[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
        FY `07 BUDGET AND REAUTHORIZATION PROPOSALS OF THE SBA
=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                     WASHINGTON, DC, MARCH 15, 2006

                               __________

                           Serial No. 109-43

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house


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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
SAM GRAVES, Missouri                 DANIEL LIPINSKI, Illinois
TODD AKIN, Missouri                  ENI FALEOMAVAEGA, American Samoa
BILL SHUSTER, Pennsylvania           DONNA CHRISTENSEN, Virgin Islands
MARILYN MUSGRAVE, Colorado           DANNY DAVIS, Illinois
JEB BRADLEY, New Hampshire           ED CASE, Hawaii
STEVE KING, Iowa                     MADELEINE BORDALLO, Guam
THADDEUS McCOTTER, Michigan          RAUL GRIJALVA, Arizona
RIC KELLER, Florida                  MICHAEL MICHAUD, Maine
TED POE, Texas                       LINDA SANCHEZ, California
MICHAEL SODREL, Indiana              JOHN BARROW, Georgia
JEFF FORTENBERRY, Nebraska           MELISSA BEAN, Illinois
MICHAEL FITZPATRICK, Pennsylvania    GWEN MOORE, Wisconsin
LYNN WESTMORELAND, Georgia
LOUIE GOHMERT, Texas

                  J. Matthew Szymanski, Chief of Staff

          Phil Eskeland, Deputy Chief of Staff/Policy Director

                  Michael Day, Minority Staff Director

                                  (ii)


                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Barreto, The Honorable Hector, Administrator, U.S. Small Business 
  Administration.................................................     5
Smith, Ms. Patricia, PEMBA Lighting and Automation...............    21

                                Appendix

Opening statements:
    Manzullo, Hon. Donald A......................................    36
    Velazquez, Hon. Nydia........................................    73
Prepared statements:
    Barreto, The Honorable Hector, Administrator, U.S. Small 
      Business Administration....................................    75
    Smith, Ms. Patricia, PEMBA Lighting and Automation...........    96

                                 (iii)


