    [House Hearing, 106 Congress]
    [From the U.S. Government Publishing Office]

                        HEARING ON SBA COMPUTERIZED LOAN
                      MONITORING SYSTEM: A PROGRESS REPORT
    =======================================================================

                                    HEARING

                                   before the

                           SUBCOMMITTEE ON GOVERNMENT
                             PROGRAMS AND OVERSIGHT

                                     of the

                          COMMITTEE ON SMALL BUSINESS
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED SIXTH CONGRESS

                                 SECOND SESSION

                                   __________

                       WASHINGTON, DC, FEBRUARY 29, 2000

                                   __________

                               Serial No. 106-44

                                   __________

             Printed for the use of the Committee on Small Business

                        U.S. GOVERNMENT PRINTING OFFICE
    65-506                      WASHINGTON : 2000

                          COMMITTEE ON SMALL BUSINESS

                      JAMES M. TALENT, Missouri, Chairman
    LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
    JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD,
    DONALD A. MANZULLO, Illinois             California
    ROSCOE G. BARTLETT, Maryland         DANNY K. DAVIS, Illinois
    FRANK A. LoBIONDO, New Jersey        CAROLYN McCARTHY, New York
    SUE W. KELLY, New York               BILL PASCRELL, New Jersey
    STEVEN J. CHABOT, Ohio               RUBEN HINOJOSA, Texas
    PHIL ENGLISH, Pennsylvania           DONNA M. CHRISTIAN-CHRISTENSEN,
    DAVID M. McINTOSH, Indiana               Virgin Islands
    RICK HILL, Montana                   ROBERT A. BRADY, Pennsylvania
    JOSEPH R. PITTS, Pennsylvania        TOM UDALL, New Mexico
    JOHN E. SWEENEY, New York            DENNIS MOORE, Kansas
    PATRICK J. TOOMEY, Pennsylvania      STEPHANIE TUBBS JONES, Ohio
    JIM DeMINT, South Carolina           CHARLES A. GONZALEZ, Texas
    EDWARD PEASE, Indiana                DAVID D. PHELPS, Illinois
    JOHN THUNE, South Dakota             GRACE F. NAPOLITANO, California
    MARY BONO, California                BRIAN BAIRD, Washington
                                         MARK UDALL, Colorado
                                         SHELLEY BERKLEY, Nevada
                         Harry Katrichis, Chief Counsel
                      Michael Day, Minority Staff Director
                                     ------

               Subcommittee on Government Programs and Oversight

                     ROSCOE G. BARTLETT, Maryland, Chairman
    MARY BONO, California                DANNY K. DAVIS, Illinois
    PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
    RICK HILL, Montana                   CHARLES A. GONZALEZ, Texas
                            Nelson Crowther, Counsel

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on February 29, 2000................................     1

                                   Witnesses

    Hochberg, Fred P., Deputy Administrator, U.S. Small Business
      Administration.................................................     3
    Wilkinson, Anthony R., President & CEO, the National Association
      of Guaranteed Lenders, Inc.....................................     8
    Willemssen, Joel C., Director, Civil Agencies Information
      Systems, Accounting and Information Management Division........    10

                                    Appendix

    Opening statement:
        Bartlett, Hon. Roscoe........................................    27
    Prepared statements:
        Hochberg, Fred P.............................................    30
        Wilkinson, Anthony R.........................................    55
        Willemssen, Joel C...........................................    59

     HEARING ON SBA COMPUTERIZED LOAN MONITORING SYSTEM: A PROGRESS REPORT

                                  ----------

                           TUESDAY, FEBRUARY 29, 2000

            House of Representatives, Subcommittee on
                Government Programs and Oversight, Committee on
                Small Business,
                                                        Washington, DC.
        The subcommittee met, pursuant to call, at 10:00 a.m., in
    Room 2360, Rayburn House Office Building, Hon. Roscoe Bartlett
    [chairman of the subcommittee] presiding.
        Chairman Bartlett. Good morning. Let me convene the
    Subcommittee on Government Programs and Oversight of the House
    Committee on Small Business.
        Before I begin, let me note that we are this morning
    nationwide live on the Net, so if you would please speak into
    your microphone so that the system can pick it up clearly.
        Good morning and welcome to this hearing of the
    Subcommittee on Government Programs and Oversight of the
    Committee on Small Business. A special welcome to those who
    have come some distance to participate and to attend this
    meeting.
        Today we will examine a matter that is of great importance
    to the taxpayers who expect the 7(a) government guaranteed loan
    program to be well managed and remain solvent. The hearing is
    important to Congress in its oversight role and to the U.S.
    General Accounting Office which is responsible through the
    audit function to provide accurate information as to the
    financial condition of federal government programs. And this
    hearing should be of importance to the Small Business
    Administration known here in Washington as ``SBA'' the federal
    agency that is responsible for the day-to-day direction of the
    7(a) loan program.
        Section 233 of the Small Business Reauthorization Act of
    1997 (Public Law 105-135) requires that SBA complete eight
    mandated planning actions before the agency obligates or
    expends any funds for the development and implementation of the
    proposed new, automated 7(a) loan monitoring system. It would
    seem only a matter of common sense that the planning phase
    should be completed before an agency makes major software and
    hardware purchases for a new computer system.
        The proposed new automated loan monitoring system for the
    7(a) loan program was the subject of a prior hearing of this
    Subcommittee held on July 16, 1998. We were encouraged by
    testimony at that hearing that the Small Business
    Administration had a project plan, but none of the eight
    planning steps had been completed.
        We in Congress support the Administrator's initiative in
    relying more on the private sector in the 7(a) loan program. We
    support SBA's turning over to hometown bankers the decision to
    originate loans and the responsibility for servicing and
    liquidating loans. Certainly the local banker has more
    knowledge of the lender and his or her credit worthiness than
    bureaucrats located some distance from the community in which
    the loan is made.
        Also, there is a broad-based support in Congress for the
    Administrator's efforts to modernize SBA's systems and outlook.
    There is also broad-based support for the Administrator's goal
    for the 7(a) loan program that is, to get SBA out of the loan
    application approval business altogether and to assume the role
    of overseer of the lending institutions.
        This hearing will focus on the progress SBA has made, since
    the July 16, 1998 hearing, in performing and completing the
    planning needed to serve as the basis for funding the
    development and implementation of the 7(a) loan program
    computerized loan monitoring system including the eight
    planning steps required by the Act.
        At this hearing today, we would appreciate your assessment
    of (1) whether any planning has been completed as of today, (2)
    the management decisions made as a result of that planning, (3)
    the planning remaining to be completed, and finally (4) the
    management decisions remaining to be made. Further, we would
    like to know the extent to which SBA has involved the lenders
    in the planning process. Lastly, does the planning for the
    system include maximizing opportunities to reduce needless
    paperwork, regulatory burden and costs borne by the borrowers,
    lenders and SBA?
        It would be unacceptable for SBA to ignore the law and the
    will of Congress expressed in Section 233 of the 1997 Small
    Business Reauthorization Act. It would be unacceptable for SBA
    to bypass accepted system development standards and essential
    planning steps. No successful business could omit prudent
    planning. It is incumbent upon Congress and the U.S. General
    Accounting Office to see that a federal agency does not engage
    in wasteful, willy-nilly project management.
        In a nutshell, the purpose of this hearing is to hold SBA's
    feet to the fire to make sure that they complete the eight
    planning steps required by law before the agency spends any
    taxpayers' money to buy software or hardware for a new
    automated computer system for monitoring its 7(a) loan
    portfolio.
        Again thank you all for participating in this hearing. And
    thank you in the audience for attending this hearing.
        And we are pleased today to be joined by Mr. Danny Davis,
    Ranking Democrat on our subcommittee, and would now turn to him
    for any opening remarks that he would care to make.
        [Mr. Bartlett's statement may be found in appendix.]
        Mr. Davis. Thank you very much, Mr. Chairman, and first of
    all let me commend you for calling this hearing today to review
    the progress of the Small Business Administration's Automated
    Loan Monitoring Program.
        As we all know, Section 233 of the 1997 SBA Reauthorization
    Act, PL-105-135, mandated that SBA perform the necessary
    planning to implement the computerized loan monitoring system.
    Modernization of SBA's loan monitoring system is critical to
    the survival of our small businesses, as it will help expedite
    loans in a more efficient and timely manner. This is most
    important to those programs which embody 7(a) programs and
    disaster assistance.
        As a member of this committee, I have worked tirelessly to
    see that all members of this country receive a fair and
    equitable treatment from the Small Business Administration
    regarding access to capital. I have also seen the same
    commitment from the Small Business Administration. First,
    completing the modernization of SBA's Loan Monitoring Program
    will enable everyone here to evaluate the progress made by the
    Small Business Administration concerning access to capital.
    Therefore, the full implementation of the SBA plan is critical
    to the success of the SBA andsmall businesses who need the
    services that it provides.
        I have complete confidence that the Small Business
    Administration and this committee will work together to that
    end. It is certainly encouraging to see the progress that has
    been made. It is encouraging to know that the Small Business
    Administration is dealing with what I consider to be,
    especially in much of the community that I represent, access to
    capital has and continues to be one of the most significant
    barriers to the development of small business, especially by
    minority groups and women.
        So, I thank you, Mr. Chairman, for this hearing. I look
    forward to the testimony that we are going to hear today, and
    thank all of those who have come to participate.
        Thank you.
        Chairman Bartlett. Thank you very much, and I would like
    now to welcome our witnesses.
        Let me say first that your prepared testimony will, without
    objection, be included as a part of the record, so we would
    encourage you to summarize in any way that you see fit.
        Our witnesses today are Fred Hochberg, Deputy
    Administrator, Small Business Administration, then Anthony
    Wilkinson, President and CEO of the National Association of
    Guaranteed Lenders, Inc., and Joel Willemssen, Director, U.S.
    General Accounting Office.
        Chairman Bartlett. Mr. Hochberg, we would be pleased to get
    your testimony first.
        Thank you.

