STATEMENT
of the
Honorable Nydia M. Velázquez, Ranking Democratic
Member
House Committee on Small Business
New York Bankers Association
Tuesday, July 17, 2001
I want to thank Michael Smith and Bill Bosies, and everyone
here, for inviting me today. I look forward to sharing with
you, as a senior member of the banking committee and the
Ranking Democratic Member of the Small Business Committee,
a unique vantage point surveying the current credit environment
as it relates to small business lending. Even when we appear
to be entering a less certain economic period, the demand
for capital remains high. At the same time, however, small
businesses find it difficult to secure access to vital capital
financing in some areas of the country.
As we discuss finance,
some words of the great banker Andrew Mellon come to mind.
He once said, "gentlemen prefer bonds". That may
have been true, for his time and his place. But he also
said something else, which I think is a timeless reminder
of the role you play in our society. Mellon said, "if
the sources of capital investment are dried up, the flow
of all income may eventually cease." That is never
more true than with today's small business, which accounts
for fully half our GDP and three-quarters our job growth.
Capital investment truly fuels our economy.
Recent studies, however,
have indicated that credit has become increasingly difficult
for America's small businesses. There are several causes
of this growing credit crunch. While a clearly softening
economy is a contributing factor, there are other underlying
trends which are draining your ability to provide lending
to those businesses.
As everyone in this room is aware, the financial landscape
in this country changed dramatically in 1999 when we passed
the landmark legislation package known as Gramm-Leach-Bliley.
While it was designed to modernize our nation's financial
network by allowing banks to engage in a whole array of
financial services, it has also created some difficult dynamics
for the banking community. Addressing these new dynamics
is the challenge if we want to truly reshape the face of
lending.
Today our financial institutions
are being pulled in two different directions by regulators
and the marketplace. Federal regulators are prodding banks
to tighten loan-underwriting criteria. But at the same time,
banks are trying to attract customers in a very competitive
and expanding market for deposits. This presents consumers
with a growing array of options for their money. We are
seeing more popular investment options such as money market
funds, stocks and mutual funds luring deposits away from
many banks.
Another factor that affects
lending is the high regulatory, examination and compliance
costs making it very difficult for banks to compete with
other players in the financial industry. Clearly, the current
regulatory environment is more conducive to lending. But
requirements such as loan loss reserves and new regulatory
criteria still effectively limit credit availability. Make
no mistake: lending to small business for start-up and expansion
is very much a high-risk/high-reward venture. But while
the financial community has diversified its services, small
business lending is still very much a job that is left to
banks. I believe that many banks are looking for innovative
ways to assist small businesses to obtain the funds they
need to start, grow, and prosper. As the Ranking Democrat
on the Small Business Committee, it is my job to help you
in your search for new ways to assist small businesses secure
access to credit.
Certainly the aggressive
rate cuts by the Federal Reserve have eased some of the
pressure on business loans outstanding today, and lowered
the average cost of new loans. But rate cuts alone will
not spur increased lending, especially to small businesses.
One critical contribution
to significantly easing this credit crunch are the SBA lending
programs. These programs provide as much as 40 percent of
all long-term loans. Because these loans traditionally have
significantly longer maturities than conventional loans
--- OMB estimates that SBA loans mature on average after
14 years, compared to only 16 percent of conventional loans
maturing later than one year --- the SBA loan programs mean
lower monthly payments for borrowers. The difference for
a small business in monthly payments from a 10-year loan
to a 5-year conventional loan would be 35 to 40 percent.
This is a significant increase for the average SBA borrower
who tends to be a new business startup or an early stage
company. These companies simply do not have the same access
to capital as do large businesses.
The lending programs bridge
that capital gap. We cannot expect banks to make long-term
loans --- the kind most needed by small businesses --- especially
when these loans are so dependent on funds provided by a
short-term deposit base. By providing a leverage of almost
99 to 1 for private lenders, the SBA loan programs are the
government's best bargain for the dollar. These are remarkable
commercial instruments which help small business obtain
the long-term capital they need for growth and expansion,
which translates into jobs and a "net return on investment"
for our local communities.
The SBA programs aid banks
helping small businesses build and expand by providing loan
guarantees, which protect banks against losses while providing
credit that would otherwise be unattainable. This is a win-win
example of an effective public-private partnership. For
small businesses, this assistance can make a critical difference
between financial survival and failure.
Unfortunately, my friends,
there seems to be a disconnect at the White House over the
benefit of these programs. The Administration's budget proposes
to impose new fees on both lenders and borrowers benefitting
from SBA guarantees. These higher fees would dramatically
reduce bank participation in loan programs and the number
of loans made. New fees will mean that both lenders and
the small business will pay thousands of dollars in new
costs, making this program less and less of a viable option.