         FY `07 BUDGET AND REAUTHORIZATION PROPOSALS OF THE SBA

                              ----------                              


                       Wednesday, March 15, 2006

                   House of Representatives
                                Committee on Small Business
                                                     Washington, DC
    The Committee met, pursuant to call, at 2:45 p.m., in Room 
2360 Rayburn House Office Building, Hon. Donald Manzullo 
[Chairman of the Committee] presiding.
    Present: Representatives Manzullo, Bradley, McCotter, 
Westmoreland, Velazquez, Udall, Lipinski, Christensen, 
Bordallo, Barrow, Moore.
    Chairman Manzullo.Today, the Committee will examine the 
President's Fiscal Year 2007 Budget Reauthorization Proposals 
of the Small Business Administration. The President's Budget 
request includes $624 million in spending for the SBA in Fiscal 
Year 2007. This is about 37 percent less than what was spent on 
the SBA in Fiscal Year 2001, while in the same time, the SBA 
served more small businesses than ever in its history. The SBA 
certainly knows how to do more with less and it ought to be 
commended. While the President's budget request for the SBA is 
generally sound and reasonable, there are few notable 
exceptions particularly the proposal to increase fees in the 
SBA's finance programs to begin to cover some administrative 
expenses and the idea to institute an adjustable interest rate 
for disaster loans in the fifth year.
    However, I would be negligent if I did not remind my 
colleagues and the small business community that the 
President's budget request also includes the following key tax 
relief proposals of keen interest to small businessmen and 
businesswomen.
    1. Making permanent the tax cuts previously passed by 
Congress including death or an estate repeal in which the 
average tax savings in 2005 was $3,235 per small business 
according to the U.S. Treasury;
    2. Making contribution to the Health Savings Account tax 
deductible; and
    3. Enacting an even higher and permanent small business 
expensing limit to $200,000.
    The Committee is also in the middle of a comprehensive 
review of all SBA's programs which has not been done since 1995 
in preparation for reauthorization. In 2004, Congress passed a 
two-year reauthorization bill that made a variety of 
significant changes to the policies and small business programs 
of the SBA. The Committee is reviewing how the SBA has carried 
out the various programmatic changes contained in the previous 
reauthorization and ideas for further reform.
    Two weeks ago, Representative Musgrave's Subcommittee 
examined SBA's entrepreneurial programs. Last week, 
Representative Bradley's Subcommittee reviewed SBA's finance 
programs and before the March District work period, 
Representative Akins' Subcommittee will conduct an oversight 
hearing on SBA's procurement programs.
    Today we're honored to have the Administrator of the SBA, 
Hector Barreto testify before the full Committee to discuss his 
vision of the direction of the SBA for the reminder of the 
administration. Mr. Barreto is the second longest serving SBA 
administrator in its history and I am pleased that he has taken 
the time to be with us this afternoon.
    Through the hearing process, the Committee has received 
input from SBA stakeholders as to what should or should not be 
included in the authorization package. About two weeks ago, the 
Committee received the Administration's legislative proposals 
for the SBA. The purpose of the hearing today is to examine 
these proposals, particularly in light of input we received 
from other SBA stakeholders.
    I'm pleased the Administration included several provisions 
in their reauthorization package that would further improve 
SBA's response to catastrophic disasters. The SBA has done an 
excellent job already by approving a record $6 billion of low 
interest disaster loans for over 86,200 Gulf State residents 
and business owners affected by Hurricanes Katrina, Rita and 
Wilma at a rate twice as fast as the nation's previous largest 
disaster, the Northridge Earthquake in 1994.
    The overall approval rate for SBA's disaster loans in the 
Gulf region is 31 percent or 37 percent if you exclude 
withdrawn application, not 15 percent as alleged by the 
minority. This is up 16 percent from the last year. Why has 
this happened? SBA has hired and trained 4,250 employees to 
process disaster loan applications, doubled the size of their 
loan processing center, quadrupled the size of their call 
center, doubled access to the loan processing system, 
streamlined documentation for all business loans and simplified 
approvals and processes for business loans under $100,000, 
expedited loan approvals with credit scoring, created a new 
system for tax verification with the IRS and launched the 
Disaster Loan Partners Initiative designed to increase the role 
of private sector financial institutions in recovery efforts.
    The further reforms that the Administration seeks in the 
reauthorization include increasing the size of disaster loans, 
offer an economic injury disaster loans to nonprofits and 
provide more flexibility to allow business development centers 
to redeploy resources and staff to assist disaster victims. 
This will require legislative changes to the Small Business 
Act.
    I'll also be working on initiatives to further improve and 
expand the reach of SBA's finance programs to serve more small 
businesses all with the context of a zero-loan subsidy rate and 
SBA's entrepreneurship programs as part of the SBA 
reauthorization process. I'll yield to Ms. Velaquez in just a 
second. But as with is our custom here and Mr. Barreto, if 
there is a question as to which you would feel having a high 
level member of your staff answer the question directly, that 
person could just scoot up to the table, introduce himself or 
herself for the record and answer that question. That's within 
your prerogative.
    [Chairman Manzullo's opening statement may be found in the 
appendix.]
    Mr. Barreto. Thank you, Mr. Chairman.
    Chairman Manzullo. Okay. Ms. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman. Over the past five 
years, SBA's budget has been cut nearly in half. Clearly, there 
are many areas of the Agency's budget we could delve into 
today. But at this point in time, with thousands of Gulf Coast 
small businesses desperately in need of SBA assistance, the 
SBA's Disaster Loan Program needs the immediate attention of 
Congress.
