatory approach and trying to801just give money as fast as they can. And they don't really see802them as human. They just see them as another source of803financing and getting rates. So that's where my concern is the804most, is the fact that they're taking the human approach away805from community banking when you allow fintech to take over.806    The Chair. Yeah, I do appreciate that support. Thank you.807And Mr. Fitzgibbon, the SBA has had four straight quarters of808negative cash flow. Over roughly that same period upfront809borrower fee revenue has decreased by 13 percent while loan810purchases, which occur when SBA has to buy a defaulted loan811from a lender have increased by 73 percent. How concerning are812these trends and what steps need to be taken to ensure that the8137(a) program continues to operate at zero subsidy from the814taxpayer?815    Mr. Fitzgibbon. Well, thank you, Senator. I mean, four816quarters of data is you can't draw every conclusion from four817quarters of data, but it's all we have, and it is alarming for818the comparison to the other vintages. So, I think looking at819borrower fees is probably, and lender fees and reintroducing820them is probably necessary.821    I would say that the cost of inaction is high, because822regardless of the cost of the taxpayer, every loan that823shouldn't have been made those defaults, ruins the financial824life of that small business owner. And so, you could take a825wait and see approach for the year and see if things normalize,826but I think there's a human cost to that, that to me seems827unadvisable.828    The Chair. Okay. Thank you. And now I would like to ask a829question to all the lenders on the panel. Over the last five830years, we have seen a dramatic expansion in the use of lender831service providers or LSPs by SBA lenders. These LSPs assist SBA832lenders by referring processing and servicing loans and are833often increasing the volume of SBA lending.834    Does your company utilize an LSP and could you just talk835about the proper role of an LSP in assisting SBA lenders and836Mr. Lanza-Weil I'll start with you first and then we'll go to837the other lenders.838    Mr. Lanza-Weil. Well that's easy: No, we don't.839    The Chair. Okay. Thank you. [Laughter.]840    The Chair. Mr. Fitzgibbon.841    Mr. Fitzgibbon. We don't use them. I think they play a842helpful role if the lender that they're partnering with has843good guardrails. But I think in combined with a fintech lender844that it's all about churning volume, I think that they can be a845part of the problem.846    The Chair. Okay. Thank you, Ms. Sims.847    Ms. Sims. Starting an SBA department in a community bank is848daunting. It's a difficult task. And so, it can be very849alluring to look at an LSP. I looked at it at one time when I850was starting the department, but it's really difficult to keep851consistency of your culture of who you are as a bank when you852outsource it to somebody else. Keeping that consistency and853also keeping the culture of your bank is out of your control.854    And a lot of times the customer experiences very bad855customer service because they're not only dealing with us,856they're also dealing with the LSP. If it's sold in the857secondary market, they're not able to renegotiate their858interest rates. So, they're also putting some guardrails on859that. So LSPs do have a sense of purpose, don't misunderstand860me, but they can also abuse that situation. So, we do have to861enter that cautiously when using LSPs.862    The Chair Okay. Thank you, that's very helpful.863    Ms. Sims. And we do not use LSPs, by the way.864    The Chair. Okay. Thank you very much. I appreciate that. I865will turn it now to Ranking Member Markey for your questions.866Thank you.867    Senator Markey. Thank you so much. And so great news,868really, really, really great news. In the United States last869year. Last year, the Biden administration, 886,000 jobs870directly related to 7(a) were either created or retained, great871number. Another great number in Donald Trump's last year before872Covid 2019, the 12-month default rate on 7(a) program 2.75,873percent last year the last year of the Biden administration,8742.76 percent default rate.875    Now, we do admit that the default rate did go down to 1.32876percent at the height of COVID, but that was because of this877great committee's work, passing the PPP program, passing the878EIDL program, we were actually able to lower the default rate879because of our actions to help those small businesses.880    But it's returned to normal, Trump 2.75 percent Biden 2.76881percent. So, we'll give Trump the win there by one 10th of 1882percent. Okay. He wins in that one category, but let's just say883we're back to normal in terms of the 7(a) program and we should884be very, very proud of the work that all these business people885are doing out there.886    This SBA Community Advantage program has demonstrated887success in making small dollar loans to small business owners888that struggle. We see this story here in Springfield,889Massachusetts. We see the lender and the recipient creating890some capitalist magic that otherwise would not exist.891    And these lenders don't just provide loans: they provide892financial