    STATEMENT OF FRED P. HOCHBERG, DEPUTY ADMINISTRATOR, U.S. SMALL
                        BUSINESS ADMINISTRATION

        Mr. Hochberg. Thank you.
        Mr. Chairman and Congressman Davis, my oral testimony will
    address the questions that you raised, Mr. Chairman, in your
    opening statement, and all of what we are doing here will also
    address issues of access to capital, because we will have far
    better information from our lenders, where loans are being
    made, and where they are not being made, as a result of our
    efforts through this program.
        Good morning, Mr. Chairman and Members of the Subcommittee.
    Thank you for inviting the U.S. Small Business Administration
    to testify about the progress we have made in planning for the
    implementation of our Loan Monitoring System. My name is Fred
    Hochberg, Deputy Administrator of the SBA. By way of
    introduction, I should add that I come to the SBA from the
    business world. I served as President and Chief Operating
    Officer of the Lillian Vernon Corporation, a business founded
    by my mother which I guided from $6 million to $170 million
    over the course of 18 years.
        One of the projects I undertook at the company was a
    complete enterprise-wide overhaul of my company's computer
    operations. But, before I get started I'd like to just brag a
    little bit. In yesterday's issue of Forbes magazine, the title
    is ``Best of the Web,'' the SBA was cited as having the best
    web site. You can find that on page 76 of yesterday's Forbes
    magazine. So, we are developing a very strong IT program at the
    SBA and we are glad that Forbes recognizes it.
        Joining me today are some of the senior executives who are
    responsible for the Loan Monitoring System. Behind me, you will
    find Kris Marcy, our Chief Operating Officer, Larry Barrett,
    Chief Information Officer, Charles Tansey, Associate Deputy
    Administrator for Capital Access, and Joe Loddo, our Chief
    Financial Officer. We are appearing on behalf of SBA
    Administrator, Aida Alvarez, whose schedule did not permit her
    being with us today.
        Despite her absence, the Administrator is deeply committed
    to transforming the SBA into a 21st century institution, using
    the best practices of the private sector, as well as the most
    recent advances in technology. Let me summarize my rather
    lengthy statement, and I thank you for including this as part
    of the official record as well.
        SBA's legislative mandate is quite clear. Simply put, our
    mandate is to serve as a gap lender, to ensure that those small
    businesses who do not have access to traditional means of
    capital have the funds necessary to start or grow their
    businesses. Our success in carrying out this mission has been
    nothing short of phenomenal. Since 1990, our loan portfolio has
    grown from $17.5 billion to over $50 billion. We now guarantee
    between 45,000 and 50,000 loans a year, three times the amount
    in 1990. And, we have made fundamental, major changes to the
    way we do business.
        Just a few examples. Now, all routine servicing is handled
    in our centralized business and disaster loan centers. Seventy-
    five percent of all loans bypass the district offices. SBA has
    reduced burdensome paperwork and increased efficiency with the
    SBAExpress and LowDoc programs, programs that help borrowers
    needing less than $150,000.00 in capital.
        We have completed our first round of safety and soundness
    reviews of the small business lending companies and are in the
    midst of our second round. This is a first for the SBA.
        In accordance with our legislative directive, SBA now
    contracts out about a third of its disaster loan servicing.
    Seventy-five percent of our business loan portfolio is now
    serviced by the private sector, our lending partners, and we
    launched our first ever asset sale, which was quite successful,
    last August.
        And, we did this with 22 percent fewer employees over the
    last decade. Obviously, this meant that the way we deliver
    programs had to change dramatically. You might say at this
    point, well, this is all well and good, but why not centralize
    even more. The answer goes back to our legislative mission,
    small businesses, new businesses, businesses without long
    credit histories, have special needs. Just look at the current
    crisis in the home heating oil industry in New England, and I
    should add in Maryland. If banks were to send these loan
    requests from these small oil companies to our Sacramento
    processing center, they might well be turned down. Many of
    these companies have no borrowing history, many of them need
    technical assistance, and it does take local knowledge of the
    local marketplace to make these loans work. We must give these
    small companies the loans coupled with technical assistance to
    help them get back on the road to recovery.
        We are all for centralization, but only if we can use it
    effectively in assisting our small business clients. SBA once
    made loans directly and did the credit reviews directly. Now,
    as I mentioned, 75 percent of all business loans are being made
    by our lending partners, with no or limited credit review by
    the SBA. This presents a level of risk, which you noted in your
    letter of invitation to this hearing, and this concern, Mr.
    Chairman, is why the agency began planning for a Loan
    Monitoring System back in 1996 and made its first funding
    request to Congress in February of 1997.
        Our computer systems were originally designed 20 years ago,
    when SBA's once primary function was direct loan making. Simply
    put, our systems have not fully evolved to meet the challenges
    and the way our loan products are now being delivered by
    lenders. It is critical that SBA develop a computer system that
    allows us to rapidly identify and respond to variations in
    lending patterns.
        Two major challenges face us as we move ahead. First, as a
    result of recent changes in thenation's banking laws, the face
    of lending has changed and changed dramatically. And, the industry has
    become increasingly polarized as mergers among large and medium-sized
    lenders have created a core of very large multi-state banks on one
    hand, and left an equally large number of rural and small banks on the
    other.
        Secondly, we are challenged by the fact that technology
    systems are evolving rapidly. When we first began planning in
    1996, the full power of the Internet was just beginning to be
    realized. And, its potential as a consumer banking forum was
    understood hardly at all.
        In 1998, 6.9 million households were banking on line. The
    number is expected to grow to over 24 million by 2002. Thirty-
    nine of the largest consumer banks in the U.S. now offer
    Internet bill payment, up from just 17 a year ago. SBA must be
    able to keep pace or we will be bypassed.
        Mr. Chairman, you are a scientist with numerous patents to
    your name. I understand you've held key positions in research
    and development. You, probably better than most, understand how
    critical it is to keep up with technology. I know that you and
    this subcommittee recognize the importance of our developing an
    effective Loan Monitoring System for all our loans, not just
    7(a) and 504.
        I recognize the contribution this subcommittee has made by
    outlining the planning steps which, along with the Clinger-
    Cohen Act, have guided the development of our system thus far.
    In fact, since the 1997 SBA Reauthorization Act, we have worked
    closely with the staffs of the House and Senate Small Business
    Committees and subcommittees, our appropriators and the General
    Accounting Office, to design a system which makes sense for all
    of our small business clients, and lending partners, and our
    staff.
        As you requested, I have included a detailed description of
    the work we have done to fulfill the eight planning steps in my
    written testimony. These steps have proved to be beneficial. I
    am pleased with the work we have done thus far. We are now
    ready to go forward.
        Let me summarize here some aspects of the planning work
    related to the benchmarking and business process reengineering.
    And, in fact, just yesterday we completed one additional step,
    which was pending and is now in final.
        The purpose of benchmarking was to identify the best
    practices of organizations. At the beginning, our contractor,
    Booz-Allen & Hamilton, emphasized the fact that none of the
    organizations identified in the benchmark report performed
    precisely the same function as the SBA. Freddie Mac, in its
    multi-family program for example, deals with about 40 banks.
    SBA does business with over 6,000. The quasi-government
    entities we studied, like Freddie Mac and Fannie Mae, are also
    significantly different from the SBA, because they are involved
    in housing rather than commercial loans. Housing loans tend to
    be more homogenous. Conventional lenders in the study do not
    have SBA's mission of providing financing to those who do not
    have access to credit on reasonable terms. The difference is
    mainly due to our role as a gap lender, which I mentioned
    earlier. Nevertheless, their systems provided very good models
    for the SBA to use in developing our Loan Monitoring System.
        There was one underlying theme throughout the benchmarking
    process, our inability to capture and analyze information which
    results in increased taxpayer exposure to credit risk. Booz-
    Allen & Hamilton recommended that systems be developed that
    would obtain information at loan origination and then
    automatically and seamlessly transfer the information
    throughout the organization.
        I know that you are particularly interested in the use of
    credit scoring. Greater use of credit scoring to make
    objective, standard determinations of front-end risk was
    identified in the bench marking process. By the summer of 2000,
    SBA plans to begin using customized credit scoring to expedite
    the decision-making at its LowDoc centers. Specifically, when a
    loan guarantee request receives a credit score in the low risk
    range, the credit scoring process will replace one of the two
    manual credit reviews now required for loan approval.
        The use of credit scoring, however, must be balanced.
    Credit scoring is not viable for new businesses and first-time
    borrowers, nor does it factor in anticipated business cash
    flows or other factors that SBA uses to determine ability to
    repay.
        SBA's BPR represented an important step in the agency's
    modernization planning. The BPR study was conducted from
    December of 1998 through June of 1999, with a 40-member team
    composed of a cross section of SBA field and headquarter staff.
    The team recommended incorporating technology advances that
    were not even available five years ago. After the BPR, we made
    a number of management decisions. Using GAO's BPR Assessment
    Guide, SBA conducted a feasibility study. Senior management and
    a panel of program experts, who are not part of the BPR team,
    reviewed the 38 recommendations. Ultimately, 30 of the 38
    recommendations were adopted without any change. The remaining
    eight were adopted with slight modifications to better meet our
    legislative mission as a gap lender.
        Then, at the October field managers conference, SBA's
    senior staff reviewed the future role of the district office
    and the degree of appropriate centralization and
    decentralization. That subject was fully discussed and debated.
    In December, following review by senior staff, the
    Administrator adopted the recommendations of the feasibility
    study mentioned above.
        What are the hallmarks of our Loan Monitoring System? We'll
    be electronic with our lenders. We will be paperless. We will
    use high-quality data and be timely. We'll hold lenders to
    strict performance standards. We will proactively perform risk
    management. We will strengthen our ability to do timely and
    accurate subsidy rate calculations.
        Mr. Chairman, we have created a safe system. We can handle
    the challenge of doing business electronically. We have worked
    with the public key infrastructure group as we set up a secure
    Internet site for conducting SBA business and tested the use of
    digital signatures. We have two solid years of experience in
    addressing cyber intrusions and threats. SBA has taken
    aggressive steps to implement a proactive computer security
    program, including Internet monitoring, fire walls and two-step
    authentication to gain access to our site.
        As a result of the planning process, we are ready to begin
    the initial development of the system. No further management
    decisions remain to be made for Iteration One. Also, we have
    nearly completed orientation of our field staff who will be
    using the new system. We will continue to solicit feedback from
    our private sector lending partners. We have been meeting with
    them monthly to implement a system which will work best for
    them, too. These forums are an essential ingredient to ensure
    we develop a system that works for the SBA, our lending
    partners, and small business owners.
        Mr. Wilkinson will further elaborate on that.
        I stress that we are ready to begin the initial
    implementation of the system. Through extensive consultation
    with GAO, we have recently provided greater detail on Iteration
    One, which we believe demonstrates that we are ready to begin.
    We will continue to work closely with GAO as we evaluate this
    prototype effort. We have purposely adopted an evolutionary or
    iterative approach. It is less risky. We are mindful of the
    mistakes that have caused other organizations to stumble.
        Let me go back to our commitment. I hope I have convinced
    you that Administrator Alvarezand I, backed by the team who are
    sitting behind me, are totally committed to bringing the best of the
    technology to our agency. We will use electronic commerce in every
    facet of our operations, using it in our work and communications with
    every member of our staff and SBA family, our resource partners, and
    our small business clients. We are modernizing, and we are mindful of
    the risk associated with major IT projects. We are also aware of the
    greater risk of not proceeding.
        As a result of our planning, we are now fully appreciative
    of the exposure we face. As stewards of federal resources, our
    failure to proceed would be irresponsible and imprudent.
        Thank you for inviting the SBA to discuss with you the
    Automated Loan Monitoring System. I appreciate your continued
    support of this effort, and I ask for your support in the
    future.
        I'd be happy to answer any questions you may have.
        [Mr. Hochberg's statement may be found in appendix.]
        Chairman Bartlett. Thank you, Mr. Hochberg.
        We now will turn to Mr. Wilkinson for his testimony.

