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Hearing of the Senate Small Business and Entrepreneurship Committee - Small Business Financing: Progress Report on Recovery Act Implementation and Alternative Sources of Financing

Location: Washington, DC



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SEN. MARY LANDRIEU (D-LA): The Small Business Committee of the U.S. Senate will come to order. And I thank our administrator for joining us who will be on our first panel, and we have a distinguished second panel which I will introduce in a moment.

But let me just thank Senator Wicker for sitting in for our ranking member -- (audio break) -- Snowe has laryngitis. So a senator that can't talk I'm not sure is worth much. Don't say I said that -- no, she's fine, but she just has lost her voice. So, Senator Wicker is here, and I thank our committee.

Let me begin by saying that our committee today is focusing on our continued focus on the challenges before small businesses relative to the credit markets. This is the third of a series of hearings that we've had relative to our credit markets.

We've made it a priority in this committee to look into why small businesses are having difficulty borrowing money, what can be done to get capital into their hands because we understand as you do, Administrator Mills, that if any group is going to lead us out of this recession, it's going to be the group of our million plus, millions and millions of small businesses, creating jobs here in America.

Over the last four months, we have looked at a variety of sources of small business financing. I'd like the staff to put up the charts that show where small businesses are getting most of their financing. And as they do that, I'll continue. At our past hearings, we've heard from several types of lenders. We've heard from large national and international banks, our community banks, and from lenders that provide small business loans.

As you can see here, however, most businesses are getting their at least short term capital and in large measure a lot of their capital from credit cards, traditional bank loans -- vendor credit comes second -- and other types of financing down the line.

Today we're going to hear from a credit card company, a community development credit union, and a micro lender to talk about their positions in lending.

Since our first hearing in this Congress, President Obama has signed the Recovery Act into law. The legislation included key suggestions made by ranking member Snowe, and myself, and members of this committee. We made temporary changes to the 7(a) loans, reduced fees associated with those loans in the 504.

We're going to hopefully hear today that the lending has increased, which we hoped when we put these provisions in place. We had five primary objectives: unfreezing the secondary market; establishing more capital to small businesses; encouraging risk- adverse banks to lend money; free up microloans and venture capital; and to get emergency short-term loans to small businesses having trouble.

I'd like to welcome Administrator Karen Mills. This is our first hearing since your confirmation. We all look forward to the report that you're going to give us today on the implementation of the Recovery Act and small business provisions as well as the $15 billion in TARP money that we've allocated for the purchase of 7(a) loans and other SBA backed loans.

Let me just say, in addition to the alternative sources of financing in our second panel, which I'll introduce after this panel, we're going to be specifically focused on the credit card industry and what they may be doing to assist the millions of small businesses that they help and support.

We've learned a lot. I'm going to short this opening statement by submitting the rest of the record, but we have learned a great deal, senator, in the former hearings that we've had. We hope that the testimony that we receive today will give us an opportunity even to streamline and bring to bear some additional help and support either administratively or legislatively about what this committee can do to really support the small businesses that are in America today that are trying to get started, trying to grow, and trying to create the kind of jobs that will lead us out of this recession to recovery.

Let me then turn to Senator Wicker for an opening statement and then Senator Hagan, if you'd like to say anything before we start. Thank you.

SEN. ROGER WICKER (R-MS): Thank you, Madame Chair, and I appreciate you convening this hearing to gauge the administration's progress in implementing the stimulus lending provisions and to highlight alternative sources of credit available to small businesses.

Thank you, Administrator Mills for being here today and for your willingness to testify concerning the implementation process. And thanks to the members of our second panel for taking the time to join us and for sharing your experience in providing alternative source of credit to small businesses.

On a point of personal privilege, Madame Chair, I'm pleased to note that one of those members of the second panel is Bill Bynum, a fellow Mississippian. Bill leads the Enterprise Corporation of the Delta and the Hope Community Credit Union. This is a nationally recognized leader in providing financial development to low wealth communities, not just in Mississippi but across the region.

And I'm glad that Bill is here to join us. It's my regret that I will not be able to stay and hear his testimony, because these day there are not enough Republicans to go around, and I'm called upon to attend a couple of other committee hearings at the same time.

Small business creates two-thirds of all the jobs annually, playing an invaluable role in our nation's economy. But in order to lead us out of the recession, we must be able to ensure that small businesses obtain the credit needed to start improve and expand their operations.

Unfortunately, we all know, as I've certainly heard from small businesses in Mississippi, the current economic crisis has been particularly difficult on small business credit.

In fact, in the first quarter of fiscal year 2009, the number of SBA 7(a) loans dropped by 57 percent when compared to the first quarter of fiscal year 2008. And earlier this year, projections were that the SBA would guarantee less than $10 billion in 2009, half of what it normally guarantees in a typical year.

Fortunately, in recent weeks, SBA 7(a) lending has increased. The bad news is that we are now a full 85 days after the passage of the stimulus, and yet, according to the GAO, only two of the eight major administrative provisions in the Stimulus Act have been implemented.

Clearly, the administration must do everything within its power to implement the remaining provisions as soon as possible. The administration must act responsibly to ensure that these taxpayer funds are safeguarded and that the SBA's lending programs are targeted, relevant, and effective.

Administrator Mills, we appreciate the opportunity to hear what the SBA is doing to implement these provisions and the protections the agency is putting into place to ensure the program's success.

I would be remised not to discuss the critical role that alternative sources of finance have played in funding small businesses. Credit unions, community banks and innovative outside the box thinkers play a vital role in filling gaps in small business lending. Where others have failed, these sources have stepped up to provide a lifeline to small businesses in need.

So, thank you to our second panel for sharing with us your innovative solutions for providing alternative sources of credit to small businesses.

Again, Madame Chair, I thank you for calling this hearing and I hope that it, in fact, sheds light on the issue.

SEN. LANDRIEU: Thank you, very much. Senator Hagan, your statement?

SEN. KAY HAGAN (D-NC): Thank you, Madame Chair. Just thank you for convening this committee and I'm looking forward once again to hearing administrator Mills' comments.

I'm still hearing a quite a bit of concern back in North Carolina about the unavailability of getting credit, so I think it's very important that we continue to pursue this and see what we can do to push this along. And I look forward to hearing the testimony of the next panel. Thanks.

SEN. LANDRIEU: Thank you, Senator Hagan. Senator Levin?

SEN. CARL LEVIN (D-MI): Thank you very much, Madame Chair, for calling this hearing. The credit crunch in Michigan is immense. The SBA has been given some real tools to try to address that problem. Some of the -- most of tools have not yet been implemented which is discouraging for those of us who work so hard to get that bill passed that provided those tools.

There are many, many examples that I could give of small businesses in Michigan that are creditworthy. They've been going on for a long period of time, and suddenly, credit is cut and that means they're going to go out of business unless SBA move much more quickly in the direction that we indicated when we passed the stimulus package.

So I'll save my questions for later, but I want to thank you, Madame Chairman, and thank our administrator for being here and hopefully give us some good news about moving some of the secondary market proposals forward. For instance, I have some additional proposals which have been adopted by this committee before, not then make it into law because they weren't accepted by the House but now may be very, very timely.

But I'll save that for question time, and again, join you in welcoming our administrator and thank you for whatever success she can have in getting our direction moving.

SEN. LANDRIEU: Thank you, Senator Levin. And your voice is particularly important being the senior senator from Michigan, an area of our country that's been very hard hit and the people of Michigan should be very grateful to have you and senator's staff now here who have been a constant advocacy on their behalf, one area of the country that has been very hard hit.

Karen, Mrs. Mills, if you would begin now with your testimony, and then we'll have a round of questions. We are expecting votes, and if so, we're going to try to keep the hearing going through votes as members can rotate to the hearing. Please, proceed.

MS. KAREN GORDON MILLS: Thank you, Chair Landrieu and members of the committee. I'm honored to testify before you.

Today, the SBA's top priority is to implement the Recovery Act and to put our programs into the hands of America's entrepreneurs and small businesses so they can lead our economic recovery as they've done so many times over the course of history.

When I testified last before this committee, I described the credit crunch facing small business as a set of interrelated problems. Many borrowers are less credit worthy. Many banks have tightened their lending criteria. Many banks are also concerned about adding additional loans to already stressed balance sheets. And the lack of liquidity in the secondary markets prevents banks from selling off loans to make room for new ones.

The Recovery Act's SBA funding was designed to address these issues and to get capital flowing. While these problems still exist, I'm pleased to report that we're getting this funding into the market and it's beginning to work.