help, marketing help, technical assistance that893otherwise Ms. Guerrero and people like her, all across the894country creating 886,000 jobs would not otherwise have. Which895is kind of this brilliant construct that we have. So, Mr.896Lanza-Weil, you say in your testimony, we lent to people, not897to paper. Can you explain how common Capital's approach to898making a loan to small business contrasts with a conventional899lender.900    Mr. Lanza-Weil. Absolutely. We're a high touch lender. It's901all about building a relationship with a borrower, with an902applicant. You know, my first day on the job as a bank trainee903in 1986 an old-time lender who smelled like cigar smoke, pulled904me aside and said, you got to know this, know your borrower,905it's the first rule of lending.906    And I think sometimes in larger institutions, and certainly907in fintech, which I'm not here to bash, we lose sight of that.908I think Ms. Sims referenced it as well, building a relationship909with an applicant, getting to know that person as a human910being, getting to know them as something beyond the paper on911which their credit report is printed is so important. And we912invest a lot of time. It's inefficient, it's slow, it's high-913touch, and it's highly effective.914    Senator Markey. I agree with you. When I needed student915loans, I was sitting next to my mother and father at the First916National Bank in Malden, and Mr. Wentworth the banker, he said,917Mr. and Mrs. Markey, you paid every month on the mortgage, so918we trust you. So, we'll give the loan. There you go, high919touch, they knew the customer.920    So, Ms. Guerrero, talk about how Mr. Lanza-Weil and his921operation was able to help you.922    Ms. Guerrero. Gladly. Common Capital has been just super923helpful. The truth is that I really don't know how we would924exist as a business if Common Capital and the SBA Community925Advantage Loan program was not available to us.926    I like the fact that the support that we received from927them, I mean, you told me earlier there were nine people in928your team. I really don't know the nine of them, but I know six929of them by name. And I know how to get a hold of them for930questions or anything like that. And that is just that931relationship that I don't have with my community bank.932    Senator Markey. And so, give us one quick example, if you933can, of something that they could help you to do that you934would've had no capacity as a startup or small business.935    Ms. Guerrero. I mean, exist, sincerely, Senator, who936would've given me the--okay, my other option to get the money937to start my business would've been a predatory lender that938would've given me a really high interest rate in terms that939were really not conducive to profitability. So, it's as simple940as that.941    Senator Markey. And you could have found them in942Springfield, Massachusetts.943    Ms. Guerrero. Oh, of course.944    Senator Markey. The predatory lending?945    Ms. Guerrero. You can find them anywhere.946    Senator Markey. Oh, yes. So, you are just a perfect example947of a wonderful system creating 886,000 jobs that is working948with the default rate equal to the Trump years. Okay. Which is949just an incredible achievement. So really helps to show how950America can be great in helping startups to get over that951financial hump.952    The Chair. Thank you, Ranking Member. And I do want to953stress, it's the early defaults are really the issue that we're954getting at today. The last three years, loan defaults are955rising faster than pre COVID levels. And the program is losing956money for the first time in a dozen years. So, it is something957that we do need to scrutinize and we need to understand why958this is occurring. So, we will go next to Senator Husted. You959are recognized for five minutes of questions.960    Senator Husted. Thank you very much. Welcome to all of you.961Thanks for being here today. I have a background overseeing a962small business development center. I have a background on the963board of a community bank, where I was on the loan committee,964and I know how much our regulators scrutinize what loans we do965make and what loans we don't make.966    And that this is--the community banks around the country967are very close to their customers, and they know these issues968quite well. But what I don't know well, I've only been a969senator for four weeks. [Laughter.]970    Senator Husted. So, I'm, I'm trying to catch up on all the971things that have happened in the past, and I know Mr.972Fitzgibbon and Ms. Sims, you talked about rule and fee changes973that had happened under the Biden administration, and I want to974understand that better, and how that impacted the 7(a) program975and just what the exposure and the risk of that.976    So just help educate me a little bit more about what that977means, what the impact is, Mr. Fitzgibbon I'll talk, start with978you.979    Mr. Fitzgibbon. Thank you, Senator. So, briefly, the rule980changes reduced the underwriting criteria, and over the last981couple of years the guarantee fee and the lender fee were982waived up to, I believe it's a million dollars, no guarantee983fee to the borrower up to a million dollars, this year it's no984lender fee up to $500,000. So