       STATEMENT OF ANTHONY R. WILKINSON, PRESIDENT AND CEO, THE
            NATIONAL ASSOCIATION OF GUARANTEED LENDERS, INC.

        Mr. Wilkinson. Good morning, Mr. Chairman, Congressman
    Davis, Congressman Toomey. My name is Tony Wilkinson, and I'm
    the President and CEO of the National Association of Government
    Guaranteed Lenders, or NAGGL as we like to call it. We
    represent nearly 700 lenders and other program participants who
    cumulatively make approximately 80 percent of the 7(a) loans
    guaranteed by the SBA annually. We thank you for holding this
    hearing today and requesting our input on SBA's automation
    efforts.
        I have learned today that one of the other reasons I was
    asked to be here today was to help bring the average size of
    the testimony down. My two colleagues have done an excellent
    job in covering the technical sides of the issue in front of
    us, and I'm going to speak briefly on what is going on from the
    lender's perspective.
        Over the last decade, the SBA 7(a) loan program has
    experienced tremendous growth. What once was a fairly small
    program is today a $10 billion plus program. In the early part
    of the 1990s, the SBA processed the majority of the 7(a) loans.
    To better leverage private sector resources, so that we could
    provide access to capital, this process had to change and we
    had to rely more on preferred lenders and other means to
    deliver the product, and that has happened. This transformation
    is well underway at the SBA, and as Mr. Hochberg just said, 75
    percent of all 7(a) loans last year were processed under the
    PLP program or other limited review procedures. So, again, the
    SBA is now better leveraging private sector resources,
    providing greater access to capital to small business, and
    doing so with fewer employees.
        An integral part of SBA's success will be the development
    and implementation of the new Loan Monitoring System, and from
    the lender's perspective this will be no easy task. The agency
    must deal with the smallest of community banks, all the way up
    to the largest multi-district commercial banks, and non-bank
    lenders. These banks and lenders serve various geographical
    areas, so the needs of the lenders that will be involved in
    this new Loan Monitoring System are very different, and SBA has
    had a challenge in figuring out how to meet the needs of both
    extremes and every lender in the middle.
        We agree that the SBA must gather sufficient data to manage
    its loan portfolio in a responsible manner, while not creating
    a reporting burden on either the borrower or the lender.
        NAGGL thanks the SBA for the ongoing dialogue that we've
    had with our Automation Committee. It's been a pleasure to work
    with Mr. Hochberg and his staff, and from our perspective they
    are doing an excellent job in putting together the new Loan
    Monitoring System.
        We hope this dialogue will continue. We do have regularly
    scheduled meetings, and we hope this continues especially since
    we are nearing the stage of refinement. One of the things that
    we are looking for in the not too distant future is a set of
    specifications with the data file elements that will help our
    lenders determine what we will have to do to comply with the
    new Loan Monitoring System.
        NAGGL concurs that the Internet should be the standard
    medium for submitting loan applications and servicing actions.
    Reliance on the automated flow of information should create
    efficiencies both with the lender and SBA. We also appreciate
    SBA's willingness to work with lenders who are not
    technologically capable, by agreeing to accept applications by
    paper.
        As well as having ongoing dialogue with the lending
    community, we hope that SBA is having a similar dialogue with
    their current contractors to make sure that they can
    specifically integrate their computer systems with what the SBA
    is planning. Hopefully, this will maximize results and there
    will be no duplication of efforts.
        As equally important to the process of collecting the data,
    is the establishment of performance standards by which lenders
    will be reviewed. The SBA has recently established the Office
    of Lender Oversight, and it is our understanding that
    development of performance standards is one of high priority.
    NAGGL has long said that the SBA needed to be in the business
    of lender oversight, and we hope to work with the agency to
    develop performance standards that are appropriate to protect
    SBA's interests, but also reasonable, fair and focused on
    compliance with SBA rules.
        Mr. Hochberg said in his testimony, both written and
    verbal, that one of the uses of the data collected in the new
    Loan Monitoring System will be to predict more accurately the
    future cash flow of loans and help with subsidy rate
    calculation. We, at NAGGL, hope this actually happens. For the
    last several years, the Administration has materially
    overestimated the cost of the 7(a) program by using a default
    estimate that is much higher than actual defaults. This means
    that borrowers are being charged fees higher than necessary.
        In just the last few years, the Office of Management and
    Budget, per the agency's Fiscal 2001 budget request, now says
    they overestimated the cost of the 7(a) program by a total of
    $1 billion. Compared to the request of 7(a) appropriation for
    Fiscal 2001 of only $142.6 million, this to us is a serious
    problem. But, even though OMB has reported they overestimated
    the cost of the program in the past, primarily due to excessive
    default estimates, they did not change the default estimate, or
    materially change the default estimate, for Fiscal 2001. OMB is
    still using a default estimate that we believe is more than 40
    percent higher than necessary. A 40 percent decline in the
    default estimate in the subsidy model would mean a 7(a) program
    subsidy rate of approximately zero. We would not need an
    appropriation for Fiscal Year 2001. NAGGL would appreciate any
    help this committee could provide in helping obtain a more
    reasonable and fair subsidy rate calculation for the 7(a)
    program.
        Mr. Chairman, thank you for the opportunity to appear
    today, and I'd be happy to answer questions.
        [Mr. Wilkinson's statement may be found in appendix.]
        Chairman Bartlett. Thank you very much.
        Now we welcome Mr. Willemssen, and look forward to his
    testimony.
        Thank you.