First, of the SBA's $730 million in Recovery Act funding, over half, $375 million, was targeted to temporarily increase the guarantees and to reduce or eliminate fees on certain 7(a) and 504 programs. These are two most popular lending programs.

On March 16th, we announced the availability of these funds and we offered up to a 90 percent guarantee on the 7(a) loans and the elimination of all the fees on the 504 loans, all the upfront fees on the 504 loans and the borrower fees on the 7(a) loans.

The results are good. And as you can see from the chart, which is now over here, the weekly loan volume is up more than 25 percent compared to the weeks prior to the Recovery Act's passage. It's 28 percent in the 7(a) program and 22 percent in the 504 program.

Now, Senator Landrieu asked us to think a lot about adding banks to the program, and this increased lending is partially due to the fact that lenders are returning to the 7(a) programs while in some cases participating for the first time. More than 1,200 lenders have approved 7(a) loans as part of the Recovery Act. And of these, more than 360 had not made a loan since October 2008. And almost half of those lenders had not made a loan -- so that's over 150, 160 lenders had not made a loan for two years since 2007.

In total, more than 100,000 Recovery Act loans have been approved, representing $3 billion in credit supporting small business. We project these loans will save or create tens of thousands of jobs throughout the country.

We're also pleased with the wide diversity of Americans who are benefiting from these loans. According to a recent Urban Institute Study, SBA-backed loans are three to five times more often made to minority and women owned businesses.

So, as shown in our second chart here, 22 percent of the Recovery Act loans have gone to minority-owned businesses, 19 percent to women-owned businesses, 9 percent to veteran-owned businesses, and 25 percent to rural businesses.

The Recovery Act also provides funding for two other loan programs, one existing and one new that I'd like to discuss at this time. The Recovery Act supports an additional $50 million in loans to micro lending intermediaries and $24 million in technical assistance to accompany these loans. This is on top of the regularly budgeted funding for this program which is currently available.

In order to effectively deploy the funds, we are working to attract new like micro lending partners to the SBA and to automate processes in order to broaden the reach of this program.

In addition, the Recovery Act provides funds for America's Recovery Capital or the ARC loan program. The ARC loans are the $35,000 loans that are designed to help viable small businesses who have economic hardship, and they need some kind of bridge over these troubled waters, so that's why we call them the ARC loans.

The ARC loans are going to pay the principal and the interest on non-SBA debt for up to six months. The Recovery Act allocates $255 million for these loans. We expect them to be in high demand. We're going to have more information on these loans actually next week when we have Small Business Week.

Beyond these four Recovery Act programs, on May 1st, we announced an alternate size standard for SBA's 7(a) program that temporarily expands eligibility by using the same standard that we use in the 504 program. We estimate that this step will mean approximately 70,000 additional small businesses will now be eligible for SBA financing.

In addition, our 68 district offices and our more than 14,000 affiliated counseling partners are reaching out to borrowers and lenders to help them understand all of the options for refinancing other loans into 504 and 7(a) loans during this difficult time.

Another area I'd like to discuss with you is SBA's work to ensure that America's small businesses have a fair share of the Recovery Act contracts and subcontracts. To accomplish this, we are making sure that the states and the other agencies issuing contracts are aware of the benefits of working with small businesses.

And just last week, I sent a letter to all the governors -- and I think we may have copies for you of this letter -- urging them to reach out to small businesses about contracting opportunities. We're also doing another thing which is that we are working to provide an online listing for small businesses of all of the subcontracting opportunities that are possible through the Recovery Act.

Also, on March 27, the SBA implemented the Recovery Act provisions that raised it from $2 million to $5 million -- thank you Senator Cardin -- the maximum contract amount that can qualify for an SBA surety bond guarantee. This change allows small businesses that might not otherwise qualify, the opportunity to compete for larger Recovery Act contracts.

The SBA is focused on implementing the Recovery Act programs responsibly, transparently to help foster entrepreneurship and job creation, to restart lending and to invest in small businesses. As part of that, I'm committed to optimizing the SBA's programs by investing in our people and in information technology. Our nation's economic recovery will be driven in large part by America's small businesses and entrepreneurs, and the SBA will be the critical partner they need in the midst of this crisis.

Before I close, I'd like to invite you all and your staff to come to National Small Business Week. We're going to recognize small business winners from every state, as well as award honors in categories including lenders, government contracting and advocates for small business. And, we'll recognize the accomplishments of small businesses who have overcome the challenges of natural disasters. We hope that you will join us for these events.

I'm going to be pleased to take your questions and comments.

SEN. LANDRIEU: Thanks. Thank you very much, Administrator Mills, and I do have a few. We'll start with our first round of questions. If you could comment about the -- you touched on this, but the progress we're making in unfreezing the secondary markets for either the 504 loans or the 7(a) loans, I think we establish in the recovery package a fairly significant, I think $15 billion, effort to Treasury. Can you give us a report on what the secondary market situation is in that initiative?

MS. MILLS: Yes. The secondary market, as you know, is one of the critical elements in un-sticking the credit markets for small business. And the reason that it's important, as you know, is that banks will make loans, but they often sell the guaranteed portion of those loans into what had been a fairly active secondary market trading about $300, $350 million, at least, per month. And those loans then would be off their books and they would have liquidity to be able to make another loan.

In the fall of this year, the activity in those markets pretty much dropped and they were frozen. Broker dealers at that point did not have liquidity, and one of the things that you all did in the Recovery Act was put in a provision which we are implementing for loans to broker dealers in order to let them borrow which they couldn't at the time.

As it turns out, that problem has resolved. There are 12 broker dealers in that pool. We have been in touch with most of them and they do have sources of liquidity now, so that issue is good. We are, in any case, implementing that program in the Recovery Act.

But in addition, the concern was broker dealers might have liquidity, but there were not investors. So, as you know, on March 16th, we partnered with Treasury, and Treasury is providing $15 billion of TARP money which would be available to purchase any loan that a bank would make and want to package and sell on the secondary market. We are working that program with Treasury and expect to be able to use that to clear the secondary market.

Fortunately, some other good things are happening in the secondary market. In the last month, TALF, which was also a program between the TARP money and the Federal Reserve, had one of their -- I think their third sale. In that sale, $84, $87 million of SBA loans traded and those were the first loans to trade through TALF. So that's also a good sign.

If you look at the loan volume, it is -- it's come straight down in October. It didn't recover until the last two months it has began to recover and it's back up to about a third to 40 percent of what it was. So we're seeing quite good signs in that market. That will not stop us from implementing the other programs that we have.

SEN. LANDRIEU: So the bottom line on that is your testifying that prior to the setback, this market was trading at about $350 million a month. It's recovered up to about $84 million. Is that what your testimony is?

MS. MILLS: Actually, it's recovered to $185 million.


MS. MILLS: So it was trading at -- sorry -- $328 on average through the six months, between January and when it really fell off which was September. So it was $328 million, up and down, up and down but on average. Then if fell way down to about $100 and is back up to $185.

SEN. LANDRIEU: That is a good sign. Let me ask this. On the second panel, one of our witnesses is going to testify to some problem related to the micro-borrowers. The question is: does the SBA plan to allow the microloan technical assistance fund to be used for existing loans? This is an issue that's been raised. You may not be able to stay through the second panel so I thought I would ask you now. Do you have any comments on that issue?

MS. MILLS: We have loan subsidy to provide about $50 million of new micro-loan availability through the stimulus pack. We also have the 2009 and potentially the 2010 micro-loan budget. Senator Hagan knows. We have some terrific potential micro-lending partners that we can add to increase our reach through this program.

This is a very powerful and important program. We are doing some internal investment particularly, as we told you, in information technology. The current system is a paper system.

We are automating it.

So we are working very hard to be able to automate this process, to make it easier to give these loans, and to coordinate and assess best practices, not only in micro-lending but in the application of technical assistance so that when we put -- there's plenty of availability right now in these markets but we have additional availability to come.

SEN. LANDRIEU: Thank you. And my time is almost concluded, but I have to ask given this is the early part of May. Hurricane season starts June 1st. We've worked as this committee in a bipartisan basis to give the SBA new tools to better respond to disasters, particularly mega-disasters or catastrophic disasters as was the case in Katrina and Rita.

Could you give just a brief, maybe one minute update about the progress that you've been making in that regard? Should we face a monster storm again, whether it's in North Carolina or South Carolina or Georgia, Florida or along the Gulf Coast, our people could have some confidence that there's a better program ready to go at SBA. Would you just give a minute comment about that?