those are fees that support the985program in a sense, it's skin in the game for the borrower.986Those have been waived for a couple of years.987    The concern is that the lessened underwriting criteria has988resulted in loans being made that shouldn't have been made and989that's what's driving up delinquency and default rates.990    Senator Husted. Okay. And Ms. Sims.991    Ms. Sims. So, when you get insurance, you have to pay a992premium to have insurance. So, you think of the government993guarantee in that sense, is that typically when you're asking994for a government guarantee, it's protection on the loan for the995bank.996    And so I've been an SBA lender for my entire career, and997I've seen the fees my entire life where, you know, SBA has998provided this guarantee, this insurance to the lender, AKA, the999customer gets this insurance as well, there's protection on1000their side, so there's benefit for the customer on that side,1001but typically, because we don't want this to be a burden on1002taxpayers, they self-fund through these fees.1003    And so that's, really important to understand that we don't1004want the fees to be inappropriate, but we also want to make1005sure that they're not impacting the taxpayer money.1006    Senator Husted. So, you, so summary, you think that would1007improve default rates and it would help sustain the program so1008that it's not a burden.1009    Ms. Sims. So, sustainability is the key, right? We want to1010make sure it can be in the black. We don't want it to be in the1011red. So, if we see that there's problems there, we got to see,1012we got to reevaluate the situation when it comes to you know,1013the underwriting, that's something else that I've never seen,1014what we call the SOP dramatically change, to ``do what you1015do'', that's the rule. And makes it very complicated to know,1016because I, as a community bank can operate differently than1017another community bank.1018    And having the regulations so loose, if you do what you do,1019also doesn't provide what I call a level playing field. And so1020that's important to also understand is that the SOP has1021changed. And now if you feel comfortable providing loans that1022are what I would say, not prudent, then you're allowed to do1023that because you are not regulated in the same way as maybe a1024community bank that has higher regulations.1025    Senator Husted. Great. Mr. Lanza-Weil, do you have a1026thought on that?1027    Mr. Lanza-Weil. Thank you, Senator. I don't know much about1028the fees. What I do know is about underwriting standards. We're1029required to maintain our underwriting standards even when the1030rules change in the SOP, the standard operating procedures. I1031think what we are hearing is that there are some lenders that1032haven't followed their own prudent underwriting guidelines. And1033that's perhaps not the fault of the program, that's the fault1034of the lender.1035    So, I'd be cautious about throwing the baby out with the1036bath water. Our default rate hasn't changed, and among all the1037CDFIs I know, the default rate hasn't changed because we're1038very focused on making good loans in our market. It sounds as1039if there's a lot of lenders out there that aren't doing that.1040And they should have more guidance and be more careful. And I1041would hate for their imprudent lending to harm our prudent1042lending.1043    Senator Husted. Okay. Thank you.1044    The Chair. Thank you, Senator. Senator Rosen.1045    Senator Rosen. Thank you. Chair Ernst, Ranking Member1046Markey, and thank you all for being here and just spending,1047well, of course, your life working with small businesses and1048for your work really in the mental health space, it's so1049needed.1050    And I'm going to give a little bit of a plug here for1051Nevada's credit union and community banks, I know them all so1052well. And I will say during the COVID crisis, but all the time,1053like you said, they're in the neighborhood. These are their1054friends, their neighbors. They know people have a relationship1055with them. They know if maybe a family emergency happened and1056they can't pay something now, and they'll pay it later. And1057they really want to see communities thrive. So, I just know the1058importance of this kind of lending and that special touch that1059you can give it. It's very meaningful.1060    And so, I think we can all agree that the 7(a) program,1061it's a vital source of funding for our small businesses. And1062Nevada business have received over 700 loans totaling $3551063million just last year alone of 99 percent of businesses in1064Nevada, or small businesses, by the way. Although we're known1065for those big casinos, 99 percent are the small businesses. But1066it should be a shared bipartisan priority for the program, like1067you say, to run as efficiently as possible.1068    And you know, I'm really thankful for your testimony so1069far, but it's not surprising that loan defaults delinquencies,1070they're more likely in times of economic uncertainty. And small1071businesses may face declines in sales or subsequent cash flows,1072mental health, of course I think you're going to stay pretty1073steady there. But similarly, poor economic conditions can put a1074strain