       STATEMENT OF JOEL C. WILLEMSSEN, DIRECTOR, CIVIL AGENCIES
      INFORMATION SYSTEMS, ACCOUNTING AND INFORMATION MANAGEMENT
                                DIVISION

        Mr. Willemssen. Thank you, Mr. Chairman, Ranking Member
    Davis, Congressman, thank you for inviting GAO to testify
    today. As requested, I'll briefly summarize our statement.
        Overall, SBA has made substantial progress in completing
    the eight mandated planning actions for its Loan Monitoring
    System. SBA has now completed final or draft products for each
    of those required actions. For example, SBA has benchmarked its
    business processes against those of leading organizations, and
    has conducted a reengineering study to identify and select new
    processes to improve its operations. The reengineering study
    addressed the key business functions within SBA, such as
    guarantee procedures and lender oversight, and made numerous
    recommendations for improving the agency's business processes.
        SBA has also started to identify the data needed for the
    proposed Loan Monitoring System, begun defining data quality
    standards, started addressing the target information
    architecture, initially defined system requirements, and
    estimated the costs to complete the project. Based on the
    results of the reengineering study, SBA has developed a general
    description of the Loan Monitoring System. The system is
    expected to be on line to all users around the clock.
    Internally, SBA staff are to have access to records from
    anywhere in the agency, while externally the system is expected
    to allow lenders to view their own portfolios. SBA plans to
    have the Loan Monitoring System linked to the Internet and be
    integrated with a secure web site. Currently, SBA estimates
    that the new system will cost about $27.7 million.
        While SBA has made substantial progress in its planning for
    the Loan Monitoring System, it still must take a number of
    actions to reduce the project's risk. Let me highlight just
    some of those key actions.
        First, SBA needs to identify the costs and benefits of a
    range of business process and systems alternatives to provide
    greater assurance that it is pursuing the most cost effective
    options.
        Second, SBA needs to ensure that the system it is building
    will be integrated with its future agency-wide information
    technology architecture, so that the Loan Monitoring System
    will be able to work seamlessly with SBA's other systems.
        Third, SBA needs to make sure that it implements plans for
    improving data quality, including defining standards and
    developing a schedule of actions to include data quality in the
    current systems.
        Fourth, SBA needs to make sure it's defined key
    requirements for the Loan Monitoring System before proceeding
    with development.
        And finally, SBA needs to provide a clear rationale for why
    automation of many of its business functions must be custom
    developed, rather than addressed through the use of commercial,
    off-the-shelf products.
        As it proceeds with the Loan Monitoring System, SBA will
    also need to continue strengthening its project management
    processes and controls. It has started to implement these basic
    policies and processes, and they are really critical for such
    an effort as the Loan Monitoring System. For example,
    instituting capabilities such as project tracking and oversight
    are essential to be able to monitor actual results and
    performance against the schedule. In addition, implementing
    configuration management policies, which are a set of controls
    over changes to computer and network system changes, are
    important to successfully managing systems that intend to be as
    complex as the Loan Monitoring System. Further instituting
    quality assurance activities, to verify that system development
    complies with applicable standards, provides SBA's management
    with the information they need on whether the project is
    adhering to established standards and procedures.
        Another key aspect that must be addressed is security and
    privacy of automated information. SBA's planned reliance on the
    Internet poses security challenges that must be addressed early
    in the project's life. Because of this, SBA needs to update its
    security operating procedures before it begins wide-scale
    development of the Loan Monitoring System.
        That concludes the summary of my statement, and I'd be
    pleased to address any questions you may have.
        Thank you.
        [Mr. Willemssen's statement may be found in appendix.]
        Chairman Bartlett. Thank you very much for your succinct
    and informative testimony.
        Let me turn now to our Ranking Member and ask Mr. Davis for
    his questions and comments.
        Mr. Davis. Well, thank you. Thank you very much, Mr.
    Chairman.
        Let me just indicate that I find this kind of testimony,
    especially the technical complexity of it, very intriguing.
        Mr. Hochberg, I know that many lenders use credit scoring
    when they are processing small loans. My understanding is that
    credit scoring may not work well with small and new businesses.
        I also noticed that you mentioned credit scoring and credit
    worthiness in your testimony. Can you indicate how you will use
    this information to assist start-up businesses, small
    businesses, real small businesses?
        Mr. Hochberg. Thank you.
        I think credit scoring is not really going to be applicable
    for very small businesses and start-up businesses. It looks at
    past payment history. However, we can use credit scoring on
    some of the more established businesses, where right now we
    have two separate financial analysts who review some of these
    loans. It will replace one of them, so that we can use those
    resources better, perhaps, to work on more complex or trickier
    loans.
        But, credit scoring is just one tool that we'll be using,
    one tool that we'll be importing from the outside, not
    reinventing, but use as an outside resource, an off-the-shelf
    program that we'll customize in some ways.
        Mr. Davis. You really wouldn't have to have any fear that
    there is any possibility that this process or this mechanism
    could be used to redline. I'm always fearful of redlining, in
    terms of having gone through those experiences and having seen
    how sometimes the establishment of standards and criteria will
    box some people out because they just, for a number of reasons,
    may not be there.
        Mr. Hochberg. I think that with this Loan Monitoring System
    we will have better information on which banks are making
    loans, where they are making the loans, and the kind of
    businesses they are financing. So, in some ways I believe the
    opposite will happen, we'll have far better data to understand
    where the gaps exist, so that we can better address those gaps.
    And, if we find in certain districts or neighborhoods that
    there is lower lending activity, which we'll have a better
    handle on, we can go out and recruit other banks and other
    lending institutions to makesure that access to capital is not
    part of the problem.
        Mr. Davis. In his testimony, Mr. Wilkinson mentioned a
    desire or the desirability of SBA being a bit more specific in
    terms of specifications for compliance. How would you respond?
        Mr. Hochberg. I'm not sure I fully understand that
    question.
        Mr. Davis. Well, I think he, could you mention that again?
        Mr. Wilkinson. I'm not sure I understand the question
    either.
        What I said was, we were looking for a set of
    specifications that they expect to publish soon, so that our
    lenders will know exactly what data file elements the SBA is
    looking for, so that we can then sit down with our computer
    folks to see what we have to do to comply.
        Mr. Davis. That is exactly my question. Is that
    forthcoming?
        Mr. Hochberg. We will be putting out the performance
    standards and how we will evaluate and analyze different lender
    performance, so that banks will know precisely what are the
    criteria in terms of their PLP status and how they operate with
    the SBA. That will be much more explicit than it's been in the
    past.
        Mr. Davis. Also, Mr. Willemssen mentioned in his testimony
    some question in relationship to custom development of data
    quality, in terms of whether or not there can be a boilerplate,
    I would assume, set of data as opposed to having to customize
    for so many different entities and, perhaps, at different
    times. How would you respond to that question?
        Mr. Hochberg. It is our desire to use as much off-the-shelf
    software as we possibly can in each phase of the program,
    because this is a large system that has a lot of components to
    it. We mentioned credit scoring. We'll be using D&B or a
    similar company in terms of getting credit analysis, but we
    will be, as much as possible, using off-the-shelf systems
    because they are, frankly, less expensive.
        What we did find, though, up to this point, is that we
    found fewer parallels, fewer exact matches in the private
    sector or in other government agencies than we, perhaps, had
    thought at first. So, we probably will rely a little bit more
    on customization than, perhaps, we would desire, but we don't
    have a choice in this matter.
        Mr. Davis. Thank you.
        Mr. Willemssen, I thought that you were quite complimentary
    to the SBA, in terms of progress that it has made towards
    compliance. Are there any areas beyond what you have discussed
    where you think there is a need or that they could make more
    progress or more effort?
        Mr. Willemssen. I think, Ranking Member Davis, I tried to
    summarize those pretty well in the opening statement, and what
    we've seen on the part of the Deputy Administrator and his
    staff is a real willingness over the last few months to work
    with us. They have been very responsive to the issues we've
    raised.
        We do have some remaining issues that we would like them to
    pursue. I'm not aware that they disagree with the need to
    implement those actions. There may be a slight disagreement on