    Hurricane Katrina has been very telling of what the SBA has 
become. There is no doubt that Hurricane Katrina was one of the 
most massive disasters to ever touch down in the United States 
and there was no way for the individuals that reside in the 
Gulf Coast region to avoid its path.
    But what could have been mitigated? What we do have control 
over is the response. SBA's lack of planning and foresight in 
this disaster response shows that something has gone terribly 
wrong in this agency's ability to assist small businesses. The 
fact that they implemented a brand new loan processing system 
at the height of the hurricane season is indicative of the 
Agency's foresight for dealing with disasters. To compound the 
difficulties, the Agency drastically reduced their disaster 
employees as part of a work force transformation to only have 
to turn around at the last minute and rehire a brand new group 
of workers.
    The worst part is that this Agency does not seem to have 
learned from its mistakes. SBA has been through two massive 
disasters over the past five years. Yet they have no plan of 
action and they have done nothing to show that they have taken 
steps to avoid this type of mistakes in the future.
    Instead, the Agency has chosen to make decisions on a whim. 
From their Go-Along Program which was supposed to make millions 
in loans, but they have only administered 150 loans, these are 
not solutions. Steps like these do not put loans into the hands 
of those that needs most right now. Today nearly seven months 
after Hurricane Katrina touched down, 65 percent of the loans 
have been declined, less than ten percent of approvals have 
been paid out and individuals are still saying that they are 
having to wait over three months just to hear back from SBA. 
Rather than addressing these downfalls, SBA has instead managed 
to throw out a myriad of reasons for all of this. But the 
bottom line here is that the approval rates should not be 
declining at such massive rates.
    We are releasing today a report that shows for the last 
five years approval rates have been historically lower for the 
disaster loans when compared to previous administration. Where 
averages used to be around 60 percent during the George H. W. 
Bush and Clinton Administrations, they are now only around 35. 
These declining approval rates are a result of change in 
priorities. The goal used to be to make this loan 
wholeheartedly, but now it seems the goal is to make these loan 
on the cheek.
    We're going to hear from a real woman business owner from 
the Gulf Coast region today, one woman that is representing 
thousands of stories just like hers. I also want to share this 
video of Patrick Kimber (PH) from the Gulf Coast as yet another 
example of the hardships facing individuals in accessing 
disaster assistance through SBA. It is clear that something is 
not working here and it is about time we have some leadership 
that will get the job done and enable the Gulf Coast to make a 
full recovery.
    [Ranking Member Velazquez's opening statement may be found 
in the appendix.]
    Chairman Manzullo. Before you start that, could you pause 
that just a second please? It's very usual to have a video tape 
as part of a person's opening statement because the opening 
statement is to include the words of the person making the 
opening statement, but I'm doing that to accommodate the 
minority and I understand this tape is less than a minute. Is 
that correct?
    Ms. Velazquez. That's correct.
    Chairman Manzullo. And I also would ask if you would be 
willing to have this person who testifies sign a privacy waiver 
so the SBA can conduct its own investigation.
    Ms. Velazquez. Absolutely.
    Chairman Manzullo. And also as to the witness, your 
minority witness, we were just advised of that person a few 
hours ago, would you be willing to have that person also sign a 
Privacy Act waiver?
    Ms. Velazquez. We'll get that to you, Mr. Chairman, on 
that.
    Chairman Manzullo. It's important because we just had 
notice. It's usually 48 hours notice given to a witness and the 
reason for that is so that--You're willing to sign that?
    Ms. Velazquez. She's willing to sign that, Mr. Chair.
    Chairman Manzullo. Would somebody from our staff take it to 
the witness and have her sign the Privacy Act? Okay. Is that 
the wrong one? Just a second.
    Ms. Velazquez. Can we play the video?
    Chairman Manzullo. Go ahead.
    Witness. The biggest frustration with the SBA now is that 
is seems like they are only giving it to what I would call the 
top ten percent, all these people that already had one and it's 
a government program. Why aren't they helping the little people 
as much as they're helping all of the big wigs. I pay my taxes 
too. I work hard. I don't default on any of my loans at all. I 
pay my house on time. I had two brand new cars, paid them off 
before they're ever due. I've had loans even after the 
hurricane that I've paid off already.
    The money that I have received to work on my house from my 
insurance company I'm going to pay my mortgage company so I 
don't default on my loan. People like me who's 26 years old, 
have three kids and a wife, I'm just trying to live the 
American dream and I do everything like everybody else. Why not 
me?
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Manzullo. Could I have the name of the person who 
made the tape for the record?
    Ms. Velazquez. Mr. Chair, I could provide it. Sure.
    Chairman Manzullo. Could your staff get it and provide it 
within the next half hour or so?
    Ms. Velazquez. Mr. Chairman, you can get it at the House 
Recording Studio.
    Chairman Manzullo. Wait a second. You're the one that asked 
to have this tape shown. As a matter of record, whoever 
testifies or gives testimony before this Committee, I want to 
know who they are.
    Ms. Velazquez. The House Recording Studio, Mr. Chairman.
    Chairman Manzullo. Do you know the name of this person?
    Ms. Velazquez. I could give it. Yes, sure.
    Chairman Manzullo. Why don't you give it for the record?
    Ms. Velazquez. I don't have it now, Mr. Chairman.
    Chairman Manzullo. Does anybody on your staff know who it 
is?
    Ms. Velazquez. I would be more than happy to submit it to 
you. I don't have it now.
    Chairman Manzullo. Would you do that before the hearing 
ends?
    Ms. Velazquez. Sure, Mr. Chairman.
    [Ms. Velazquez didn't provide the name of the person who 
made the tape for the record.]
    Chairman Manzullo. All right. Thank you. Proceed please.