on lenders who may be tightening their criteria and they1075reduce their loan volume.1076    And so, we might look at looming tariffs, unreliable1077federal funding, economic uncertainty. It's critical we1078understand, again, the impact it's going to have on all of you.1079So, Mr. Lanza-Weil, can you discuss how the broader economic1080picture in this country is going to, in fact, affect maybe the1081borrower's loan performance and your lending activity?1082    Mr. Lanza-Weil. Thank you, Senator. I think you said the1083word already, it's the uncertainty. The uncertainty that's1084existing in the marketplace today because of so much rapid and1085chaotic change is making it hard for us to plan. I don't know1086what the SBA's budget will look like next year. None of us do,1087obviously. I hope it's robust. But as we begin planning for our1088next fiscal year, we don't know how much money we can count on1089for an SBA grant that supports the business assistance that is1090so critical to supporting entrepreneurs like Mayrena.1091    The business education and training that we provide is1092focused on helping people create and understand and use their1093financial statements and the management of their business.1094Mayrena knows how to be an exquisite mental health counselor,1095but probably didn't know much about QuickBooks before she came1096to us, or how to market her business.1097    Senator Rosen. She learned pretty quickly us, and then1098that's what we're going to ask. How's the business environment1099impacting you and the uncertainty impacting you? You're working1100together, giving her the training, the resources, understanding1101how to be successful. How are you feeling in this moment?1102    Ms. Guerrero. Well, it is true that the need for mental1103health services is there, but it's also true that the economic1104landscape is making--for example, I'm noticing that my clients,1105instead of booking weekly, they are booking biweekly because1106they can't afford the copay, or they have a hard time affording1107the deductible. Or like, people are losing their jobs, which1108means that they're losing access to healthcare. Or there could1109be like an executive order like freezing government funds,1110which affects Medicaid and Medicare, and that's 20 percent of1111my income. So definitely there's an impact in my business.1112    Senator Rosen. Well, I want to go back to something you1113just mentioned. The importance of the SBA resource partners, as1114we see, it makes you successful. You're a great counselor, but1115maybe you didn't know QuickBooks when you started. And so, we1116have to bring that critical support and the training for our1117small business owners, from veterans' business outreach1118centers, small business development center, women business1119centers, and the like.1120    I was so proud to bring the first ever Veterans Business1121Outreach Center to Nevada. We have almost a quarter million1122veterans in Nevada, very entrepreneurial. And really provide1123that tailored support and that free counseling, that technical1124assistance so that they can do what they do. And I know I have1125a short time left.1126    Can you talk Mr. Lanza-Weil about the importance of this1127financial management counseling? I know all of you could really1128speak to this, but that's a big part of what you're helping a1129small business owner do, and how critical it is that we keep1130these resources flowing or their success and payback of the1131Loans.1132    Mr. Lanza-Weil. Absolutely. Many of our applicants and1133borrowers have received services from our local small business1134development center network, and from our Women's Business1135Resource Center, which is the Center for Women in Enterprise,1136which serves all of New England and has had to lay off some1137staff already, because they are not getting the federal funds,1138they need on an ongoing basis to pay their staff to provide1139services to small businesses.1140    The way we mitigate risk in a community development1141financial institution is with hands-on business assistance and1142training. By making Mayrena a better business person, she's1143also a better mental health counselor, and a better, a more1144sustainable and viable business in the long term.1145    And at this particularly uncertain time, if the economy1146worsens, banks will tighten their lending as they always do.1147And CDFI loan funds, which are countercyclical, we'll see an1148increase in demand. And that increase in demand means that1149we'll need more help from our service partners to serve the1150businesses that we're able to make loans to.1151    Senator Rosen. Well, thank you. I do believe small1152businesses are the engine of our economy in every state. Thank1153you for having this hearing, Madam Chair, and we need to1154continue to invest in the good work that you're doing. Thank1155you. Great.1156    The Chair. Thank you, Senator Rosen. Senator Booker, you1157are recognized.1158    Senator Booker. Thank you so much. I was excited to get on1159this committee when I got here, because I spent so much time as1160the mayor trying to get more access to capital for businesses1161in the City of Newark. And we were able to see an explosion1162during