    what that means in terms of the roll-out of the eventual
    system, but we'll continue to work with them to help ensure the
    project's success and reduce the risks as much as possible.
        Mr. Davis. Thank you.
        Mr. Wilkinson, you, likewise, were quite complimentary, and
    I think we always like to see various partners being able to
    work cooperatively and work well, because that generally means
    there's going to be a different level of success.
        Are there any other areas that you'd like to see some
    additional effort or additional movement in?
        Mr. Wilkinson. Well, as I said in my testimony, one of the
    key areas that we want to watch is the development of
    performance standards, and once we've figured out, okay, what
    do we have to submit up front on a loan application to comply,
    we've now collected certain amounts of data, well now, what are
    we going to do with that data, and how is the lender going to
    be graded, if you will. And so, we are looking forward to
    working with the agency on developing those standards over the
    coming months.
        And, the only other comment I would have is, the agency is
    hard at work at this. They have dedicated some serious
    resources to getting this done. Iteration One is scheduled to
    be finished by summer of 2000. My only concern is that if, for
    whatever reason, that doesn't get finished by the summer of
    2000 and we slide, we'd move into a presidential election, a
    change of administration, changes in leadership at the agency,
    that the project could get bogged down.
        So, we in the lending community are hopeful that while the
    ball is rolling that this project does get finished, at least
    Iteration one, this summer, because they've got a lot of folks
    working on it right now.
        Mr. Davis. Perhaps, this is my last question, Mr. Chairman.
        Mr. Hochberg, you heard that question. It's also a thought
    that I've had, in terms of sometimes if administrations change,
    and when they do, certain policies within agencies sometimes
    will also change. As a person inside the agency, can you give
    us any assurance, while you can't ever give absolute
    assurances, but can you help belay any concerns that we might
    have in relationship to that, relative to what's being
    instituted internally to make sure that there is a
    continuation?
        Mr. Hochberg. One, I just want to add, I think we've been
    working hard and have a very good relationship with the General
    Accounting Office and NAGGL, so, one, our outside partners,
    that is not going to change, and that is a steady factor.
        Additionally, the team that is sitting behind me, our Chief
    Operating Officer is a career person, and our Chief Financial
    Officer is a career person. Larry Barrett is our Chief
    Information Officer, career person. They will be here
    regardless of a change in administrations. But, I do think that
    Tony mentioned one important thing. The best way to ensure that
    there is less interruption is for us to get moving and start
    implementing, to get this project underway.
        The concern always is with a change of administrations that
    when things are simply in draft form or planning form, there's
    a good reason to reevaluate everything, but if we are making
    progress, as Tony mentioned, having Iteration one installed,
    working it through, we will learn so much by installing that
    first iteration that will inform the rest of the process. I
    think that's the best assurance that we keep this thing moving
    and moving rapidly.
        Mr. Davis. It seems to me that progress is, indeed, being
    made, and so I want to compliment you on, not only the effort,
    but what appears to be a great working relationship, and
    certainly it seems to me that you are moving positively towards
    implementation.
        Mr. Chairman, I don't have any other questions. I thank you
    very much.
        Chairman Bartlett. Thank you very much.
        We'll turn now to Mr. Toomey.
        Mr. Toomey. Thank you, Mr. Chairman.
        Just a couple of quick questions. Mr. Hochberg, it's my
    understanding that this Loan Monitoring System has been
    designed with the 7(a) program in mind. Could you just comment
    whether there's any applicability at all to the other loan
    programs, or where that stands?
        Mr. Hochberg. Yes. This loan program was designed initially
    with the 7(a) program in mind. It does include the 504 program.
    It includes microloans and those loans are really made
    tointermediaries. In addition we did some disaster planning models in
    modules for our disaster loan, which is a direct loan program. So, we
    did some front-end work to make sure that this system will encompass
    the full range of lending that we do.
        Mr. Toomey. Okay.
        And, I think it was Mr. Willemssen who suggested that one
    of the areas that continue to need development, if I understood
    correctly, was to ensure that the system is fully integrated
    with the MIS agency-wide, and could you just comment on that,
    how you see that proceeding?
        Mr. Hochberg. Let me emphasize, we know this is a large
    project for the SBA. This is a big systems development effort,
    larger than we have tackled before, which is why it has been
    such a deliberate process, why we've gone through the eight
    steps, why we've worked so closely with GAO, with our outside
    partners, and have brought in a number of consultants and
    contractors.
        But, the architecture has been developed. We are waiting
    for the final draft of that to come back from our contractor to
    review. That is an essential platform that has to be in place
    before we go further.
        So, we are fully in agreement on that.
        Mr. Toomey. And, last question, when all is said and done
    and this is finished, what do you think the total cost will
    have been?
        Mr. Hochberg. Well, I think the total cost we currently are
    estimating at $27.7 million, will be the total cost for phase
    one of this system. That is for the Loan Monitoring System.
    That does not include the overhaul of our financial systems,
    which we have just begun, including our human resources as well
    as contracting programs, and some of the other technical
    assistance programs. So, I should just add that's the cost
    estimate only for phase one.
        Mr. Toomey. Okay, thank you.
        Mr. Hochberg. And, that is an estimate.
        Mr. Toomey. Okay, thank you.
        Chairman Bartlett. Thank you very much.
        Let me ask a technical question or clarification first. I
    wonder if you could put back up the chart which is entitled,
    ``Doing More With Less.'' You said in your oral testimony that
    you were now doing more with less, and that you were now using
    22 percent less employees in the last decade.
        If I look at the chart, it would appear that in the last
    decade your number of employees has dropped to about 50
    percent. I was just wondering, was your oral statement wrong or
    is the chart drawn incorrectly?
        Mr. Hochberg. Our total employees are down. The problem
    with the chart is we should have a scale on the left side to
    show total number of employees.
        Chairman Bartlett. I'm presuming the scale was linear, no
    matter what the scale is, if it's linear why it would appear
    that in the last decade it's dropped almost 50 percent. Has it
    not?
        Mr. Hochberg. Let me just get a clarification. The staff in
    1992 was 3,874 employees. In 1999, we are looking at 3,123
    employees, which is a reduction of 751 to be precise, so that
    would be the exact number.
        Chairman Bartlett. Okay. So then, the chart is drawn
    incorrectly.
        Mr. Hochberg. Probably the scale is off. The staff part of
    the chart appears to be on the high side.
        Chairman Bartlett. Okay, thank you very much. The two just
    didn't jibe, and I wanted to make sure why.
        Mr. Wilkinson, you mentioned that the default rates were
    too high, which means a lot of monies have accumulated because
    they were not needed to cover those default loans. One of two
    things presumably could happen as a result of that. One is that
    less monies could be appropriated because monies have built up.
    Is there a second alternative, and that is that we now could
    make more loans because we have the monies there?
        Mr. Wilkinson. No, sir, that money automatically goes to
    Treasury. It is gone. There is the agency cannot use those
    funds.
        Under the Federal Credit Reform Act, the agency must
    estimate what the net present value cost of their program is,
    and that is done based on entering the future cash flows, how
    much fees we are going to charge borrowers and lenders to be
    involved in the program, so all the fees are set up front. As
    time passes and we get actual numbers, the actual numbers
    replace the estimated numbers, and there's a reestimate amount,
    either positive or negative, that either flows to Treasury or
    is borrowed from Treasury. Borrowed is the wrong word, or
    received from Treasury, to settle up the account.
        But, what has happened over the last several years is,
    there's always been too much money estimated up front, so that
    the amount of appropriations, fees charged to borrowers and
    fees charged to lenders, has been more than has been necessary.
    But, under the Federal Credit Reform Act, those monies flow
    straight to Treasury and they are gone.
        Chairman Bartlett. I thought I heard you say in your
    testimony that enough monies had accumulated that we wouldn't
    need any appropriations for the next year.
        Mr. Wilkinson. No, well I was trying to draw the comparison
    of how much had been overestimated, how much the cost of the
    program had been overestimated, in relation to what we had to
    obtain in appropriations for the Fiscal Year 2001 budget.
        Chairman Bartlett. Okay, but there are no monies that are
    available to you, because at the end of the year they simply
    return to Treasury.
        Mr. Wilkinson. That is correct.
        Chairman Bartlett. So, we need to take cognizance of that
    in future appropriations, so that surplus monies don't need to