STATEMENT OF THE HONORABLE HECTOR BARRETO, U.S. SMALL BUSINESS 
                         ADMINISTRATION

    Mr. Barreto. Thank you, Chairman Manzullo. Ranking member 
Velazquez. Distinguished members of the Committee. Thank you 
for inviting me here today to discuss the President's Budget 
Request for the U.S. Small Business Administration and related 
legislative issues. Since 2001, the SBA has been on a mission 
to deliver more services to the nation's small businesses as 
efficiently and effectively as possible. We are very proud of 
SBA's success in that quest and the Fiscal Year 2007 Budget 
reflects the continuation of this goal.
    Lending is at an all-time high. More clients than ever are 
being served by our Entrepreneurial Development Programs and 
we're improving methods to assist small businesses gain fair 
access to government contracting opportunities. A number of 
different initiatives have been implemented to further that 
goal.
    We realize that any time that you strive to be more results 
driven as President Bush has directed us, there are going to be 
challenges. Nonetheless, we remain keenly focused on our 
efforts to serve the needs of America's small businesses by 
restructuring key Agency operations and reengineering the 
Agency's largest loan programs, the SBA has achieved record 
program growth while reducing its budget by 37 percent since 
Fiscal Year 2001.
    The SBA has also improved the effectiveness of the 
taxpayers' dollars supporting small business development. With 
these improved efficiencies in 2007, SBA will be able to record 
record numbers of small business loans with a total budget 
request of $624 million.
    SBA lending has seen record-setting growth in small 
business lending in our Flagship Loan Programs. Since 2001, the 
number of loans has more than doubled on 7A and 504 loans. In 
Fiscal Year 2005, we made nearly 98,000 small business loans in 
our two primary lending programs compared to only 42,000 in 
2001. In Fiscal Year 2005, minorities received 31 percent and 
women received 17 percent of 7A and 504 dollars which we 
funded. The Fiscal Year 2007 request will support $28 billion 
in financing to the U.S. small business community. This 
represents a 42 percent business lending increase over Fiscal 
Year 2005 through the 7A and 504 and SBIC Debenture Program.
    In all of these programs, SBA will be able to continue to 
meet the growing demand for loans in Fiscal Year 2007 without 
fears of shutdowns or caps because all three programs will 
operate at zero subsidy. Zero subsidy is still the best policy 
for the long-term stability and growth of SBA's loan program 
and as you can see with our results over the last year, it has 
not impacted our lending.
    In addition to better results, we've also increased 
efficiencies in lender oversight functions, loan processing and 
liquidating, saving the taxpayer millions of dollars. Further 
consolidations and efficiencies planned for Fiscal Year 2006 
and 2007 will result in additional savings.
    In keeping with these savings and efficiencies, the 
Administration is proposing an administrative fee for 7A and 
504 and SBIC financings for loans over $1 million. This fee 
will cover the cost of making these loans and will save the 
taxpayers $7 million in Fiscal Year 2007.
    On the Entrepreneurial Development side of our mission, we 
continue to focus on making our programs more effective and 
efficient as well. Key to this is a close collaboration with 
our resource partners, the Small Business Development Centers, 
SCORE, the Counselors to America's Small Business and Women's 
Business Centers.
    With the help of these partners as well as through our 
extensive online resources, we provided training and counseling 
to over 1.1 million clients. To reach new clients, SBA is 
encouraging our partners to utilize online development and 
maximize the resources we provide them to increase capacity and 
outreach. We're certainly going to use technology at the SBA to 
the greatest extent possible to reach additional clients.
    With respect to government contracting and business 
development, I can report that we now have 58 procurement 
center representatives, PCRs, assisting small business with 
federal procurement issues. SBA's Office of Government 
Contracting and Business Development has also instituted 
enhanced practices and technological improvements. These have 
provided many benefits and increased efficiencies concerning 
government contracting opportunities and monitoring.
    Strives have been made to maximize staff resources and 
monitor contracting activities as well as to improve 
communication and interaction with the small business community 
through the automation of many basic systems. SBA's focus in 
Fiscal Year 2007 as it has been since I became Administrator 
and also part of the President's small business agenda will 
continue to be to work to increase small business participation 
and competition in the federal procurement arena.