This proposal will depress a loan volume already declining
due to high program costs.
For an Administration that
takes tax relief as its mantra, the White House seems to
ignore the fact that increased fees on the 7(a) program
effectively constitute a new tax on banks and on the small
businesses that depend on them. The leadership in the House
of Representatives followed the White House lead lockstep
when the Appropriations Committee reported funding for the
7(a) program short almost $40 million last year's appropriations,
leaving the program far below the $10 billion loan level
required to meet lending needs.
This 32 percent cut will
result in almost 20,000 fewer loans made to small businesses.
One can only imagine the economic growth and job creation
smothered under this poorly conceived proposal.
The 7(a) program is a critical
program for both small business growth and the financial
institutions trying to balance regulatory requirements with
their continuing role as a prime small business lender.
Just as we made major changes to our nation's financial
network in 1999 with Gramm-Leach-Bliley, we need to undertake
a major restructuring of the SBA and its loan programs.
Broadly speaking, the agency
itself must be streamlined and become more responsive to
lenders' needs. More specifically, we need an accurate accounting
of the subsidy rate for all programs, but especially 7(a).
The Federal Credit Reform Act of 1990 required SBA to estimate
the subsidy rate, which determines the costs for loan guarantees.
These estimates are very important because they identify
for Congress --- in particular the Small Business Committee
--- the amount of appropriations needed. When subsidy rates
are under-estimated, the program risks running out of money.
When the rate is over-estimated, borrowing and lending are
subject to excess cost through fees that are pegged too
high.
Getting a fair account of the subsidy rate has been one
of my top priorities, since taking over as Ranking Democratic
member. What I have discovered is that since 1997 the subsidy
rate for 7(a) has been routinely miscalculated. It will
come as no surprise to anyone in this room that the current
fee-rate system has over-charged both lenders and borrowers.
This unnecessary tax, imposed via credit reform, has robbed
both lender and small business of valuable capital worth
one billion dollars! That is outrageous!
Ladies and gentlemen, this
program is at a cross-roads. At a time when we should see
program demand increase, it is dwindling, while some of
the largest lenders are deciding to opt out of the program
altogether.
To begin to reverse this
trend, the Small Business Committee has secured language
in the Treasury-Postal appropriations bill directing OMB
to go back and report a more realistic subsidy rate. I don't
expect this to solve all the subsidy rate problem, but it
will begin to rectify the situation.
Once we have an accurate
cost of the program, any savings must be applied to reducing
fees the Administration is attempting to hike. This would
immediately free millions of dollars for more lending, spurring
as much or more economic revitalization than any tax cut
proposed by this Administration. Such a cut, combined with
stream-lining the paperwork requirement for participation,
will enable the 7(a) program to reach its full intended
economic lending potential!
This direction is certainly not one shared by the White
House or the House leadership. So we must work to educate
and advocate if we are to bolster these lending programs.
In addition, to further support SBA at this critical time,
I will propose an amendment this week to restore part of
the funding cut by the Administration's Commerce-Justice-State
appropriations bill. My amendment will restore $17 million
to the agency, allowing us to adequately fund SBA's 7(a)
loan program and restore funding to two business development
programs that have been critical to firing up new companies.
As I mentioned, 7(a) in particular is important to helping
you extend capital to more businesses, by guaranteeing the
ones you make and freeing up reserve deposits to lend more.
A decline in the SBA's participation will hurt both small
businesses and banks through a slow strangulation of the
supply of capital.
I would like to end here
by recalling what Andrew Mellon said about the crucial contribution
you make to the income of the nation, and adding to it:
access to capital is access to opportunity. The result of
Gramm-Leach-Bliley, however, is a stretching of resources
as financial institutions draw money away from deposits
that fund the loans that fuel business growth. We want to
help you continue to invest in small firms and entrepreneurs.
We will do this by insisting on a correct assessment of
the 7(a) subsidy rate for loan guarantees. We will oppose
any new tax masquerading as fee increases. We will work
to streamline the SBA and reduce regulatory burdens. All
with the goal of increasing access to capital by more people.
By increasing the number
of people you lend to, you expand the American entrepreneurial
class --- which is the envy of the world. We know the foundation
of our prosperity is built by individuals who take risks,
who set out on their own to better themselves and their
families and who contribute to the strength and vitality
of our communities. Their contribution could not be made
without you, the banking institutions, who make this strength
and vitality possible.
Thank you very much.