    be appropriated, is what you are saying, because they can't be
    used and simply go back to Treasury.
        Mr. Wilkinson. Well, each year we must get an appropriation
    to fund a certain program level, and what we are saying is that
    the estimates used in that are too high. We still have to have
    those appropriations, because once OMB sets the subsidy rate
    number it is set, and we have to live with that. So, the Fiscal
    Year 2001 subsidy rate is set, and for us to have sufficient
    monies to loan to small business we must obtain the
    appropriation.
        Where we need to focus is more on the Federal Credit Reform
    Act and the kinds of estimates that OMB is allowed to use in
    the model.
        Chairman Bartlett. Thank you very much.
        The purpose of our hearing today, of course, was to
    determine the status of planning or implementation of this Loan
    Monitoring System. Mr. Hochberg, in your oral testimony you
    said that we were now ready to go forward. I gather from
    subsequent remarks you made that you feel that you are now
    ready to implement the system.
        The monies, of course, as a result of Section 233 of the
    Small Business Reauthorization Act of 1997 Act, have been
    fenced, and they will not be released from the appropriators
    until a signal from our committee, and that signal will not be
    made until we get a signal from GAO that you, in fact, have
    completed those eight planning steps that were mandated by that
    Act.
        Mr. Willemssen, in his testimony, and his summary, went
    through and I think I numbered them correctly, a dozen items
    that in his view need to be completed. I am presuming, Mr.
    Willemssen, that your position is that these actions need to be
    completed before you can certify that these eight planning
    steps have been completed, so that the system can now be
    procured.
        Mr. Willemssen. The majority of those actions we would want
    to see completed before SBA embarks on major design and
    development activities associated with the Loan Monitoring
    System. To the extent, and this is the subject of some
    discussion that we've had with SBA over the last day or two, to
    the extent that their Iteration One is viewed as more of a
    prototyping effort and something that helps them learn more
    about what they want the system to do, then I would reduce that
    list to a much smaller number.
        We have received some information from SBA on exactly what
    that first iteration associated with the system is, but not
    enough yet to make a final determination.
        Chairman Bartlett. Thank you.
        Let me go through the list, if I might, and just ask each
    of you your position on it, and then I would like to get an
    estimate of time to complete. It's my understanding that there
    are more than adequate monies there to complete the planning?
        Mr. Willemssen. Correct.
        Chairman Bartlett. Okay.
        Number one was, completing the analysis of benefits and
    costs for alternative business processes identified through
    SBA's business reengineering effort. This is a task that needs
    to be completed, in your judgment, Mr. Willemssen, before we
    can certify the system as ready to be implemented?
        Mr. Willemssen. Yes. We would like to see additional
    information on costs and benefits associated with a range of
    alternatives for going forward with the major system
    development activity.
        Chairman Bartlett. Mr. Hochberg, do you understand what GAO
    is interested in here, and do you agree?
        Mr. Hochberg. My understanding in working with Joel, is
    that what is needed is a more explicit articulation of what the
    cost benefits are program by program, not the total system, but
    by elements of the program. That's my understanding. But,
    associated with what options that the agency will pursue is
    making sure that those are the most cost effective options, so
    that we are getting a system that meets everyone's needs at the
    lowest possible cost.
        Chairman Bartlett. And, how long should it take for that to
    be implemented? Your guess, Mr. Willemssen, and then I'll ask
    Mr. Hochberg his.
        Mr. Willemssen. I would say it would still take a couple
    months more work on the part of SBA to do that.
        Chairman Bartlett. Any argument with that, Mr. Hochberg?
        Mr. Hochberg. I probably should ask Larry Barrett, our
    Chief Information Officer, to give a more precise estimate of
    that kind of information.
        Mr. Barrett. Larry Barrett, Chief Information Officer,
    Small Business Administration.
        I estimate it slightly shorter than that. We are estimating
    somewhere from four to six weeks to accomplish those tasks.
        Chairman Bartlett. Thank you very much.
        The second one I have identified here is performing benefit
    cost analysis for systems alternatives.
        Mr. Willemssen. Correct, and that can actually be
    associated with the item that we just talked about. As SBA goes
    through the business and system alternatives, it should
    determine the costs and the benefits of each.
        Chairman Bartlett. So, if they completed the first project
    that we talked about, they would have to finish the second
        Mr. Willemssen. The two should be done in concert.
        Chairman Bartlett. Okay, so the two months, or the four to
    six weeks estimate on the part of the agency, should accomplish
    both of those first two. All right. Thank you very much.
        The third one I have identified here is completing the part
    of its information architecture that specifies the rules and
    standards for interoperability and maintainability of
    interrelated systems.
        Mr. Willemssen.
        Mr. Willemssen. If SBA puts the necessary resources to that
    task, there's no reason that they can't have an initial
    identification of the standards and protocols they want to
    adhere to in a matter of several weeks. It's just a matter of
    putting the resources on it.
        Chairman Bartlett. Mr. Hochberg, you have the resources to
    get this done, and do you agree with several weeks?
        Mr. Hochberg. Let me just add, Mr. Chairman, that the money
    you mentioned, the $8 million that was appropriated for 2000
    that is fenced off, some of this project can be done by
    internal staff that is dedicated to this project. However, the
    funds to pay that staff are actually in that $8 million
    appropriation. The only money we have is fenced off, parked at
    FEDSIM to be used for outside contractors. But the money needed
    to have our internal staff keeping doing this work and doing it
    more thoroughly, we do not have access to those funds.
        Chairman Bartlett. Mr. Willemssen, from your testimony it
    was my understanding that adequate monies were there, do you
    understand that some of those monies are fenced so that they
    are not available, and who needs to take action to make sure
    they are not fenced so that they can complete the planning?
        Mr. Willemssen. Well, our view of the monies available,
    it's a matter of whether SBA wants to decide to use in-house
    resources or contractor resources to get some of these
    activities accomplished, and then laying out a clear schedule
    of activities for who is going to do what and when.
        It would certainly appear to us, based on the information
    we have at this point in time, that adequate funds are
    available for those planning activities. If SBA or the Deputy
    Administrator has information to the contrary we'd be more than
    happy to look at that.
        Chairman Bartlett. But, the information you now have
    available, you would indicate that probably there should be
    enough monies there to complete the planning?
        Mr. Willemssen. Yes, sir, Mr. Chairman.
        Chairman Bartlett. And, they are not fenced and we do not
    have to take action to release them?
        Mr. Willemssen. I do not have evidence of that for the
    planning side.
        Chairman Bartlett. Mr. Hochberg, if that is true, if monies
    which you need are fenced and some action needs to be taken to
    release them, would you please indicate what is fenced and what
    actions need to be taken, so that your progress will not be
    slowed due to lack of available monies?
        The fourth one was identifying requirements and data
    elements for reports.
        Mr. Willemssen.
        Mr. Willemssen. SBA has made progress on this and is
    getting close to having a standard set of data elements. I
    think it was discussed somewhat in the testimony earlier that
    the lenders want to have this information too. SBA just needs a
    little bit more on the input and output side on the level of
    detail, but I think they are getting fairly close on that.
        Chairman Bartlett. What is close in terms of time to
    complete?
        Mr. Willemssen. I would say, again, within a period of
    several weeks.
        Chairman Bartlett. Several weeks?
        Mr. Hochberg.
        Mr. Hochberg. Mr. Chairman, generally GAO is conservative,
    so if they say several weeks I'm comfortable with that
    estimate.
        Chairman Bartlett. Okay, thank you.
        Let me ask a question, when you are saying several weeks,
    and four to six weeks, and two months and so forth, are you
    presuming, are both of you presuming that there are adequate
    resources there that these times can run concurrently, or they
    have to run sequentially?
        Mr. Willemssen. No, many of these activities can run
    concurrently, and that's why I would echo the comment I made
    earlier, it's a matter of SBA putting the needed resources on
    these activities to get them done in that time frame.
        Chairman Bartlett. When we finish this list, we'll go back
    again and ask you to look at the longest one of these and ask
    the question, are there enough resources to complete them all
    within that time period, or do some of these have to be
    sequential, simply because maybe some of them can't be done
    until others are done, or because the same people are needed to
    do two of them. You can't do two things at once.
        Mr. Willemssen. Right.
        Chairman Bartlett. So, we would like to come away with a