    I would also like to speak about our disaster response. To 
date, we have received an unparalleled 389,000 disaster loan 
applications from homeowners, from renters and businesses. This 
is nine times more than we received for Hurricane Andrew. More 
than $6.1 billion in disaster loans have been approved to more 
87,000 victims. In the last two and a half months, we've 
approved more than $4 billion in disaster loans.
    Let me put this in perspective. The SBA is already 
surpassed by more $2 billion what was previously the largest 
response in history. That was the 1994 North Ridge earthquake 
in California. Following that disaster, it took one full year 
to process 250,000 applications which we received.
    In this response to the 2005 Gulf Coast hurricanes, the SBA 
has processing more than 251,000 applications in half that 
time. Our response has been agency-wide from the thousands 
working in our Office of Disaster Assistance to the hundreds of 
staff in our district offices across the country who are 
helping to process loans. Ninety-seven percent of the economic 
injury disaster loans have been processed. More than 286,000 
damaged properties have already been inspected. That's 95 
percent of all of the total inspections.
    We're now focusing our efforts on loan closing and 
disbursements so that we can put money in the victims' hands 
and they can start rebuilding. We've already made disbursements 
in more than 36 percent of the approved loans. I am proud of 
the hard work, the dedication, the compassion and urgency our 
staff is demonstrating. It's important to reiterate that we 
make disaster loans with lenient underwriting requirements. We 
do not provide grants. This is how the SBA Disaster Loan 
Program model has worked for more than 50 years.
    With respect to the Fiscal Year 2007, we're proposing 
funding to support $900 million for loans to homeowners and 
businesses struck by natural disaster. That estimate is based 
on the five year average. The Fiscal Year 2007 Budget proposes 
to continue providing preferential loan terms to victims of 
disasters.
    However, in order to contain escalating costs of these 
loans, the budget proposes to adopt a graduated interest rate 
for the Disaster Loan Program. Without such an action, the 
subsidy costs of disaster loans will increase to over 20 
percent over this year's rate.
    During the first five years after a disaster, interest 
rates will remain deeply subsidized as they are currently 
structured, although the interest rate caps would be 
eliminated. Thereafter, rates would revert to a rate reflected 
of comparable Treasury instruments determined on the approval 
date of the loan still below market rate. This structure would 
continue to provide borrowers with deep interest subsidy when 
they need them the most, immediately after a disaster. And 
after five years, the subsidies would be reduced for the 
remainder of the loan term.
    The SBA operates like the businesses it helps to succeed by 
continually meeting challenges and evaluating cost 
effectiveness. The SBA has succeeded in achieving record growth 
in its programs while at the same time reducing the overall 
budget request through focused, practical implementation of the 
President's Management Agenda, the PMA, and related 
initiatives.
    To maintain these trends and to build on the Agency's 
achievements, the SBA budget reflects a commitment to improving 
management systems and processes, investing in new and upgraded 
infrastructure, improving the efficiency and skill level of our 
staff and continuing transformation of Agency operations. The 
Agency is committed to continuing our mission and legacy to 
develop more services efficiently to the nation's small 
businesses. The SBA's 2007 Budget Request does just that.
    Mr. Chairman, Members of the Committee, thank you again for 
the opportunity to meet with this Committee today. I would be 
happy to answer any questions.
    [The Honorable Barreto's testimony may be found in the 
appendix.]
    Chairman Manzullo. Thank you. I have a series of questions 
and maybe I won't be able to have a chance to get them in 
during this round. First of all, thank you for coming. I 
appreciate it very much. Do you support allowing individual 
certified development companies to process or contract out loan 
liquidations?
    Mr. Barreto. Now you're talking about CDCs, processing 
disaster loans.
    Chairman Manzullo. No. Just 504s.
    Mr. Barreto. 504s, absolutely. Obviously, that's been the 
real strength to our program is the incredible work that our 
certified development companies do on that program.
    Chairman Manzullo. Do you support a higher $3 million 
maximum loan amount in the 7A Program?
    Mr. Barreto. That is something that we're taking a look at 
right now and analyzing. It's something that we've discussed 
before. The only thing that we want to understand a little bit 
more because as you know the implications of the program are 