a recession, of new investment into our city,1163entrepreneurs succeeding. It was one of the best experiences1164that I got on this committee and it's been one of the better1165bipartisan committees that I've had here, and just finding ways1166because all of us know in our states, there's so much1167investment worthy people.1168    I remember the now Secretary of State and I working1169together in the midst of the pandemic when the PPP loans coming1170out. But we found an arbitrary rule that disbarred people who1171had been justice involved returning offenders.1172    They'd had to be out of for five years before they could1173qualify for a PPP loan, that was arbitrary and just dumb. And1174my Republican colleagues agreed, and we got it fixed under the1175Trump administration.1176    So, it's just a great environment for us to continue to try1177to do good work. I'm a big person who believes in1178entrepreneurialism and the power for communities of capitalism,1179the double, triple, quadruple bottom lines that we find.1180    And so, I just want to jump into some areas really quickly.1181One concern having had so much experience with Microloan1182programs inspired by the Grameen Bank in my community I'm1183really worried that we've had, you know, 15 years of mission-1184based lenders through the Community Advantage program that have1185worked closely with small businesses to help them get the1186capital they need, which is often small.1187    But in January, the SBA announced it would increase the1188loan maximum up to half a million dollars, which I think is1189going to have a really stunning impact. And right now, I'm1190hearing from lenders that they haven't had communication,1191really from the SBA on whether they can offer increased loans1192to small business owners. There's a lot of delay going on.1193    I got an extraordinary note from a small business lender in1194New Jersey, ``Last week, we had to decline a loan request from1195a farmer in Mullica Hill, who sought to expand his seasonal1196open-air farm into a larger year-round operation. The business1197was doing well despite its seasonal limitations. His goal was1198to provide his community with high quality produce plants and1199specialty groceries year-round instead of in his current just1200five-month operation.1201    However, during our review, we determined that he required1202more than $350,000 to complete renovations, purchase equipment,1203and secure the necessary working capital for successful1204expansion. He was concerned about the risk of1205undercapitalization. We had to decline the request. Given his1206limited collateral, securing traditional bank financing would1207have likely been a challenge for him. We believe the borrower1208needed Community Advantage 7(a) loans of at least $450,000.''1209    So, it's disappointing that small businesses in New Jersey1210are missing out on opportunities with these larger loan1211possibilities. And so just I'm hoping you shed some light on1212this, Mr. Lanza-Weil, have you been able to offer increased1213loan amounts in addition to the small ones that you're probably1214very familiar with? what would the impact be for your business1215folks?1216    Mr. Lanza-Weil. For a long time, Senator our loan limit has1217been only $300,000. So, there's not been an effect in the past1218for the changes in the loan limits. But we'd like to raise our1219loan limit internally for all sorts of loans. And we find that1220most of our larger loans, and a larger loan for us is a loan1221over $75,000, our people coming to us with insufficient1222collateral.1223    So, if we're going to raise our loan limit, we need an1224increased loan limit on the Community Advantage program in1225order to be able to continue to help low asset and low wealth1226individuals.1227    Senator Booker. So, I just think there's a lot of common-1228sense fixes. I have some other questions I'm going to ask for1229the record that I don't think we'll be able to get through and1230the chairwoman is just rough on me. She particularly picks on1231New Jersey. So, I'm going to ask some questions for the record.1232I hope that you all will respond.1233    I want to thank the four of you because I know your heart1234and your determination, you do this work really to see1235communities' flourish. And it means a lot to me that you would1236come down here and testify before the United States Senate. I1237know time is money, as you all know that, so it means a lot to1238me that you're here.1239    But I hope you'll be as the hearing is open, I hope that1240you'll be responsive to some of the other questions I have that1241I think can really inform this committee, which I hope1242continues its record of just working in a bipartisan manner to1243help folk out. So, thank you.1244    The Chair. Thank you. Senator Booker. My ears perked up1245when you said farmer?1246    Senator Booker. I know.1247    The Chair. I was so invested in----1248    Senator Booker. It's fourth largest industry. People don't1249think it is the garden state, you know.1250    The Chair. In New Jersey, folks. [Laughter.]1251    The Chair. Thank you, Senator Booker. Now we will recognize1252Senator Hirono for five minutes. Thank you.1253    Senator Hirono. Thank