    feeling as to the maximum amount of time it's going to take in
    addition to the amount of time it's going to take for each of
    these components.
        Five, completing the definition of specific data, quality
    standards, did we cover that one?
        Mr. Willemssen. Yes, among the items we'd like to see there
    is more specificity on SBA plans to clean up the data before
    embarking on major software design efforts.
        Again, depending on how Iteration One is defined, something
    like this can possibly be delayed. The data quality standards
    are absolutely essential eventually but not as pivotal in terms
    of finishing them before proceeding.
        Chairman Bartlett. In other words, you are saying that you
    could certify to us that they were ready to buy equipment
    before this was necessarily completed?
        Mr. Willemssen. Right, there would be other activities that
    would be higher on the priority list to address. Data quality
    must be addressed, it's absolutely essential. But in terms of
    doing this before proceeding with the initial system design,
    I'm not as concerned.
        Chairman Bartlett. With an adequate understanding between
    GAO and the agency, you then could certify to us that they were
    ready to procure if you had a good feeling about how they were
    going to address this?
        Mr. Willemssen. Right, and we saw the specific milestones
    that SBA officials have laid out for when they are going to do
    this and how, and then they have the project management
    oversight to track what actually happens against that schedule.
        Chairman Bartlett. Okay, thank you.
        Number six, ensuring that systems requirements document
    include capacity and performance requirements.
        Mr. Willemssen. This is possibly the one of the eight that
    would take the longest, in my opinion, especially if Iteration
    One is the beginning point of a typical system design and
    development effort.
        Among the things that SBA needs to still look at here are
    specifying exactly what they want the system to do from a
    capacity perspective and a performance perspective. For
    example, how big is this going to be? How many lenders are
    going to be accessing it? How many employees and, therefore,
    how much horsepower do we need, how much communication
    throughput do we need? What kind of performance are we
    expecting? Are we expecting immediate on-line access 24 hours a
    day? That has ramifications for the size of the system, which
    has ramifications for the cost.
        So, there are still some issues here that SBA needs to look
    at. Again, I want to reemphasize, to the extent that Iteration
    One is more of a prototyping effort, where SBA tries to learn
    more about what they want the system to build, then we're less
    concerned with making sure this is fully done before they
    proceed.
        Chairman Bartlett. But, if you don't know the system's
    capacity needed and the performance requirements, how can you
    size the system?
        Mr. Willemssen. Well, you can't from a traditional life
    cycle approach to system development. Again, and that's why if
    they wanted to take an initial prototyping effort to get some
    more indication and validation of where they think they are
    going is correct, then that's a more appropriate strategy. But,
    starting on a major system design and development effort with
    not knowing those exact specifications on capacity and
    performance, that's a little more risky.
        Chairman Bartlett. I'm familiar with prototyping in the
    defense area, where you acquire a prototype system and you gain
    experience with it. You now know what you need to change so
    that the next one will be better, that's not what we are
    talking about here. You are not talking about a prototype
    system that they are going to get some experience on and then
    discard and buy the real thing?
        Mr. Willemssen. I don't have the full description of the
    system at this point, for example, a statement of work on
    exactly what would be involved right now in SBA Iteration One.
    I'd defer to the Deputy Administrator, but I know SBA is
    considering looking at testing some different scenarios, some
    different prototype systems, to see that the requirements that
    they've laid out to date are reasonable.
        Chairman Bartlett. Am I also correct in assuming that this
    cannot be done until some of the other things are done, because
    you will have to have completed some of the others before you
    could get an estimate of the capacity needed and the
    performance requirements, would you not?
        Mr. Willemssen. That is correct.
        Chairman Bartlett. So, this will be sequential.
        Mr. Willemssen. That one is, from a couple perspectives, a
    bit more sequential, and, again, is the one that probably holds
    SBA up the longest.
        Chairman Bartlett. Now, once they are able to start with
    that, have the information necessary to start, how long will it
    take to complete it in your judgment?
        Mr. Willemssen. To complete Iteration one?
        Chairman Bartlett. No, to complete ensuring systems
    requirements document, include capacity and performance
    requirements. You can't do that until some of the other things
    are done. Once the other things are done, how long will it take
    to do this one?
        Mr. Willemssen. I would say my best estimate would be early
    summer 2000, to have it all done, from a system requirements
    standpoint.
        Chairman Bartlett. Okay, so you are talking about four
    months.
        Mr. Willemssen. And again, those time frames are driven
    based on the point that you made a few minutes earlier. We have
    to look at where the resources are, and does SBA have available
    resources from a contractor and in-house perspective. And my
    other caveat is, as the Deputy Administrator mentioned earlier,
    dependent upon the approach they want to take with Iteration
    One.
        Chairman Bartlett. Okay.
        Mr. Hochberg, do you agree with this estimate?
        Mr. Hochberg. Let me respond to that. I'd also like Larry
    to respond, since it is his direct responsibility to do this
    implementation.
        I should add for a point of clarification that I will also
    follow up in writing, the funds for 2000, to pay for staff to
    do this work, because this is a blend of both contractors and
    staff, are held by Chairman Rogers' Appropriations
    subcommittee. We cannot use those funds, to pay internal costs
    to do this work until that money is released.
        The money we have access to at the moment is at FEDSIM,
    which can only be used for outside consultants and outside
    contractors. None of that can be used to pay the people that at
    the direction of the committee we have brought in house to
    ensure continuity in the planning process. Therefore, we are
    using regular salaries and expense funds--not modernization
    funds--until we get that release from Chairman Rogers.
        But, let me ask Larry to respond to the timing issue.
        Mr. Barrett. Larry Barrett, CIO.
        We disagree with GAO's estimates. We think that we can do
    it probably in a slightly shorter period of time for two
    reasons. The first reason being that we think that we have
    collected a lot of that information already, although we
    haven't provided it to GAO yet, and the second reason is that
    we view Iteration One as a prototype, and we need that
    prototype or we need that first iteration to provide additional
    information for us to do the capacity planning for the full-
    blown system that will come later.
        Chairman Bartlett. Okay.
        Let me ask Mr. Wilkinson, I gather that you have not yet
    determined whether prototype equipment needs to be acquired and
    work lists before completing final system design. At what point
    will you be comfortable with whether or not that needs to be
    done, so that the monies necessary for that, I'm gathering that
    the monies necessary for acquiring the prototype are fenced,
    and they would need to be released, and that will require your
    agreement and the agreement of this committee and the
    Appropriations Committee before that's released?
        Mr. Wilkinson. I would be more comfortable with Iteration
    One when I saw a document such as the statement of work, for
    what the contractor is exactly supposed to do for that
    particular iteration, and we have evaluated that, discussed it
    with SBA, and made some determination as to the adequacy of
    that approach.
        Chairman Bartlett. Okay. So you need proper documentation
        Mr. Wilkinson. And, I have not seen that to date.
        Chairman Bartlett. So, that needs to be done before you can
    reach a considered judgment.
        Mr. Wilkinson. And, the SBA may have it done, we have not
    yet been provided that document.
        Chairman Bartlett. You've just not seen it yet. Okay.
        Now, the seventh one was ensuring that sound justification
    exists for pursuing custom development functions. I gather that
    GAO has a concern that not enough COTs, commercial off the
    shelf, is being planned, and that the agency is considering
    pursuing some custom developments that may not be necessary in
    your judgment?
        Mr. Wilkinson. Well, the Deputy Administrator has discussed
    this point, the fact that they will, to the extent possible,
    try to pursue commercial off-the-shelf products. We think
    that's the right approach, because generally speaking you can
    get those done quicker and at less cost.
        It was a bit surprising to us to see that about 40 percent
    of the functions needed non-COTs products, and we just wanted
    to see the written justification and rationale for why it was
    that high. So, it's not to say we don't believe SBA, we would
    just like to see what documents support that, given that that
    kind of approach generally results in higher costs and
    lengthier time frames.
        Chairman Bartlett. Okay.
        Mr. Hochberg, does the agency have the justification for
    the custom developments, rather than going commercial off the
    shelf?
        Mr. Hochberg. Mr. Chairman, we are looking at that. There
    are many parts of the Loan Monitoring System. So on a system-