constantly changing. So we're looking at it right now to see 
how many people could benefit from larger loans of that level 
and we're very glad to continue working with NATCO on that 
proposal.
    Chairman Manzullo. Appreciate that. With regard to the 
disaster that occurred along the Gulf Coast, the equivalent of 
that is a series of side-by-side tornados 100 miles deep 
running from Boston to Chicago. Most of us have no idea as to 
the enormity of the damage that was done down there. In this 
particular disaster, FEMA referred a lot more people to SBA 
than before and many think that that's one of the reasons for 
the high denial rate because my understanding is that SBA 
became a gatekeeper not only as to its own programs but also as 
to the FEMA grant programs. Would you want to comment on that?
    Mr. Barreto. Yes sir. Thank you, Mr. Chairman. We've gone 
back and we've reviewed this. Obviously, we've received 
millions of referrals from FEMA on this disaster. I want to say 
that we've sent out close to three million applications, 
fielded well in excess of two million requests for loans, have 
received almost 400,000 loans.
    When we went back and we looked at this in previous 
disasters, it used to be that FEMA would refer to us somewhere 
around 35 to 40 percent of the people that were inquiring for 
assistance. In this disaster, it's been closer to 85 percent of 
the individuals that have originally registered with FEMA that 
have referred to the SBA. So that by itself created a 
tremendous, a huge volume.
    But one other thing that we've talked about before and 
sometimes I think people forget this is that many of the 
individuals that apply for SBA are not looking for a loan. 
They're actually looking for a grant. But the way that the 
federal disaster model is structured right now, SBA must make 
every attempt to determine whether that individual could 
qualify for any kind of a loan. So far, FEMA has done more than 
1.7 million grants and the total amount of those grants now 
totals close to $7 billion in grants.
    Chairman Manzullo. And those applications when people 
applied to you and were rejected by the SBA, then they 
qualified for FEMA grants. Is that correct?
    Mr. Barreto. Yes, if they're a homeowner they go back to 
FEMA for the grant.
    Chairman Manzullo. Do you have any idea how many of those 
people applied to SBA and then were rejected?
    Mr. Barreto. I can get you the exact number, but the 
majority of them would have because FEMA has referred most of 
the individuals to the SBA and as I mentioned, FEMA has 
communicated to us that they've done 1.7 million.
    Chairman Manzullo. So the fact that SBA rejected these 
people does not mean that these people did not receive any 
help. Is that correct?
    Mr. Barreto. That is absolutely correct.
    Chairman Manzullo. Okay. Thank you. Excuse me. And the help 
they received would have been up to $26,000 from FEMA.
    Mr. Barreto. $26,200 is the maximum amount.
    Chairman Manzullo. So when you rejected them for a loan, 
many or most of them actually got a grant of $26,200.
    Mr. Barreto. That is correct.
    Chairman Manzullo. Thank you. And as to those people that 
got the grant, Mr. Barreto, a lot of times it's because they 
simply couldn't qualify for a loan based on their credit 
history.
    Mr. Barreto. That's what would have happened because of 
credit history, no ability to be able to repay the loan. For a 
variety of other reasons, they would not qualify for an SBA 
loan. We make every attempt. We have very lenient underwriting 
and by the way, the credit underwriting that we do for disaster 
loans has not changed. It's not more difficult in this disaster 
than it has been in other disasters. We're very lenient as it 
is.
    Chairman Manzullo. All right. Thank you. And this is the 
last question.
    Ms. Velazquez. Mr. Barreto, regarding the Gulf Coast 
disasters, can you please evaluate your performance today? What 
grade would you give yourself as the Administrator of SBA for 
handling this situation?
    Mr. Barreto. I'm not sure that I understand the question in 
terms of a grade. I can tell you that we've done more than $2 
billion in loans above the biggest disaster in history and $6.1 
billion in -
    Ms. Velazquez. Let me tell you why I ask this. I ask this 
because the SBA implemented a new disaster processing system in 
the heart of the 2000 hurricane season. The SBA paid for 
disaster processing capacity that it did not receive. The SBA 
did not realize it had nearly run out of money to make disaster 
loans until days before. The SBA centralized without a 
sufficient backup plan disaster problem processing in Fort 
Worth which nearly was devastated by Hurricane Rita. The SBA 
had insufficient workforce plans which then led SBA to ask 
banks to volunteer their employees and now has SBA trying to 
get banks themselves to process loans through convoluted and 
inefficient methods. So based on all of this, Mr. Barreto, are 