MS. MILLS: Yes. Thanks to your impetus, we have spent -- we have invested heavily in planning, not just for our existing disaster operations which are functioning quite strongly right now but also for a very large disaster. And we have now incremental plans in place for various levels of increased activity. As of now, we actually go first to tornado season, unfortunately, and then hurricane season as well. So we just had a briefing on it yesterday and those operations are in very good shape and are ready to go.

SEN. LANDRIEU: Thank you. And we'll go, if we could, in the order of appearance. Senator Hagan?

SEN. HAGAN: Thank you, Madame Chair. And, Administrator Mills, thank you so much for your tireless work already. But it's obviously such a problem for small businesses to know where to turn and how to get the help they need.

But, last week in Durham, I held a small business roundtable and it was primarily for minority contractors and small business owners to look at how to get money under the stimulus projects within the State of North Carolina. But there are a lot of small businesses there and they were also concerned a lot with any sort of financing and help that they could get through the SBA.

And I was just wondering: how has the SBA worked to raise awareness among current and aspiring small business owners of the loan opportunities that we worked with the administration to create? And is there more that can be done to expand that outreach?

MS. MILLS: Well, as you know from my testimony before, I'm a big believer in the benefits of having a small business as a contractor. You get the most innovative ideas. You can get the CEO. You can get the top management working on your contract. So this is a win-win. So it's good for the spending of the taxpayers' money to get it to small business and it's good for the small business and the economy.

What we have done, as I mentioned, I did write to all the governors to urge them, but, in addition to that, we're doing something interesting on the website. We have created, with some partners -- if you go to and you look at our Recovery Act area, we will have a list of all of the -- we're going to populate it with all of the subcontracting opportunities. Usually, the prime contracting opportunities are quite visible. But small businesses might tend to be more eligible for the subcontracting opportunities. And we are going to attempt with others to collect all that and make it available online.

In addition, we are pushing out through this very powerful network that we have between our counselors, our field operations, our lenders the availability of these contracts. And we have had offers from everyone from the chambers to some of the folks you're going to hear from this afternoon to help us publicize some of these places that you can find out this information. So we are determined that taxpayers get the benefits of small businesses as contractors.

SEN. HAGAN: I think that's an excellent start. And I was just wondering from that comment about the bonds. A lot of the small businesses have such a heart into small contracts which have such a hard time being sure that they can get the bonding.

MS. MILLS: Well, thank to this committee and the leadership here, we have the opportunity to give even larger bonds. And so, our bond program is out and available, and I've been told that bonding in general is down 10 percent and our bonding programs are only down 7 percent. So we are out there active at least in even a little better than the market.

SEN. HAGAN: Thank you.

SEN. LANDRIEU: Thank you. Senator Levin.

SEN. LEVIN: Thank you very much, Madame Chairman. Let me first ask about the relationship of SBA to the TARP program. You made reference here that there's going to be some TARP money which is going to be used to buy up packages of loans. But have you put pressure on the Treasury to put pressure on the banks which have received TARP funding to unfreeze credit, particularly for small businesses? Has there been any direct contact between you and the folks at Treasury to add your voice to unfreeze this credit by telling some of the banks that have gotten such huge amounts of TARP money that they should use that money for unfreezing of credit?

MS. MILLS: Yes, sir. Absolutely.

SEN. LEVIN: Had any luck?

MS. MILLS: Yes, sir. I promised -- I think it's one of my three priorities to be a voice of small business through the administration. And I'm pleased to say that it is not a difficult task in that I've been invited into these discussions.

The Treasury takes very seriously -- and has been proactive about the issue of small business. So we have had these discussions on a, well, more than weekly basis. And we share, I think, a tremendous amount of frustration with our small businesses that there are these difficulties getting credit. So, yes. The answer is we are really very much partners in this discussion.

SEN. LEVIN: Well, if you could supply some examples of success where you've had some banks that have responded to pressure to open up lines of credit as a result of your intervention or the Treasury's intervention, just let us know for the record, because I, at least as one senator, do not have the impression that there's been much heat on the banks receiving TARP funds to unfreeze credit for small businesses and for other purposes.

So give us some examples for the record, if you would, where there's been some success? I know you're fighting for it, but I'd like to see that there's a response on the part of Treasury. And all these banks are getting these huge TARP funds. I don't have the feeling -- I think there's a bunch of my colleagues who share my angst in this regard that there's much of a response on the part of the banks receiving TARP funds. So I'll leave that for the record if you could supply some of that.

MS. MILLS: I absolutely would be delighted to come back to you on that, and I want to reiterate that there is a really strong commitment and I believe we're seeing some signs of progress, so we'll come back to you.

SEN. LEVIN: The last couple of years in SBA reauthorization bills, I've offered a pilot program called the small business intermediary lending pilot program as an amendment in order to make available low-interest midsize loans right above the lowest loans, that we have the microloans, so that this program on a pilot basis would make loans available from $35,000 to $200,000. Our chair has been very supportive of it. It has passed this committee. It's passed the Senate once. We didn't have support from the administration before.

I'm wondering whether if you are familiar with this amendment. Could you comment as to whether the Obama administration would support the amendment? If you're not familiar, could you let us know for the record whether we could get some support from the Obama administration for this pilot program?

MS. MILLS: Yes, senator. I have read your amendment. And I was very, very pleased to read it because we have -- as you know -- a very robust microloan program but it's capped at 35,000.

And the average loan is 12,000. We believe that there is a gap, and as you have described, in the lending above that 35,000, and that there will be a very strong need that would be highly consistent with the principles and missions of the agency.

SEN. LEVIN: Okay. Well, that would be very helpful. Let me refer you to the acquisition reform bill that just passed the Senate that I introduced with Senator McCain. It passed the Senate -- first it passed the Armed Services Committee unanimously then passed the Senate unanimously last week.

There's a provision in there we should not give much attention but which will do exactly what you just described a few moments ago which would be opening up subcontracting more in the defense contract area to more bidders. So it would be more competitive. That would open up the door to small businesses. There's going to be some opposition perhaps to that provision as it goes to the House. We don't know for sure.

But if you could furnish that language to your staff and they could look it up. It's in the so-called Levin-McCain bill that just passed unanimously and it would be very helpful to small business if we can keep that provision in, and if the House is not already supportive of it, if you could take a look at it and see whether or not the SBA could weigh in on that, because it is exactly along the line you just talked about.

MS. MILLS: Thank you. We will follow up on that provision.

SEN. LEVIN: Thanks so much.

SEN. LANDRIEU: Thank you, Senator Levin.

Senator Cardin.

SEN. BENJAMIN CARDIN (D-MD): Thank you, Chairman Landrieu. Administrator Mills, it's a pleasure to have you before the committee. I very much appreciate your testimony. It's wonderful to have you where you are, on behalf of small business. And I want to follow up on some of Senator Levin's concerns.

First, let me start with the direct SBA programs because I think the information that you've presented us today is encouraging to see the growth in SBA loans. And I particularly want to acknowledge and thank you for providing the information on the diversity of the loans. That, to me, is a very important factor for us to look at and I think the information you provided is very helpful.

I would ask that we get this information on an ongoing basis so that we can compare the demographics within the small business community, the number of small businesses that are minority businesses, that are women-owned businesses -- I might also add veteran-owned businesses -- and that we can see how we have done from 2008 and 2009 so we have a chance to track efforts made to improve diversity. But I thank you for initiating and bringing this information to our committee. It's certainly refreshing.

Senator Levin talked about the TARP programs and how small business is tapping into it and has raised some concerns. I want to get to the government procurement part. The American Recovery and Reinvestment Act provided substantial funds for government and procurement. I might mention in the NIH alone there's about $10 billion. And we are concerned about the SBIR program and the STTR program.

And we have -- there's been communication by the chairman of our committee, by the ranking member of our committee, Senator Feingold and I have written letters to the people at NIH to see how these funds are going to be allocated to make sure small businesses get their fair share.

And quite frankly, we haven to gotten a positive response. And I would hope that you would take it as your mission, as the advocate for small business, as you've already indicated, to weigh in and make sure that as these procurements are being awarded. There's not only knowledge of the opportunity of small businesses and not only trying to make the connection between the small businesses and the government agencies, but we have an advocate to the government agencies to say, look, you can do better.

Let's do it. This is going to help our economy. Historically, there's been too many agencies that haven't deal with tier obligations here. Here you have a growing pie, money that's available. You should be reaching out to correct some of the historical neglect overtime. And I would just hope that you would take that as you mission to reach out and help small businesses get a larger share of those procurement dollars.