you, Madam Chair. I just happen to1254have met with some farmers from Hawaii, and they have unique1255challenges because we are in the middle of the Pacific, and1256there are all kinds of invasive species, including axis deer.1257And, you know, people don't know that we have, yes--sheep and1258others, but be that as a it may.1259    I think in you, Madam Chair, we have somebody who supports1260the that we can give from SBA, particularly to entities such as1261farmers and the people in rural areas. For Mr. Lanza-Weil, I1262just heard you say that you would want the loan limits to be1263raised, what is the loan limit that you are working with right1264now?1265    Mr. Lanza-Weil. I believe it's $350,000.1266    Senator Hirono. And that you would like that raised to1267what? And it requires the Congress to raise that limit?1268    Mr. Lanza-Weil. I don't know who requires to raise that1269limit. Okay. But 500,000 would be helpful to us.1270    Senator Hirono. Is that because based on your own1271experience, that the amount of the kind of loans that people1272requests are more in the 500 range as opposed to the 300,0001273range?1274    Mr. Lanza-Weil. Senator, we see when they come to us with1275our $300,000 loan limit, we see them scaling their plans and1276their ask to what they think they can get from us. If we had a1277higher loan limit, then they might reach further for the stars.1278And of course, everything's gotten more expensive over time.1279That's just the nature of money and time together, the time1280value of money, I think they taught us in in business school.1281So, our $300,000 loan limit has become somewhat obsolete. And1282$300,000 doesn't necessarily help launch many small businesses.1283We need to see more resources for that.1284    Senator Hirono. I saw Ms. Guerrero, you are nodding your1285head, you would agree with loan limit issue?1286    Ms. Guerrero. Definitely. I could have used $500,000 at the1287beginning of my business. And the reason why I say this is1288because I got that $300,000 from Common Capital, and about two1289years later, I needed an additional $100,000 from another1290lender. So, if I would've had that money from the beginning,1291that would be much easier for me.1292    Mr. Lanza-Weil. If I may, Senator, excuse me for1293interrupting. As Mayrena said, as a business grows, if they1294outgrow us, at least in Western Massachusetts, there's not1295another resource. We need to have more resource so we can help1296the businesses as they grow, not just as they establish.1297    Senator Hirono. Oh, that certainly makes a lot of sense.1298Ms. Guerrero, you got your loan through the Community Advantage1299program, which was created frankly not too long ago, and it was1300started as a pilot program. Could I ask, how much was your loan1301from the Community Advantage program?1302    Ms. Guerrero. The Advantage Program gave us $250,000. And1303then I had an additional 50 grand microloan.1304    Senator Hirono. So, without the Community Advantage program1305that you would have had a hard time getting your business off1306the ground?1307    Ms. Guerrero. It would not have happened, Senator, because1308I wasn't going to fall prey of like predatory lending.1309    Senator Hirono. How are you doing now?1310    Ms. Guerrero. Oh, we are doing really well. We're really1311excited. I must say we're in conversations with Boston Impact1312Initiatives, which is a venture capital sort of firm that works1313with minority owners. And they're going to do a structured1314equity deal with us and just give us money so that we can have1315doubled the workforce that we currently have. So, we're about1316to grow significantly.1317    Senator Hirono. Congratulations.1318    Ms. Guerrero. Thank you.1319    Senator Hirono. I really wish you the best. Mr. Lanza-Weil,1320then can you speak a little bit more about the importance of1321community lenders, because community lenders in a state like1322Hawaii, very important, but that's where your experience lies.1323Can you talk a little bit more about how important these kinds1324of lenders are in your----1325    Mr. Lanza-Weil. Absolutely. I think any high touch lender1326is very important. I started my career at a community bank in1327the San Diego area. To the extent that the bankers on either1328side of me are community lenders who have a high touch1329approach, I think that's very important.1330    I think on the continuum of credit, we need everything from1331community lenders that are certified CDFIs and other community1332loan funds on through to community banks and credit unions.1333It's the know your borrower conversation, that I think perhaps1334you weren't in the room for yet, Senator. The first rule of1335lending is-know your borrower. Smaller banks, community banks1336and community loan funds get to know their borrowers, and that1337enables them to say yes more often and to manage the risk when1338they do say yes.1339    Senator Hirono. So, for the two witnesses who are sitting1340to the left and right of you, are you both community lenders?1341    Ms. Sims. Yes. I'm an SBA lender that works for First1342Security Bank, and we're community bank.1343    Senator Hirono. So, you certainly would agree that1344community lenders