[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
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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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