On Friday, the House Committee on Small Business and the House Committee on Financial Services held a joint hearing entitled “Condition of Small Business and Commercial Real Estate Lending in Local Markets.” The purpose of the hearing was to bring together regulators, bankers and small business owners to discuss the condition of the credit markets and difficulty small businesses are having accessing capital.
The Committee heard testimony from the following witnesses:
- David Turnbull, Brighton Corporation, Boise, Idaho
- Margot Dorfman, Chief Executive Officer, U.S. Women’s Chamber of Commerce
- Steve Gordon, President, Instant-Off, Inc.
- Todd J. Zywicki, Foundation Professor of Law, George Mason University
- Wes Smith, President, E&E Manufacturing, Plymouth, Michigan on behalf of the Motor & Equipment Manufacturers Association
- Herbert M. Allison, Jr., Assistant Secretary for Financial Stability and Counselor to the Secretary, U.S. Department of the Treasury
- Karen G. Mills, Administrator, U.S. Small Business Administration
- Elizabeth Duke, Governor, Board of Governors of the Federal Reserve System
- John C. Dugan, Comptroller, Office of the Comptroller of the Currency
- Martin J. Gruenberg, Vice Chairman, Federal Deposit Insurance Corporation
- John E. Bowman, Acting Director, Office of Thrift Supervision
- Stephen G. Andrews, President and Chief Executive Officer, Bank of Alameda, Alameda, California, on behalf of the Independent Community Bankers of America
- David Bridgeman, Pinnacle Bank, Orange County, Florida
- William Grant, Chairman and Chief Executive Officer, First United Bank & Trust on behalf of the American Bankers Association
- Ronald Covey, President and Chief Executive Officer, St. Mary’s Bank, Manchester, New Hampshire on behalf of the Credit Union National Association
- Rick Wieczorek, President and Chief Executive Officer, Mid-Atlantic Federal Credit Union on behalf of the National Association of Federal Credit Unions
- Cathleen H. Nash, President and Chief Executive Officer, Citizens Republic Bancorp, Michigan on behalf of Consumer Bankers Association
- David A. Hoyt, Senior Executive Vice President, Wholesale Banking, Wells Fargo & Company
- Charles McCusker, Co-Managing Partner Patriot Capital, L.P. on behalf of NASBIC
- Sally Robertson, Business Finance Group Inc., Fairfax County, Virginia on behalf of the National Association of Development Companies
Representative Barney Frank (D-MA) opened the hearing by noting that the joint hearing was “unusual,” but the Committees were “dealing with a subject of unusual importance.” Representative Sam Graves (R-MO), ranking member of the Small Business Committee, and Representative Nydia Velazquez (D-NY), Chair of the House Small Business Committee and a senior member of the Financial Service Committee, also gave opening remarks, each stating in different ways that, while they certainly need to get credit moving again, they need, as Rep. Velazquez noted, to “get it right.” Representative Graves expressed his interest in hearing ideas from the panel members on how to make capital affordable to small businesses without raising the risks that led to the current financial crisis.
The first panel consisted largely of small business owners, along with a representative of the U.S. Women’s Chamber of Commerce and a law professor. Much of the discussion with the members of the panel concerned whether the Small Business Administration (SBA) should be allowed to by-pass banks to lend directly to small businesses. Steve Gordon, President of Instant-Off, Inc., testified that the SBA should be given the authority to lend directly to small businesses, as banks are not currently lending to these businesses. He staunchly advocated “expanded criteria,” beyond those currently used by banks, for making small business loans and expressed the view that the SBA is more qualified to make such lending decisions through a direct lending program. Other members of the panel noted that the problem is not that banks do not want to lend but rather that banks cannot lend because regulators, through capital ratio and capital reserve requirements, have “their foot on the necks” of banks, as Wes Smith, President of E&E Manufacturing said, discouraging them from making loans. Members of the panel disagreed on whether the SBA or banks were more qualified to evaluate businesses and make loans to those businesses.