like yours very important.1345    Mr. Fitzgibbon. Yes. Senator, we're community bank in the1346middle of Iowa.1347    Senator Hirono. Thank you. Thank you, Madam Chair.1348    The Chair. Thank you very much. And I think we'll go ahead1349and wrap our hearing. Okay. I want to say thank you so much for1350the witnesses for being here today. This was a very productive1351conversation. Really appreciate your time and input to the1352committee today.1353    And I ask unanimous consent that the record of today's1354hearing remain open for two weeks for members to submit1355questions, revise and extend their records, and submit1356additional information into the record. Without objections, so1357ordered. And with that, the Committee on Small Business and1358Entrepreneurship----1359    Senator Markey. Can I make a closing statement? Okay.1360Please, you'll like it, I promise.1361    The Chair. Oh, we will allow. Proceed.1362    Senator Markey. Thank You. Just want to say that the1363Community Advantage Program was a pilot program and is still1364not law. And the Senate Small Business Committee, in its wisdom1365in 2023, passed out of this committee by 18 to one, the1366codification of the Community Advantage Program. It was blocked1367on the floor by Senator Paul, which is a common fate for many1368pieces of legislation, I might say. But we could work together1369once again, to try to try to pass that bill.1370    And I just wanted to note that even in early defaults, it1371was 1 percent during the Trump administration back in 2019, and1372it was 1 percent last year in the Biden administration. And it1373went down lower actually, because of PPP and--but even the1374early default is kind of just returning to where it was before1375COVID.1376    And the 7(a) loan program is healthy. 99 percent of loans1377are being repaid despite the short-term increases in the1378default rate. This rate is actually normalizing back to pre-1379pandemic levels, which is great. And I just want to go back to1380Mr. Wentworth at the First National Bank of Malden.1381    I remember sitting there, it looked a lot like you. Well,1382Mr. Wentworth really didn't look like you, Mr. Lanza-Weil, if1383you know what I mean. But the earlier generation, those old1384waspy bankers in New England, in that small city. And my father1385drove a truck for the Hood Milk company, and my mother was very1386mad at me for losing the full scholarship. You know, that I1387should have studied harder, she said, and we are sitting there,1388and my mother said, take out as much money as you want, Eddie,1389because you're going to pay it back, not your father. He's not1390going to take a second job.1391    And I was in Congress at age 30, and because I went to the1392school at Boston College Law School, I was elected at age 30.1393Those loans helped; my father's a milkman. And I was paying1394back the student loans for six years as a member of Congress. I1395was the poorest member of Congress, all I had was student debt1396and my car payments. I had no other assets, but he knew his1397lender. I mean, he knew his customer, he knew who he was1398loaning to. It was my mother and father, and they would make1399sure I paid it back.1400    So essentially, that's the essence of who you are. You're1401giving people who maybe the rest of the world can't quite see1402as well as they could, but because you know them and you trust1403them, you make them work at the same level as other businesses1404that maybe have those pre-existing relationships. So, I thank1405you so much, Madam Chair.1406    The Chair. And witnesses, stay put. We had one member sneak1407in before the fall of the gavel. So, Senator Hickenlooper, you1408are recognized for five minutes.1409    Senator Hickenlooper. Thank you, Chair and I appreciate you1410allowing the meeting to extend. I appreciate your indulgence.1411This is something I really care about, but in a previous life,1412seems like several lives ago, I came in as a new governor in1413Colorado, and we did a bottom-up economic development plan.1414    We went to all 64 counties, got everyone to write an1415economic development plan of what did they see in 50 years for1416their community, what should the state do to get there? And we1417took all those together and we made something, we called the1418bottom-up Economic Development Plan. And it was amazing how1419universal the vision was. Some was obvious, cut red tape and1420needless bureaucracy. Sometimes it was, get a better workforce1421training, stop marketing the state for skiers, but for1422entrepreneurs. But one thing we heard everywhere was to find1423ways to get better access to capital, for people trying to1424start small businesses.1425    So, Mr. Lanza-Weil, I guess I'll start with you. This1426Community Advantage program of expanding access to capital for1427underserved communities. I mean, it supports so many1428entrepreneurs in a variety of small businesses and helps them1429in accessing capital. In many cases, they wouldn't be able to1430find that capital anywhere, they're not from a community that1431has a lot of family money or friends and networks already in1432place.1433    So how has the Community Advantage program made it easier1434for Common Capital to reach