MS. MILLS: Senator, I will take that as my mission, and that is a critical mission of the SBA. As I was saying earlier, I believe this is a win-win proposition, that those who use small business in subcontracts and contracts get the benefit of some of the best and most innovative companies. They might need some help in finding the small businesses and we can help, I think. Senator Enzi had that great model of a procurement fare. We are thinking about all kinds of ways, whether it's online or in person or through our network to make these matches.

I also take your point and feel very strongly about the SBIR program, and that all the agencies know and have seen the very, very positive results from SBIR in terms of small business and innovation, small businesses who take research and development and innovation and turn it into jobs, and they have very, very strong results which we've seen from a National Academy study. So I will go forward and take that as my mission.

SEN. CARDIN: Thank you for that. Just to point out, in my own state of Maryland, we had so many companies that would fall into the SBIR program, small companies. And we were extremely disappointed by the replies we've gotten to date and we're glad to work with you on that from the NIH. They should be doing better and small businesses are going to need your help. I assure you this committee is going to weigh in as heavily as we can, but we need the help of the SBA.

One last point, I appreciate you mentioning the surety bond issues. I think it would be helpful for us if you could supply similar information on the volume and amounts on the surety bond programs of your activities so that we can also monitor how the change in law is impacting on the availability of surety bonds.

MS. MILLS: We'd be happy to do that.

SEN. CARDIN: Thank you. Thank you, Madame Chair.

SEN. LANDRIEU: Thank you, Senator Cardin. Because of your urging, I'd like to remind the committee we are having a hearing on this subject next week on contracting and procurement. Because of Senator Cardin's particular interest and our committee's interest in making sure that the billions of dollars that have been allocated, at least small businesses that are struggling to stay afloat, retool, reshape, redesign based on the challenges of this economy have a fighting chance to get business but also by doing something of great benefit for the nation, the taxpayers. So I'm looking forward to this hearing, Senator Cardin, and we'll look forward to having you as one of our star witnesses.

Senator Shaheen.

SEN. JEANNE SHAHEEN (D-NH): Thank you, Madame Chairman. Administrator Mills, it's very nice to see you before the committee in your official capacity this time.

I also want to thank you and all of your staff for so quickly implementing the new alternative size standard definition that many of us advocated for us. We were talking about what more could be done to help auto dealers and small businesses who didn't quality under the previous standard, so thank you all for moving so quickly on that.

And just to follow up, give you an opportunity to talk a little bit more about what else you're doing, you and I spoke on Monday about how the status of SBA's work to help address for plan financing for auto dealers. And I wonder if you could talk a little bit about that now, about what you think the progress is and what the future holds.

MS. MILLS: Thank you. As you said, we were able to move quite quickly on the alternative size standards.

And this is something actually outside the Recovery Act but that we all had discussed, I think, with this committee prior to the Recovery Act.

It turns out that that is a very powerful tool for many, many kinds of businesses, but the automobile dealers did respond and said that it would be particularly helpful for them in these troubled times because what it does is it uses the 504 standards which are net worth and their income standards as opposed to sales and revenue standards, and that means that an auto dealer who might have a higher revenue but really not as much net income but does quality as they should to receive the SBA financing. So this would provide a bridge for them, the access for them to SBA guaranteed products in this time of transition. So they were happy with that.

In terms of floor planning, when I was here last time, I promised you that we would take that up, and we have. We are moving forward and carefully calibrating a plan that has the appropriate risk levels but does allow SBA products to be used to finance various kinds of floor plans. Senator Bayh asked that we consider RVs. We've talked about boats for Senator Snowe was also interested, and of course, autos. And we expect, as I said, to move forward with that in the very short timeframe of weeks.

SEN. SHAHEEN: Good, while I'm going to speak to the American International Automobile Dealers tomorrow and I will share with them what you've just said. They will be very pleased to hear that.

I'm very excited to hear Senator Cardin's comments and your response and the fact that we're going to be doing more around procurement. When we ask small businesses and our e-mail network in New Hampshire what questions they most wanted to have asked before this committee, that was the number one concern we heard is what more could be done to help them as they're trying to figure out how to get government contracts.

And you talked a little bit about the website and some changes to the website which will help with that. Are there other ways that you're thinking about trying to get the word out about what people need to know and provide additional help to small business as they're trying to get through the labyrinth of government contracting?

MS. MILLS: Yes. We are looking at all kinds of ways to communicate. We have not, I think, reached out in the past in quite these kinds of ways, but we have some very strong ideas.

So, there's sort of several categories. There's direct to those agencies and governments that are letting these contracts. There's our network, our own counselors and field officers.

And then, in addition, we have some interesting best practices as we talked about for sort of on-the-ground procurement, connections in fares.

And lastly, we have been offered the chance to partner with some people who have a large number of small business customers. And these would be retail operations, and that they would be loaning to in their communication to their members and to their customers help us connect them to whether it's small business contracting opportunities or SBA products.

So, we feel -- sometimes, in a difficult time, doors open and you get more opportunity, and we're going to try to take advantage of that.

SEN. SHAHEEN: Thank you very much.

SEN. LANDRIEU: Thank you. As we wrap up this first panel, just two things that come to mind, following up on just what you said, I had the occasion to meet actually with representatives from Wal-Mart and Sam's Club. It reminded me when I was in that meeting with them that Costco would be in the same situation and there would be probably one or two large regional operations that I'm not familiar with because they operate in different regions in the country.

But it brings me to the fact that these large retailers are really service organizations to small businesses throughout America. They have millions and millions of customers that are small businesses, not just individuals.

And I'm glad that you mentioned, to acknowledge them as a source of help and support getting out information, relaying information. They do surveys as businesses would or not. You and I have spoken many times about the SBA being sort of an agile muscular partner to small business by using not only what is traditionally under the umbrella of the small business agency but the partners that are available and willing if we would tap into them appropriately. So I'm very happy to hear you following up on that and we will continue to communicate.

And finally, before our call, following up on the floor plan financing which Senator Shaheen has been the leading advocate on this committee and I really appreciate that along with Senator Levin.

But as the news comes down from Chrysler and GM and the other large auto manufacturers about the way their dealers are going to have to be restructured in some situations. As you know, they're predicting that many dealers will go out of businesses or have to retool or refocus.

Is the SBA thinking about any special outreach or plans to some of these auto dealers that are -- in all of our states -- that are well established to try to help them get to a safe place through this massive change that's actually occurring now and will continue, I would imagine, for some time in the near future?

MS. MILLS: Yes. As I said, we have been invited in and included in the automotive task force discussions and have been very much at the table in discussions about suppliers and dealers. And one of the things that came out of that really was this alternative size standard which ends up being so relevant to the dealers. So we are very much in communication with those groups.

We think that, in part, that is our role, at the appropriate risk level, to be engaged with some of these entities which are the pillars of their community and they support much of what's happening on Main Street. They're very, very much important to the community banks, and if we can be there with the kind of credit support that we do provide with community banks and with others through our product lines, that would be an important role for the SBA.

SEN. LANDRIEU: Thank you. Thank you, very much. And Ms. Mills, do you have any final comments before we close this panel and move to our second one?

MS. MILLS: No. Thank you very much. And again, I hope you might join us for Small Business Week.

SEN. LANDRIEU: Thank you very much. If the second panel will come forward, we're going to begin. As they come forward, I'll introduce them because of our time constraints.

We will hear, I think, first from Ms. Sobbott, president of American Express small business program which is called OPEN. Mrs. Sobbott has been invited here today because her company is the largest card issuer for small business in the country. She has been with American Express since 1990. For the past four years, she's been general manger of OPEN, the company's second largest business unit.

Ms. Marianne Garvin is our second witness. Ms. Garvin is the president and CEO of Community Development Corporation of Long Island. CDC of Long Island has been a micro lender for the past 13 years; was formerly accepted as an intermediary in the SBA microloan program in 2000. She will be speaking about the importance of micro lending and the problems that some borrowers are facing due to the economic challenges.

Mr. Bill Bynum, CEO of Enterprise Corporation, recognized by Senator Wicker earlier, but I want to say was also recommended by State Senator from Louisiana Lydia Jackson who speaks very highly of you, Mr. Bynum. And I'm happy to have included you in the panel on her recommendation.

You're in a unique position to talk about the community development financial institutions to address some of the challenges facing small borrowers and micro borrowers along the Gulf Coast. Of course, you've been very active in the effort to rebuild after Katrina, so we're anxious to hear from your today as businesses struggle to gain credit.

In a situation that is actually not un-similar to the one districts in Michigan and Ohio are going through, I mean, we were affected by tremendous natural disaster with some manmade help when the levies broke. It wasn't completely nature but man inflicted on ourselves.

