Ranking Member Hern Opening Statement at Hearing on 7(a) Loan Program Budget Proposal
WASHINGTON - Today, the House Committee on Small Business Subcommittee on Economic Growth, Tax, and Capital Access met for a hearing titled "SBA 7(a) Budget Proposal and the Impact of Fee Structure Changes." Ranking Member Kevin Hern (R-OK) delivered the following opening statement:
Remarks as Prepared for Delivery
Thank you, Mr. Chairman.
Despite ongoing positive economic news, the nation’s smallest firms continue to face challenges when it comes to regulations, saving for retirement, and access to capital.
I know these challenges personally and professionally. I have been a small business owner for the last 34 years. Additionally, I have 17 years on bank executive boards, 13 years on the McDonald’s National Leadership Team, which represents over 3,500 U.S. franchisees, 8 of those years as the Ombudsman, 5 years as the Chairman of the Systems Economic Team, 5 years on the McDonald’s Tax Policy team, and 8 years on the McDonald’s Insurance Corporation Board. I know the issues facing our nation’s smallest firms firsthand.
In order to help fill the gap that exists for small businesses when it comes to accessing capital, the Small Business Administration offers numerous financing and lending options. The flagship and largest program is the 7(a) Loan Program that does not provide direct loans to small businesses, but provides guarantees on the loans made by partnering financial institutions to eligible small firms.
The program has grown rapidly in recent years with the program’s authorization cap going from $18.75 billion in FY 2015 to the FY 2020 budget request of $30 billion.
Additionally, the 7(a) Loan Program has built in fees to help offset the cost of any losses in the program per the Federal Credit Reform Act of 1990. Because fees have been sufficient over the last half dozen years, the program has been running on zero cost to the American taxpayer.
Within the Fiscal Year 2020 budget submission, the model that calculates the cost of the program indicates that the 7(a) Loan Program will no longer be at zero-subsidy. Rather, the program may require a $99 million dollar appropriation paid for by American taxpayers or an adjustment to the fee structure that hits program participants.
According to the Congressional Research Service, the average loan size in the 7(a) loan program is approximately $420,000 dollars. That is a total of $25.4 billion dollars in loans last year over 60,000 total loans.
I feel it is important to run this average through SBA’s legislative proposal that would bring the program to zero-subsidy. While I acknowledge there are nuances to the fee structure, the average loan size of $420,000 does not seem to be impacted by the fee proposal if the maturity of the loan is more than 12 months.
The upfront fee that goes to borrowers or the small business owner for loans of $500,000 or less seems to remain at 3.0 percent. Additionally, the fee that lenders have to pay, the ongoing fee, also does not appear to change for loans under $500,000.
However, before we entertain the legislative options of either an appropriation or fee change to close this potential $99 million dollar gap, we must explore the reasons behind the shortfall and gain a better understanding of the model used to calculate the cost.
What variables or assumptions are used in the model and has the model changed over the years? I look forward to both panels that will explore these questions and more.
Thank you, Mr. Chairman, and I yield back.