The second panel consisted of regulators from various federal agencies. Herbert Allison, Assistant Secretary for Financial Stability and Counselor to the Treasury Secretary, began by noting that credit standards for lending to small businesses have tightened for 13 straight quarters. He stressed the need for the proposed Small Business Lending Fund (SBLF), to support lending to small businesses, not as loans to, but as investments in, viable community banks on which taxpayers would likely see a profit. Karen Mills, SBA Administrator, agreed with Chairwoman Velasquez and members of the first panel that there is a need to fix the problem of limited access to capital by small businesses but cautioned that a SBA direct lending program would increase the SBA’s subsidy cost from $0.01 to $0.15 per lending dollar. She suggested that the problem was “not that small businesses need access to direct loans but rather that they need access to banks that are making loans” to small businesses supported by the 90% SBA guarantee on the loan balance. She noted that there is great demand for proposed SBA programs, such as the 90% loan guarantee and a proposal to allow refinancing of owner-occupied real estate under the 504 program. She testified that banks “want to make good loans but, for various reasons, can’t take those risks” and the SBA stands ready to continue to mitigate those risks if provided the additional resources to fill the gaps that small businesses are experiencing getting loans, even with the current guarantees.
As Federal Reserve Governor Elizabeth Duke noted, “loans to small businesses are especially vital to our economy, as they employ nearly 40 percent of the private sector workforce.” The panel seemed to agree, however, that it is important to strike the appropriate balance between encouraging bank lending to small businesses and making sure that such lending is done responsibly. John Dugan, Comptroller of the Currency, noted that while there are signs that the economy has begun to recover, stresses continue to weaken both the demand for credit and the supply of loans by financial institutions. Martin Gruenberg, FDIC Vice Chairman, said that the FDIC discourages banks from classifying loans as troubled based only on a decrease in the value of the underlying collateral. He urged lending by financial institutions to healthy businesses, stating that “prudent” small business lending by banks would not be subject to supervisory criticism. Both Gruenberg and Dugan noted that the FDIC and the other federal banking regulators have been working with bank examiners to emphasize that examiners should adopt a balanced approach in assessing small-business lending so as not to hamper prudent or responsible lending. When pressed by Representative Al Green (D-TX), the panel divided on whether banks or the SBA would be better suited to use the $30 billion in funding from the proposed SBLF to administer prudent small business lending.
The third panel, consisting of executives in the financial industry, provided testimony regarding the issues currently stifling community bank lending to small businesses. David Bridgeman, of Pinnacle Bank, pinpointed two key problems stifling lending by community banks to small businesses. First, small businesses are having a harder time qualifying for loans under “prudent” lending standards due to deterioration of their finances and assets owing to the strained economic conditions over the past two years, while small businesses are concerned about the state of the economy and are thus reluctant to borrow. Second, regulatory burdens on community banks are hampering their ability to lend. Higher capital ratios, higher reserve requirements and forced write-downs are shrinking the balance sheets of these institutions and leaving them with less funds to lend to small businesses.
Other members of the panel noted similar issues. Stephen Andrews, President and Chief Executive Officer of Bank of Alameda, noted that the regulatory “pendulum has swung too far” as examiners are questioning commercial real estate values and regulators are raising capital ratios, making banks reluctant to lend. Sally Robertson, of the Business Finance Group, testified that “the credit crisis and what is deemed by regulators to be a significant concentration of commercial real estate lending has forced banks to focus on rebuilding of their capital, rather than lending it out.” This has particularly impacted small and regional community banks that tend to traditionally hold a larger share of commercial real estate on their books compared to large money center banks. She lauded recent proposals to provide capital to more small businesses and to meet their long-term financing needs.
David Hoyt, of Wells Fargo, testified, however, that weaker loan demand as well as the “perception of the lack of availability of credit” is rooted in several factors including: reduced business cash flow and capacity to repay debt owing to the weakened economy; declines in asset values from much higher levels which existed at the top of the economic cycle; more conservative borrowers due to economic uncertainty; and more conservative loan structure and terms. He expressed his opinion that a return to more prudent lending standards is important to a sound financial system. Regarding commercial real estate, Hoyt testified that current problems have stemmed from a market correction to overvaluation of commercial real estate over the past decade, coupled with weaker tenant demand that has resulted in lower cash flows to property owners, leaving borrowers and lenders holding loans that exceed the value of the property securing them. Though the resolution to the commercial real estate problem will be uncomfortable to the individuals holding the loans, Hoyt believes that there is adequate liquidity in the market to resolve these issues “on a macro-level” but that such resolution will be a long-term process.
Cathleen Nash, President and CEO of Citizens Republic Bancorp, said that “some of the practices of the last decade must be curtailed” and that the fundamentals of capacity and willingness and ability to repay loans must be established once again as a hallmark of lending activity. Nash lauded recent proposals, including the SBLF and changes to SBA loans, which, in her opinion, should have a positive impact on commercial real estate and small business lending.
Members of the panel divided on whether bank examiners have adopted the balanced approach described by the earlier panel of regulators to assess small-business lending so as not to hamper prudent or responsible lending.