But the economic downturn has laid waste neighborhood after neighborhood in places in the country. So perhaps some of the experience that you share with what you've done can really help -- what we've done can really help others.

And finally, Mr. Stephen Watkins is our fourth witness. He's the founding chairman and CEO of ENTREX, a company based in Chicago. He's here to speak to us about emerging forms of financing for small business and how this model might work.

So, again, I want to thank the members of our committee for pushing hard to try to give voice to places where small businesses can find credit and access that market, not just through the large international and national banks, not just through community banks but through credit card companies, through micro lenders, through nonprofit organizations and through emerging opportunities.

We want to explore all of these to see what is working, what's not working, and how this committee can suggest to the Congress and to the administration how we can step up our work to get much needed capital at affordable rates into the hands of small businesses that will lead us to recovery.

So, Ms. Sobbott, why don't we start with you, please? And thank you very much.

SUSAN SOBBOTT: Chairwoman Landrieu and members of the committee, thank you for inviting me here today. My name is Susan Sobbott. And my background with small business goes back to my childhood. My father owned a small trucking company in New Jersey, and growing up. I saw firsthand both the joys and the challenges associated with running a small business.

I'm now president of American Express OPEN, a division of American Express dedicated exclusively to small businesses. We are the leading small business card issuer in the U.S. based on purchase volume. I'd like to share a few thoughts from my submitted testimony.

From our perspective, the current small business environment is being shaped by three important factors. First, demand for small business goods and services have declined dramatically. Second, the weakening economy has affected the delinquency rates, health and sustainability of businesses across all sectors and all geographies. However, of course, it has most intensely affected those markets at the nexus of the housing market decline. And third, payment behaviors across the U.S. business system have slowed. Accounts receivable remain outstanding longer and business owners are facing increased cash flow pressures meeting their payables.

Through our latest survey of business owners in April, we learned that 60 percent report cash flow concerns. This is an increase of over 10 points from previous periods. Among this group, one in five worry about their ability to pay their bills on time.

True to the resilient entrepreneurial spirit, however, small business sentiment as reported this spring has rebounded following a steep drop last fall. In fact, 80 percent of small business owners would prefer their job over yours or mine.

Managing cash flow requires resources. And as you know, American Express is one credit resource among many. Unlike banks, we provide short and medium-term unsecured financing exclusively through our payment card products.

Our primary products are pay-in-full charge cards which carry the majority of our card member spending. We also offer credit cards that allow our card members to revolve the balance.

Our focus is to conveniently facilitate the spending of our card members not on increasingly lending balances.

OPEN has seen a slowdown in spending reflecting the overall weakness in the economy. In addition, that weakness has increased our card members' delinquency rates and the reduced level of credit we can provide in some cases.

On average, the credit line for our small business card members has remained somewhat steady over the last several years. However, as a responsible lender, we have reduced lines of credit or canceled cards with greater frequency over the last 18 months. This happens in cases where we believe the card member may not be able to repay the additional debt that they could incur. We take every decision we make seriously. And we understand we are at times disappointing our customers.

As we manage through this difficult environment, as you would expect, we are striving to achieve a balance, a balance between the needs of our business customers and the importance of prudently managing rising credit risks for our company and for our small business card members.

America's small businesses are the engine of our economy, and their ingenuity and resourcefulness will certainly help lead us out of this recession. I applaud the recent initiatives by the administration and Congress. They will jumpstart the economy and assist in facilitating access to capital for small businesses.

Importantly, small businesses need more business. That is more customers to drive their revenues. Federal, state, and local governments can, in fact, be those customers. Knowledge of government contracting opportunities is essential, and I was happy to hear Administrator Mills agree that the SBA could play a greater role.

One suggestion, which appears to be somewhat in the works, is for the SBA to build a small business search engine to navigate the stimulus dollars available for bidding. This would allow businesses to quickly identify places where they could compete for government contracts. At OPEN, we would welcome the opportunity to link our entire base of card members with such a service.

OPEN will continue to serve our customers through and out of this turbulent economic environment by providing short-term financing to help manage cash flow and buy providing opportunities for growth.

Thank you for the opportunity to share our perspective. I'm happy to answer any questions.

SEN. LANDRIEU: Thank you very much.

Ms. Garvin?

MS. MARIANNE GARVIN: Thank you, Chairwoman Landrieu and honorable members of the Small Business and Entrepreneurship Committee for the opportunity to testify today and contribute to this hearing on alternative sources of credit for small businesses.

It is my hope that by sharing the perspective of a not-for- profit lender in suburban Long Island that your policymaking will be informed by realities on the ground both for the small businesses we assist and for our organization which is a small business also employing nearly 90 people.

Community Development Corporation of Long Island is a 40-year- old not-for-profit. And we are a NeighborWorks organization for about 10 years. About 13 years ago, we started lending in the community.

We started this -- I want to tell you a story -- about the North Amityville community which is in the town of Babylon on Long Island. The four corners in North Amityville, a minority, low-income community was inundated with drug trafficking, prostitution and crime. The community came together with us and with the town of Babylon to address this. And we got involved in needing to lend because the community needed to tear down the strip mall that was the source of this drug haven.

A local minority business wanted to reinvest in the community and take a chance on this community. And they started a Tutor Time childcare center. We provided the technical assistance to this startup entrepreneur and helped her to get the capital that she needed to start this business. Mothers in the community that were afraid to let their children walk on the street now had a place to put their children in a childcare center so that they could go to work.

This is community development lending and this is what CDC of Long Island does. This kind of lending, this alternative lending that we do is critical to our communities, but it's very, very risky lending.

The businesses that we lend to are not bankable.

They're not bankable for a variety of reasons: they're startups; they're in an industry where a regulated institution can't lend to; they have incorrect collateral; they have challenged credit history, but they are the backbone of communities. They are particularly the backbone of lower income, distressed minority communities and capital needs to be injected there.

I told you the reason why we lend. We've been doing this for more than 10 years. In addition to being an SBA micro lender, we're also a community development financial institution and we get additional capital from the CDFI Fund. We're also a 7(a) lender.

For 10 years, our model of lending worked. We don't credit score. We examine a business plan that we help a business put together. We examine the fundamentals, cash flow, what their idea is and this spirit of entrepreneurship that small business owners have, and we have been making loans that a bank wouldn't do. And over 10 years, our delinquency rate was only 2 percent. In the last 18 months, our delinquency rate has shot up to 25 percent.

It's not because the fundamentals of the notion of these small businesses is flawed. It's that, as the previous speaker testified to, revenues are down, demand is down. And market conditions are creating problems for these small businesses. Suppliers have cut their terms. They're cash on delivery. So, credit is tight and we are the lender of last resort, so they are turning to us for this borrowing.

As I mentioned, we're a small business also. And Community Development Corporation does other lines of business. We invest in housing. We do housing rehab, weatherization, homebuyer education, housing development, and the like. And this small business line is putting stress on the entire corporation because of the losses.

So, we need some help and we need help to continue to get credit into the community. We need consistent, predictable, technical assistance grants so that we can have people on staff to do the TA. We need some help with the capital that is made available to us. Right now, 100 percent of that is on our backs, so we need the federal government to share in the risk so that we can continue lending during this difficult time.

And we could be assisted with some reduction in the nonfederal loan loss reserve requirement that we have. I see that my time is short, and I hope that I'll be able to answer some of your questions about how this is working for us right now in the community.

SEN. LANDRIEU: Thank you very much for that clear and heartfelt testimony. We appreciate it and look forward to following up with some questions.

Mr. Bynum?

MR. BILL BYNUM: Thank you, Madame Chair. I appreciate the opportunity to testify this afternoon. By the way, I have an apartment in New Orleans and we have offices in New Orleans, Baton Rouge, and Monroe.

Under ideal conditions, small businesses often lack the equity, the collateral, and credit, and formal management experience that they need to access traditional financing. In distressed places like the delta and areas that have been ravaged by Katrina, the Gulf Coast and like much of America today in this economic climate, these challenges are much, much greater. This is even more the case with minority, rural and female entrepreneurs. In these markets and for these entrepreneurs, alternative financial institutions are often the difference between closing their doors and survival.

Since the Treasury Department created the CDFI fund in 1994, community development financial institutions have emerged as a primary source of affordable financing for small businesses in distressed markets. CDFI's may be involved in loan funds and microloan funds, community development banks, community development credit unions or venture funds.

The primary thing that distinguishes us is that we target specifically underserved communities and distressed markets. We employ more flexible underwriting, and we often couple our financial assistance with technical assistance to help businesses work through their hurdles.

