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Statement of the Hon. Nydia M. Velazquez on Under the Microscope Reviewing Key SBA Programs with Associate Administrator Frost

I’d like to start off by thanking Associate Administrator Frost for joining us here this morning. Ms. Frost, welcome to the committee. The COVID-19 pandemic posed a historic threat to our nation’s small businesses. The number of active business owners in the US plummeted by 3.3 million, or 22 percent, over a two-month period from February to April 2020.

The drop in business owners was the largest on record and losses were felt across all industries. Small businesses of color were especially hard hit; African American businesses experienced a 41 percent drop, while Latino business owners fell by 32 percent, and Asian business owners fell by 26 percent.

Throughout the pandemic, the SBA stepped up and offered small businesses across the country a lifeline.The SBA delivered an unprecedented $1.2 trillion in emergency grants and loans over two years. That funding contributed to a historic economic recovery of twenty-one million lost private sector jobs, plus four million more private sector jobs than existed before the pandemic. But, in an effort to disburse funds quickly, the SBA weakened and removed internal controls that invited unprecedented fraud and weakened the Agency’s defenses in the early months of the pandemic.

Beginning in early 2021, thanks to the leadership of Administrator Guzman, longstanding anti-fraud controls were reinstituted, and new safeguards were put into place to reduce the risk potential for fraud.

Since then, the SBA has been actively engaged in reducing the risk of fraud throughout the Agency by improving its operations and bolstering its risk management systems.

Across all four pandemic relief programs, the SBA has: screened 49.3 million applications; identified $400 billion in applications, loans, grants, and awards that had indicators of potential fraud; and blocked 2.46 million applications due to likely fraud.

That being said, many of the fraudulent activities that occurred in PPP and the other COVID-relief programs were conducted through fintechs. According to a study published by the University of Texas-Austin, nine of the ten PPP lenders with the highest rate of suspicious loans were fintech companies, and the most active fintech PPP lenders generated over $1 billion in fees from the SBA.

Given the significant level of fraud conducted by fintech lenders in the PPP, there has been strong bipartisan concern over two final rulemakings by the SBA last year which weakened the underwriting criteria and loosened affiliation standards in the Agency’s core lending programs. Most importantly, it lifted the decades-old moratorium on the number of SBLCs—potentially opening these programs up to fintech lenders.

There are still outstanding questions as to one SBLC award to Funding Circle and I look forward to hearing from Ms. Frost regarding this particular license. The SBA’s mission is too important to grant loan making authority to a lender that is not fully committed to its programs. The SBA has been critical to the success of millions of small firms through its over 70 years of existence.

Much of that is due to the core lending programs and their ability to reach businesses that have traditionally been locked out of the capital market. I hope to hear more about how Congress can strengthen and improve these programs.
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