    by-system basis we are looking at commercial off the shelf
    versus in-house programming across the board.
        I come from the private sector. I ran a business for 18
    years. The last thing I would want to see done is reinventing
    the wheel, developing things that can be found on the outside.
    I have zero interest in that whatsoever.
        I agree with Joel entirely, it takes longer, it costs more
    money to do a custom solution. So, to the extent possible we
    want to find off-the-shelf programming in the same way we want
    to centralize as many processes as possible.
        Chairman Bartlett. When will you have completed that
    analysis, to be able to get that information to GAO?
        Mr. Hochberg. I should ask Larry to give you the precise
    timing on that.
        Mr. Barrett. The COTs decision will be an ongoing
    evaluation as we go through the various iterations of the
    system. We will constantly be looking to see if we can purchase
    off-the-shelf software. We'll make a decision on Iteration One
    before we proceed in Iteration One, and then use that
    information in terms of deciding about the software for the
    succeeding iterations as we go through them.
        Chairman Bartlett. Thank you.
        Mr. Willemssen, the eighth item I have here is estimating
    the cost to completion that are based on an analysis of the
    benefits and costs of system alternatives. Do I conclude from
    this that you aren't sure that the, what, $27 million is the
    right amount?
        Mr. Willemssen. Yes, in terms of SBA's effort on this
    particular action, it is substantially completed at this point.
    However, when they embark on additional analyses and costs and
    benefits of alternatives, that figure could change, and so they
    will have to refine the figure after the cost benefit analysis.
    And, we also think it's important for SBA to look at the Loan
    Monitoring System from a life cycle perspective. That's what's
    typically done on major information systems, is you don't only
    look at the design and development costs, but the operation and
    maintenance costs down the line, and the anticipated life of
    the system.
        Chairman Bartlett. Thank you.
        You have also identified four areas in the project
    management area where SBA shouldstrengthen its project
    management process and control, and I just wanted to go through those
    briefly to see how much time that was going to take, and would their
    ability to do these things impact the final schedule.
        The first of these was to include putting in place project
    tracking and oversight capabilities.
        Mr. Willemssen. Yes, project tracking and oversight are
    very important for a major effort like this. In the grand
    scheme of information technology government-wide this is not
    such a huge effort, but for SBA it is. It's the biggest one
    they've ever undertaken.
        The reason that these four are a little different than the
    other eight, is they transcend boundaries. These have more to
    do with key processes and controls that SBA needs to implement
    agency-wide. This is not something that like the eight actions
    before that we can point to and say, do it for this project.
    It's something that has to be implemented more from an agency-
    wide perspective. It's almost cultural, that when we have a
    major system effort like this, we are going to have project
    tracking and oversight activities.
        On all of these, not just project tracking and oversight,
    SBA is committed to the changes. But it does take time, and
    it's not something that you can say will be done at a certain
    point in time. They have to continue strengthening those
    processes.
        Chairman Bartlett. Was it your presumption that they would
    have done these four things when you gave us the time estimates
    for completing the first eight?
        Mr. Willemssen. It was our belief that these would be in
    the process of being implemented, but not fully mature. Fully
    mature information technology processes take a long time to
    implement, and most of the federal agencies are not there yet.
        To the extent that those processes and controls become more
    mature, you've reduced the risk of systems that don't work as
    you expected, and you reduce the risk that they go over budget.
    This is more of a agency-wide scope, it's a little bit broader
    than just the Loan Monitoring System. It's the way information
    technology should be done, not only the federal government, but
    all major organizations. This is followed predominantly on a
    model initially developed by the Software Engineering Institute
    out of Carnegie-Mellon.
        Chairman Bartlett. Thank you.
        Mr. Hochberg, let me read these four to see if you agree
    that these are things that need doing and that you are doing,
    and that it's your judgment that you are working with GAO to
    accomplish these goals. The first was putting in place project
    tracking and oversight capabilities. The second was
    implementing configuration management processes. The third was
    acquiring independent verification and validation for the Loan
    Monitoring System project and establishing an internal quality
    assurance function, and the fourth was addressing the security
    challenge posed by internet-based access to Loan Monitoring
    System functions and data.
        Mr. Hochberg. Mr. Chairman, it is my understanding and my
    sense, as the Deputy Administrator, I am not the Chief
    Information Officer, that all four of those are in place. I can
    particularly speak to two, and I can let Larry fill in some
    details.
        On the independent validation and verification, again,
    coming from the private sector, again, looking at how other
    agencies have tackled major systems projects, I wanted that IV
    & V to make sure that we don't stumble in the way that some
    other organizations have stumbled.
        In terms of security, this was a material weakness that was
    cited in the 1998 audit of the agency. The Administrator put
    into place, upon receiving that audit, immediate plans to
    upgrade the security of computer data, as well as internet
    security. We've brought in a contractor, and added a number of
    staff to specifically address that item.
        The other two I'm going to let Larry address, and certainly
    he may want to add to what I've just said.
        Mr. Barrett. As was indicated, this is going to be an
    ongoing effort, but we have taken significant steps, I think,
    to address project tracking and configuration management.
        A couple of things that we are doing is that we have
    provided our staff, internal staff, with formal training in
    both project management and configuration management, and we
    have been given the authority to hire additional people. One of
    the requirements and one of the things that we are looking for
    when we bring in new staff members is for people to bring in
    people with experience in these basic areas, so not only will
    we have people already on staff, but bringing in new people. In
    the interim what we are doing is hiring contractor support to
    mitigate any weaknesses that we have in both the project
    tracking area, as well as configuration management and quality
    assurance.
        As the Deputy Administrator indicated, we have a big effort
    underway in terms of Internet security, and just security in
    general within the agency. We started that over six months ago.
    The Administrator made a major commitment in terms of both
    resources and dollars to enhance our programming, and that's
    well under way.
        Chairman Bartlett. Thank you very much.
        I want to thank the witnesses very much for their
    testimony. This is a necessary oversight responsibility of the
    Congress. We are pleased with the progress that SBA has made in
    the roughly year and a half since our first hearing. We are
    pleased that SBA and GAO are working together. We are pleased
    that there is a general meeting of the minds as to what yet
    needs to be done and how long it will take to do that, and I
    promised that we would come back to look at an overall time.
        If things go reasonably well, Mr. Willemssen, you are
    saying it will be early-mid summer before we would be in a
    position to proceed with procurement?
        Mr. Willemssen. The caveat I would have is based on a
    comment that Larry made. If the agency does have additional
    documentation associated with system requirements that we
    haven't seen, that substantially address the issues we've laid
    out, then I would up my estimate further, but I haven't seen
    those documents.
        Chairman Bartlett. So, with what you've seen you are saying
    it's mid-summer?
        Mr. Willemssen. Then I'd say early summer.
        Chairman Bartlett. Early-mid summer.
        Mr. Hochberg, that's reasonable?
        Mr. Hochberg. It's reasonable to me.
        Chairman Bartlett. Mr. Hochberg is nodding in the
    affirmative that it's reasonable.
        Well, let me thank you very much, and if you need some
    action to release funds, GAO is not sure that those funds need
    to be released. Our staff is not sure they need to be released,
    but if in the judgment of the agency you do not have adequate
    funds and you need funds released, please substantiate that,
    document that, and get it to us, and also to GAO so that if
    there are necessary steps to be taken they can be taken,
    because we would like the control of these lending programs to
    be moved from the agency to the private sector. That cannot be
    finally accomplished and implemented until this is done, so we
    are anxious that it be done expeditiously.
        Let me thank all of the witnesses very much for your
    testimony, and we will keep surveillance of this program and
    there may need to be an additional hearing before the funds are
    finally released.
        Thank you very much.
        Mr. Hochberg. Thank you, Mr. Chairman.
        Chairman Bartlett. The meeting is in adjournment.
        Mr. Wilkinson. Thank you.
        Mr. Willemssen. Thank you.
        [Whereupon, at 11:29 p.m., the subcommittee was adjourned.]
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