Consolidation of the banking industry has dramatically reduced the number of small relationship-oriented banks in favor of large, decentralized institutions.

A Treasury study recently documented that the number of commercial banks decreased by 27 percent between 1995 and 2007. In 2007 commercial banks with over $1 billion in assets controlled almost 90 percent of the nation's banking access up from 77 percent in 1995, while banks with less than $100 million in assets made up only 1.5 percent of the national banking assets.

The Federal Reserve Bank's senior loan officer survey on bank lending practice reported a 40 percent of domestic respondents tightened their credit criteria for small firms during the first quarter. This is the 10th quarterly survey in a row where such a tightening was reported.

This committee has previously noted noticeable decreases in SBA lending, and that was discussed earlier. Approval rates for the largest SBA loan program declined 30 percent between 2007, 2008. Even companies with long established making histories are having difficulty getting financing today.

Unfortunately, the economic shocks felt by small businesses do not affect all businesses equally. In the Louisiana Delta, only 22 percent of all loans made in 2007 were to businesses with sales less then -- to businesses with sales less than $1 million were made to businesses in low and distressed communities.

But following the hurricanes in 2005, research showed that credit was less accessible to African-American-owned businesses than to the majority of businesses in the Gulf region. Related to this unequal access, African-American-owned businesses closed their doors at a rate that was 110 percent higher than the majority owned businesses.

Even when the capital and credit markets start to recover, it's not reasonable or logical for us to expect that companies in places like the Delta and the Lower Ninth Ward will all of a sudden have access to capital at a rate that's comparable to traditional mainstream businesses.

We've got to do whatever we can to try to open up access to credit. And it's no coincidence that the growth of the CDFI industry paralleled the shift of lending decisions away from those local communities.

There are over 800 certified CDFIs in the United States that have assisted thousands of business and supported tens of thousands of jobs. Most CDFIs primarily lend to women, minority, and low-income entrepreneurs and borrowers. They reported a net charge off rate last year of 0.46 percent, which is only 700th of a percent higher than FDIC insured banks.

CDFIs like -- and credit unions like Hope Credit Union are an important part of the economic and financial fabric of this country. It's critical that we do more to route resources to these organizations that are the lifeline for so many communities.

I have a few recommendations for how we can build on the success of CDFIs that I would like to propose. Making operating lines of credit available for guarantee under the SBA 7(a) program would provide a very important tool to small businesses. These businesses depend on operating lines to bridge a timing difference between payment and collection of sales or to compensate for seasonal sale swings. As these lines have shrunk, these businesses have difficulty paying their bills which puts them at risk of closing. If SBA made operating lines of credit available for guarantee under the 7(a) program, this would open up a very important tool for small businesses.

Two more points. I see my time is running short. The new Market Tax Credit is a very important program. It should be modified to be more accessible to organizations that use the funds for revolving loan funds as opposed to just a few large transactions. We used a small $30 million CDFI new markets allocation to make a $35 million of loans for hundreds of businesses whereas those larger transactions are used for very few businesses and it just limits the impact of that for the benefit of small business.

The last point I would make is just to encourage the support of the president's budget for the CDFI Fund. It was a significant increase over what it has been in recent years. The CDFIs are an underutilized part of the nation's financial sector and should be considered a primary resource in efforts to strengthen the economy, particularly in distressed areas. There's a liquidity enhancement program that is part of the CDFI legislation that has not been funded that could be used to route significant money into the CDFI industry and help open up access for a lot of small businesses.

SEN. LANDRIEU: Thank you very much.

Mr. Watkins?

MR. STEPHEN WATKINS: Thank you, Chairwoman Landrieu. It's great to be here today. I'm pleased to be here to testify about alternative sources of financing for small businesses.

One thing we have not talked about is the billions of dollars of private capital that has really no access to small businesses in America. My company, ENTREX, was founded as an entrepreneurial exchange. It's the place to fine track manage research and trade instruments in private companies.

It was created to serve businesses that have succeeded in growing beyond the capabilities of the economic support of their friends and family but below the scope of the traditional public capital and debt markets. Excuse me.

We track these companies' private company revenue performance thorough an index we created called the private company index. This is a national index of companies that have grown over 35 percent a year each of the last four years. These companies represent $17 million companies and are typically 13 years of age. These are truly the American success story for their owners.

Financial support for these companies represents not only the American dream but also the economic stability, viability and future of our nation. These are, unfortunately, not the companies of Wall Street but rather of Main Street and of your street.

As my peers today have testified, traditional structures for working capital are available but certainly at a contracted pays and with confining terms today. The lending community is in a state of flux and currently exists only for those entities or individuals who maintain credit worthiness in these challenging times.

What we recognize at ENTREX is that there's a world of expansion funding that is lacking for these companies. For those companies that exist with financing needs between that of commercial banking structure and of the Wall Street capital markets.

This is the growth capital that allows companies to hire more employees and execute a greater volume of work stimulating the economy. Yet, it represents risk capital that is not available from traditional bank financing -- has been not available on the traditional capital market space.

It's unfortunate, today, that 26 U.S. regional exchanges no longer exist to bring together local risk capital to local companies. As these capital market systems consolidated, capital transactions on the remaining two or three exchanges have become less frequent and of a size today that is well beyond the reach of small business as defined by the SBA.

These changes in that capital market system have led the National Venture Capital Association to indicate they expect no public IPOs from venture backed entities this year. This impact on small businesses is a huge void of a capital market structure for the very growth engine of our nation.

Our focus at Entrex is to fill this void through an innovative, institutionalized, solution utilizing a security structure we've created called the TIGRcub. A TIGRcub is an acronym for a Top-line Income Generation Rights Certificate, which provides a lump sum of capital to companies. It is repaid through a simple monthly percentages of revenue for a designated period of time and which makes the instrument self liquidating and without the need of traditional IPO exits, eliminating the need and the failure point of today's capital market system.

We manage the monthly cash distribution back to an institutionalized system in partnership with the Bank of New York Mellon as our financial corporate trustee and our fiducially partner.

We've created an information and transactional market which brings transparency and efficiency to this entrepreneurial sector that we serve today through this TIGRcub security, which has previously really been unavailable through the institutional capital markets.

The TIGRcub bridges the financing gap between that of credit cards and the commercial banks and credit unions, and traditional venture-style investment. Within one year of this new security being debuted we've rallied billions of dollars from private and institutional capital around the TIGRcub transactions. We believe that the Entrex TIGRcub security fits well within the SBA's goals and specifically within the SBIC mission to stimulate investment in U.S. small business.

The self liquidating structure of the TIGRcub resolves a major challenge of existing SBIC funds, which fundamentally have no liquidity channel today to provide returns to their investors.

To conclude, Entrex welcomes the opportunity to work with the committee and the SBA to develop an alternative investment structure for the small businesses through whether is the SBA or other way -- SBIC to satisfy private investor expectations and increase the flow of capital into small business. We believe local investors want to invest locally. Let's allow them to make that happen.

Thank you for the opportunity to present to the committee. Entrex feels the future is bright for U.S. small businesses today and we believe that again the investors want to invest locally. Thank you.

SEN. LANDRIEU: Thank you, Mr. Watkins. I'll start with you. That's a very interesting presentation of a relatively, I guess, new model. I'm interested in learning more about it. Are there limits to what your organization offers to borrowers or to investors, I should say? Is there a target of investing?

MR. WATKINS: We target traditionally -- the economics of the transactions focus on $5 to $250 million revenue companies.

SEN. LANDRIEU: Five million to $250 million?

MR. WATKINS: Correct -- revenue companies and no revenue. That presents about 500,000 companies across the U.S. It's traditionally the growth sector of employments. As I mentioned, the Private Company Index represents these companies growing 35 percent a year, so --

SEN. LANDRIEU: So but for companies that are below $5 million in revenues, your exchange would not deal necessarily with that sphere or sector.

MR. WATKINS: We anticipate getting down into the million-dollar scale. There's a point of efficiency at that point that really becomes quite difficult in today's kind of structures and more difficult -- we're trying to bring private capital to the space, which needs efficient access to data and transparent access to data, which just at that level becomes very complicated due to the other --

SEN. LANDRIEU: Okay, it's your model to choose. I just was interested in the limits and it's interesting to know where you think those efficiency cut off points are for the purposes of our focus, which is to try to get capital to the hands of companies of all various, different sizes, particularly small, but there are, as I said over and over, different definitions of small, from one to two people to 10 people, to 15 people. Companies that generate just a few thousand dollars a year in profit, up to of course several hundred -- several hundred million could be defined in some cases even as a small business.