some of these underserved1435communities?1436    Mr. Lanza-Weil. Thank you, Senator. I recall you were in1437the brewery business, is that correct?1438    Senator Hickenlooper. I was a brew pub, so it was a really1439a restaurant, but it had a brewery inside of it.1440    Mr. Lanza-Weil. When three of our 41 Community Advantage1441borrowers have been micro-breweries.1442    Senator Hickenlooper. Oh, get out. Really. Who knew?1443    Mr. Lanza-Weil. It's true fact. Every single one of our 411444community Advantage borrowers came to us with a weakness that1445we could not overcome through our standard underwriting. It's1446almost always a lack of collateral.1447    We have people that have saved money for years to have1448their 10 percent equity injection. They've gotten the1449experience they need in their industry. They have a good1450business plan that's reasonable and achievable. They're buying1451assets in some cases with their loan, in the case of Mayrena,1452it was couches and clocks. In the case of a microbrewery, it's1453some hard assets that have more value, but every small business1454that forms it starts up needs working capital. And that doesn't1455act as collateral on its own.1456    So, we've needed the CA program to help bridge the gap when1457we've had a collateral deficiency. And I want to make clear1458Senators, that that doesn't cover the whole thing. The1459guarantees only 75 or 85 percent, or in one exceptional case,146090 percent. We're still taking risk in the formation of that1461business, as is the entrepreneur who's put everything they have1462into it. And if it weren't for the Community Advantage Program,1463we wouldn't be able to make many of those loans. Mayrena1464expressed already that her business wouldn't exist without it.1465    Senator Hickenlooper. Yes. I appreciate that and I salute1466you for all that work. I--all of you really, when I read the1467docket last night, it was really impressive. Mayrena, obviously1468the small businesses are important, not just for the1469entrepreneurs and not just for the employees, but for the1470communities they serve. In many cases, they serve a niche. And1471one of the wonderful things about small businesses in1472underserved communities, people live there. They know what the1473niche is, they know what the community needs. And I think1474that's an advantage that many businesses don't have.1475    You've talked about how the SBA programs helped you start1476your business of Colorful Resilience--love the title. We1477entrepreneurs spend our lives thinking of good titles, good1478names but I love the notion of Colorful Resilience in terms of1479mental health. It's a very powerful image. How would you1480describe the impact of your business on your community?1481    Ms. Guerrero. Well, huge really, because the communities1482that we serve, the BIPOC, LGBT, first Generation immigrant1483communities, have just historically been underserved, just1484forever. And that gap became greater after the pandemic. And1485so, we all know that there's a mental health crisis. There's a1486lack of providers for the demand of mental health services. So,1487our existence and that cultural competency that comes from1488working with providers that have shared identities, has been1489huge. It's a huge impact in the community.1490    For example, my marketing budget is $80; $50 for my1491website, $30 for my Psychology Today directory. Why? Because1492clients come to me. I don't go looking for them. So that tells1493you the impact that it has in the community.1494    Senator Hickenlooper. Absolutely. Amazing.1495    Mr. Lanza-Weil. Senator, may I add to that please?1496    Senator Hickenlooper. You have to talk to the chair because1497I'm out of time.1498    Mr. Lanza-Weil. Madam Mayrena's business is not the only1499culturally competent and focused mental healthcare business1500that we financed. And we have, I think, a total of five mental1501health therapy businesses in our portfolio. But Mayrena's and1502one other are very much focused on people of color and others1503that have been traditionally underserved.1504    Senator Hickenlooper. It's a great example. I'm so glad you1505guys could find time to come here. And I will watch, I've been1506running around, but I'll watch the videos tonight to catch up.1507Anyway, I yield back to the chair. Thank You.1508    The Chair. Thank you. Senator Hickenlooper. Okay, we're1509going to try this again. Thank you very much. To our witnesses,1510thank you again for being here today, really productive1511discussion. Thank you for making it in right before the fall of1512the gavel.1513    So, at this time, I will ask unanimous consent that the1514record of today's hearing remain open for two weeks for members1515to submit questions, revise and extend their records, and1516submit additional information into the record. Without1517objection. So, ordered.1518    [The information referred to follows:]15191520    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]15211522    The Chair. And with that, the Committee on Small Business1523and Entrepreneurship stands adjourned. Thank you all very much.1524    [Whereupon, at 3:51 p.m., the hearing was adjourned.]15251526                                  [all]