But Ms. Sobbott, let me ask you just a few questions and we haven't had a vote called, so we'll probably go to a little after four o'clock.

I really appreciate you being here. As you know, there's a credit card bill on the floor. Senator Dodd and Senator Shelby have brought today update of the Truth in Lending Act, TILA. These protections went in earlier. I think I understand in the 1960s. Our efforts today are to upgrade some of these provisions. Is your company supporting that effort and if so why and if not, why not? And then there is an amendment that Senator Snowe and I are going to put down on the floor today about extending some of these protections to small business owners of your products and other credit card companies. So could you just comment generally about that situation? And I thank you for coming today and the other card companies aren't here, but just from your perspective of American Express --

MS. SOBBOTT: Absolutely.

SEN. LANDRIEU: -- if you wouldn't mind.

MS. SOBBOTT: From our perspective, we certainly agree with the spirit of the legislation act on the floor. Of course, we encourage transparency and fairness in lending overall. And in fact, some of the practices that the legislation is proposing to eliminate are practices that American Express never has nor never will participate in, such as universal default or requiring payments for payments over the phone or by computer.

In terms of the application of this particular legislation, consumer legislation to businesses, we are not in favor of that. And the reason is simple. The needs of consumers and the needs of small businesses are different. And in fact, by applying that legislation universally across both segments of the population may have consequences that you're not intending. So for example, we at American Express are innovating in some of our payment products. So we've developed a product called Plum, which is -- you may have read about in the testimony -- that is an early payments trade terms product, which basically allows our business owners to have the benefit of getting a discount if they pay early. So any provisions around payments that would apply to consumers would not necessarily allow us to deliver that type of innovation that's been very valuable to business owners because we'd be constrained and that would something that I think would not allow further access to credit for small businesses.

SEN. LANDRIEU: So you're testifying, though, that any help or extension to small businesses would be unnecessary because American Express, your company, doesn't raise interest rates as long as people are paying on time and paying in full. It never has. It never will. And you don't increase the rate charge to your business consumers as opposed to your regular consumers.

MS. SOBBOTT: So we do raise interest rates based on even with people that have paid fully monthly. So occasionally, as in the last six months, we have raised interest rates across the board by 1 or 2 percent --

SEN. LANDRIEU: On people that have paid fully every month, you continue to raise the rate?

MS. SOBBOTT: On products, on all of our products, on occasion we will raise rates modestly, as I said, 1 to 2 percent a month. However, I think the rates that you're referring to, which tend to be default rates, which are the larger increases only have to do with the violations of the terms and conditions associated with payment on the American Express card, only. And so that would mean that only card members who have paid late and often repeatedly late would get increases.

SEN. LANDRIEU: But you are testifying, though, that even people, even businesses -- and there are millions and millions I think of businesses -- I think it's 27 million small business -- would be affected by the amendment that we are considering pushing forward. That's quite a few businesses to get coverage and support from this amendment. That even businesses that pay on time and have continued to pay on time you -- the company American Express would raise their rates even if they didn't default by 1 or 2 percentage points. Is it a month? Is there a cap on those rates? Is that 1 percent a month?

MS. SOBBOTT: So that's a minor change that we have made essentially to match our revenues.

SEN. LANDRIEU: But I'm trying to figure out if it's a raise of 1 percent a month, which would be 12 percent a year, or if it's 1 percent a year, a raise --

MS. SOBBOTT: No, it's in APR. So for example, our lowest rate previously was prime plus 2.99 and today our lowest rate is prime plus 3.99.


MS. SOBBOTT: So it's an annual rate. That is not a common occurrence in terms of how an individual card member would experience an increase in rate. And individual card member would experience an increase in rate typically only if their payment behaviors on American Express only -- not on any other debt obligation, but American Express only -- was not in compliance with the terms and conditions of the product.

SEN. LANDRIEU: And you understand under the current bill, I think, that's on the floor the limit is 25 -- the protections would extend to cards that have outstanding balances of $25,000 or less and you testified that in your view the protections for individual consumers that have balances of $25,000 or less are different than business that have balances of $25,000 or less. Can you explain what you and your company --

MS. SOBBOTT: Yes, so essentially what I'm saying is --

SEN. LANDRIEU: -- or there're different needs of companies and consumers.

MS. SOBBOTT: -- yes, so the spirit of the legislation again -- it certainly has the right intent, which is that we want to be sure that there is transparency and good, clear information and notification associated with credit card arrangements terms and conditions. So certainly that is true for both businesses and consumers. However, some of the obligations associated with notification periods or payment timeframes could in fact limit the innovations that we can make in products that would offer value to business owners. So again, our Plum product requires payment in 10 days in order to get an early pay discount. This mirrors trade terms that many businesses across the country use with their vendors. And something like that would be a product that we would have to look at the interpretation of the legislation on to determine if it would require any changes.

SEN. LANDRIEU: Okay, thank you. I'm still not clear about what the differences would be between a person taking out $25,000 on a credit card and what their needs would be rather different than a small business, but we will get back to that in just a little bit.

Let me ask Ms. Garvin. You testified about the success that you had as a community development lender. And it is very encouraging to know that you all are able to operate very clearly and profitably as nonprofits go -- you know what I mean -- until this downturn. Do you have any specific suggestions besides what you said in your testimony or would you like to elaborate on any of the things that you mentioned in your testimony about what we could recommend, either through this committee or other appropriate committees for help and support, number one.

And number two, how many other entities like yours are you aware of throughout the country approximately?

MS. GARVIN: We're a NeighborWorks organization and we're one of about 240 organizations around the country. I think there're about 160 SBA micro-lender and CDFIs -- I'm less sure of. I think there are CDFIs of all different sizes. We are a relatively small community development CDFI, in the same way as we are a micro-lender.

And actually it was interesting to me to hear some of the earlier discussion Senator Levin said that he had put amendments to raise the microloan limit about $35,000 and part of the reason we sought the capital from Treasury was because there were many times when our borrowers needed more than $35,000. And so we would layer capital from our CDFI fund with the microloans and actually give two loans. The business I was talking about earlier, the Tutor Time in North Amityville got a $35,000 microloan and a $45,000 CDFI loan to meet the needs. So that's how we've been able to manage that. So it really is true that additional capital, above the $35,000 is needed for some small businesses. So I hope that answers that part of your question.

The challenge for not-for-profit lenders is that we have a board of directors that provides our oversight. So we're not regulated, but we are regulated.

And it's our board that regulates us. And so the conversation that we've been having over the last many months is what's the tension between our mission and our sustainability. And we have to stay in business in order to do the business of lending. And the delinquencies that we've been experiencing are a problem for us. And we don't want to tighten up our credit. We want to put the credit out there. But if -- when we have a delinquency it's all on our shoulders, as a not-for-profit that's a problem for us and it's a challenge for us. And so the tension, which is an understandable tension, is there. So some kind of relief, even if it's for the short term until the economy gets out of this tailspin, would be very, very welcome so that we don't have to tighten up our own standards.

Yesterday, our community building fund, which is our 7(a) lender arm, granted a loan, an $85,000 loan to a startup franchise State Farm agent. And it wasn't a unanimous approval from the loan committee. And again, this demonstrates the tension. This young borrower was in debt. He was in debt with a first mortgage on his house and a second mortgage on his house, had no more collaterals there, had a credit card debt because he was using his credit card, and -- but he had a mother with a house that had equity and she was willing to give that over, but the -- it was a startup and it was going to be a risk that we would take. Now, we ended up approving the loan. It's a 7(a) loan and has a 90-percent guarantee. That guarantee helped push the committee over the edge with the approval because the government is sharing in that risk proposition.

On the microloan side, we don't have any of that. It's 100 percent on us. So that would be one change that I would strongly recommend and I'm sure would be welcomed throughout the network of micro-lenders.

SEN. LANDRIEU: That's very informative and very, very helpful and we'll consider that. And as I'm sitting here listening to both of you, you couldn't be representing more opposite ends of the lending community, one representing American Express, which is one of the largest lenders in the world, I would imagine, and then yourself lending in a very small community, but yet both of you have had to make business decisions about restricting your lending based on general business models.

The difference may be that what I think members of Congress are thinking is we gave or the taxpayers gave American Express $3.4 billion and out of the TARP funding or you all applied for $3.4 billion in dollars. Did you receive or the entities direct assistance from TARP or did you receive the 90 percent -- I know you received or used the 90 percent guarantee, but did you receive direct assistance through TARP?

MS. GARVIN: We have not received any direct assistance and in fact we are trying to be a good partner with the government with the -- some of the different stimulus programs. We are -- we have gotten a grant from the Neighborhood Stabilization Program to go into communities like North Amityville, which has experienced foreclosures and where there are record numbers of real estate owned properties. And we are partnering with our county and town governments to purchase these properties using NSP funds and then rehab them. And we're going to own them and rent them to very low-income families.

Part of that model is that we need to get permanent financing to take out some of the NSP funds and I'm being challenged right now going to my lenders to give me that permanent financing and part of it is because they see these provisions for loan losses on my small business program. And so actually I am thinking about going to another CDFI to give me some of that permanent financing. So you see how everything is sort of interrelated. We also are a sub-grantee under the weatherization program and we're getting some stimulus money to spend that weatherization money. And I have gone out into the community to encourage contractors. The discussion about procurement was very interesting to me because we need more contractors to be able to use this weatherization money and make energy efficiency improvements in single family homes and in multi-family buildings.

And so I saw this as an opportunity to get some of our building trades who are not working right now because there's no new construction on Long Island to be able to have an alternate source of employment. And so we have actively gone out to market that program and we've gotten new contractors who are interested. And if some of them need financing, I'm hoping to be able to make that available through our small business lending programs.

SEN. LANDRIEU: Thank you. That's very helpful, very helpful. Mr. Bynum, do you want to comment about anything that Ms. Garvin has said about something that rings true to you in the work that you're doing or something you'd like to add that this committee could think about?

MR. BYNUM: No, I think much of what she said is very similar to the experiences that we've had in the Mid-South. CDFIs are probably one of the most likely outlets for the businesses that she finances through her microloan programs, but as they grow, they're somewhere in that -- they're in that in-between world where they're not eligible to get financing from larger finance institutions and some other alternative sources that we've heard about. And CDFIs have a long history of financing in distressed communities to small businesses that don't otherwise have access to credit.

I think that the administration and the agencies and the government could learn a lot both from the experiences of CDFIs, but also from the things that Louisiana did right after Katrina. Louisiana did several things to benefit small businesses. First, it implemented bridge loan program that leveraged private capital by using providing a guarantee through banks and credit unions and we're able to step in and provide capital to businesses they started to recover. Then they followed that with a loan and grant program that initially they provided businesses with access through to 0 percent loans initially. They graduated up as the loan extended, but it also coupled with grand funds. It made it affordable for businesses. And it was very important that this was a vehicle that could be used for working capitals, which is often the hardest side for financing force small businesses get. It's also notable that the state used nonprofit intermediaries -- CDFIs and other lenders such as Ms. Garvin's organization and ours -- to provide this type of funding because of our experience working with distressed companies, making sure they had technical assistance, combined with the appropriately structured financing to help them through the difficult times.

SEN. LANDRIEU: Let me ask you. Do you remember what the cap of the bridge loans was? I want to say it was $10,000 bridge loans, but it might have been more than that and if you could think about it and if not, submit it for the record. And do you know what the default rate was ultimately on that program?

MR. BYNUM: The -- I will have to check the numbers. I know that the initial bridge loan program I think it made loans up to -- it may have been up to $20,000. The loan and grant program is much higher. Twenty percent of the loan amount can be a grant. And I don't recall what the total is. We've made 77 -- 77 businesses $7.7 billion, so it's well over $100,000 that can be made available to them.


MR. BYNUM: I think our average loan size is just a little over $100,000 -- all combined with the state products -- $67 million through that bridge loan and grant program.

SEN. LANDRIEU: Well, I'm going to ask the staff to look at that as a model for what we might could extend throughout the country to try to reach an area of small businesses that may be overlooked or just don't have access because of the tightening of capital in various ways and to see what the default rate is because if it's low and reasonable and responsible, we could then argue that it's a pilot that works. Something like it might continue because there will not be a recovery unless small businesses can get access to capital they can afford to start sustaining the jobs, building and expanding. It is not going to come form the large businesses in America that are going to start hiring up. It's going to be building from the ground up. And that is, in my view, and in many that have greater expertise in this than I -- this is really the core of this challenge of this recovery. And I think we're making headway, but I think there's a lot more that we have to do in this field. And our committee's going to continue to pursue it.

Mr. Watkins, do you have any other comments or suggestions? Then I do have a few more questions, but anything you'd like to share based on what's been said?

MR. WATKINS: Well, ma'am we're in a very different space and I think the testimony we've heard by my peers here today -- I think one thing I'd like to bring up is that living on Wall Street there's an enormous amount of capital that is interested in investing that as sitting on the sidelines.

We can see that in just about the negative bond deal available to an investor today that there's so much capital. It has no place to go. We have regulated out of existence the capital market system. We've created two exchanges on Wall Street and no ability of a common investor to really invest in the Main Street business. That's what we did in the early part of the 20th century -- 20th century, excuse me. I think we have to be open-minded and look at alternative systems like ours and like some others out there to allow an efficient capital flow from the capital sources that are nongovernmental into the private sector that allows efficient -- the past efficient methodologies to exist maybe through different structures and maybe with government guarantees. But we can't regulate -- continue to regulate and make it more difficult for local investors to invest locally.

SEN. LANDRIEU: And you said that there were 20 I think or 25 exchanges and now they've consolidated down to two or three. Was just the natural -- the better ones cover up the weaker ones and that's what happened, or was it caused by something else?

MR. WATKINS: Well, part of that -- if you look at the numbers, there's 18,000 public companies in America. Thirty five hundred of those are actively traded. There's 26-27 million private companies. A company under maybe $100 million of an offering, so maybe a $400 million public value -- you have to be of that scale to go public today. So there's only a few companies that can even hit the kind of the regulatory requirements which then bring them to the efficiency of Wall Street. The underlying exchanges had viable products, but were put out of existence through the limited ability of trading at that volume. So when you look at the 3,500 companies that are created kind of everyday, there's enormous companies that wouldn't trade, that can afford the Sarbanes-Oxley type compliance levels. They deserve and they would be transparent to the investors, but there's no vehicle that allows them to do it. It's just been regulated away.

SEN. LANDRIEU: Okay, you've given an excellent suggestion for a model. Let me ask American Express -- and I just have three questions. They've just called the vote, so I'm sorry. We're going to have to wrap up a little early, but these are just my final questions. Does American Express believe that TILA applies to individuals who use personal credit cards to make business purchases? And that's a bill that's on the floor. I don't know if you're familiar with the details of it. But I understand that -- and in my experience I know that people use personal credit cards sometimes for business expenses. If TILA -- if this bill is passed, will there be any change to the scrutiny of what you all perceive or note in your tracking of those personal charges versus business charges?

MS. SOBBOTT: Sen. Landrieu, it's very difficult for me to comment on what we would do if legislation that's obviously iterating as we speak here. So again I'll just reiterate that largely the policies that we apply to our consumer audience, we do apply to our small business audience. And the spirits of fairness and transparency permeate everything that we do in terms of the way that we extend credit and certainly in our pricing.

And as you know, most of the legislation is based on the Federal Reserve Board's credit card rules that they have put out. And most of that was based on consumer polling and of course consumer responses. So we would just ask that it would be useful for us to get some small business polling and small business input as well. And we would be happy to talk with you at length about our concerns in terms of any innovations that might be prevented or constrained through this legislation. But certainly all of its intent is clearly in the spirit of what we at American Express believe in.

SEN. LANDRIEU: Well, I appreciate that. I would just conclude by saying that we still, across the board -- Democrat, Republican, members of this committee and members of Congress -- continue to hear complaints as we go home to our small business owners, some who've been in business for many, many years, profitable. Everyone is under challenges, but they're seeing their sources of credit dry up and part of our job is to help unfreeze the secondary market, unfreeze the credit markets. And we're spending billions of dollars of taxpayer money to do it.

And we'd like to see that money actually get to Main Street so we start hearing of positive situations where a person could get a loan or a person could add two or three jobs here, 15 jobs there. They didn't have to close their doors because their credit card company came through or their community bank came through or their credit union came through or their neighborhood organization NeighborWorks came through for them. And we are anxious to hear that kind of testimony at home and we're going to continue to pursue administrative policies and legislative policies until we start hearing that kind of response from our consumers and our small businesses, whether they're in urban areas, rural areas, minority business owners or majority.

So I think this has been a good hearing. I'm sorry our time was cut short. I think I've only got about four minutes until they call the vote and I would like not to miss this one. So I'm going to adjourn the meeting, thank the panel for your input and your suggestions. Thank you very much.


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