you satisfied with your performance?
    Mr. Barreto. Well, one of the things I think that you said 
in your opening comments, Congresswoman, is that this is the 
largest disaster in U.S. history. There's no doubt. Usually the 
SBA processes about 100,000 loans for every disaster that we 
deal with and the SBA on a year to year basis may have as many 
as-
    Ms. Velazquez. Mr. Barreto, I don't have much time.
    Chairman Manzullo. I'm going to--
    Ms. Velazquez. Mr. Chairman, this is my time.
    Chairman Manzullo. I understand that. I might give an extra 
minute or so. But you asked a question and the witness is 
entitled to answer the question.
    Ms. Velazquez. And I want to clarify what exactly it is 
that I want. I want to yes or no answer. Are you satisfied?
    Mr. Barreto. Well, I'm very satisfied with the response-
    Ms. Velazquez. Thank you.
    Mr. Barreto. -of the Office of Disaster Assistance. I think 
they've done an incredible job during very difficult and trying 
times.
    Ms. Velazquez. You have been through two major hurricanes 
in the last year which went well beyond the plans you have more 
typical disasters. In this hand, I have a 40 pages press plan 
to deal with negative publicity about SBA's response to the 
hurricanes. This is from your agency. Why don't you have a plan 
to deal with infrastructure, networking and staff issues 
related to this type of a typical super disaster?
    Mr. Barreto. Well, we do have plans to deal with disasters 
as I mentioned. We respond to about 50 disasters every year. A 
lot of times people forget that anytime that there's a flood or 
a fire or an earthquake or any of those things we're responding 
to multiple disasters at any given time.
    The thing that we don't have, Congressman Velazquez, is we 
don't have thousands of people sitting in offices across the 
country waiting for the big one. It just would be not feasible 
for us to be able to do that. So the way that the SBA works is 
that we have an Office of Disaster Assistance that has a cadre 
of permanent employees and before the hurricanes, there was 
less than 900 employees in that disaster operation which was 
sufficient to respond to the disasters that we have on a year-
to-year basis. As you mentioned I believe, that since that time 
we've had to ramp up capacity. We've hired more than 4,000 
employees that are currently working on responding to the 
biggest disaster in U.S. history.
    Ms. Velazquez. Thank you, Mr. Barreto. I have seen what SBA 
is calling a surge plan and it's not a surge plan. It is simply 
a guide for responding to run-of-the-mill disasters. It does 
not address what the Agency will need to do to respond to large 
scale disasters. It contains no detail for integration or 
implementation and it is a complete mystery for how it will 
work.
    I've been looking at SBA disaster plans and I have lots of 
questions about them. Why doesn't this so-called surge plan 
contain contingent arrangements with IT vendors for additional 
telecommunications capacity? Why doesn't it contain vendor 
arrangements to secure additional land capacity? Why doesn't 
the plan contain contingent arrangements for additional 
commercial real estate in Fort Worth and Sacramento? Why 
doesn't it contain detailed plans for how to hire additional 
staff? Why doesn't it provide instruction for specific training 
for search related staff? You know what the General Accounting 
Office said. That is not a plan.
    Mr. Barreto. Well again, we for fifty years have responded 
to every disaster in U.S. history. We responded to 9/11 and I 
had opportunity to work very closely with you on that response. 
But the truth of the matter is that there has never been a 
disaster of this scope and for an agency the size of SBA with 
less than 900 employees to be able to predict when the next big 
one is going to be, what part of the country, what kinds of 
relationships we have, is somewhat challenging.
    I'd be happy to provide you with the plans that we do have. 
I want to make sure that you have all those and also I'd like 
to let you know that after this disaster we learned that we 
need to have a plan for the next big one. In other words, it's 
not a question if something like this could happen again. It 
will happen again and we have to prepare for it.
    Ms. Velazquez. But, Mr. Barreto, a search plan-
    Chairman Manzullo. The gentle lady's time has expired.
    Ms. Velazquez. You said you would give me an extra minute.
    Chairman Manzullo. That's correct.
    Ms. Velazquez. Can I finish my question?
    Chairman Manzullo. You already have been given extra 
minutes but go ahead. That's fine.
    Ms. Velazquez. Thank you, Mr. Chairman. A surge plan 
doesn't mean a chart that will tell your staff how many staff 
it will take to make a loan and that is all you have in your 
surge plan.
    Mr. Barreto. And again, one of the things that we need to 
do is we need to do a combination of things. As you probably 
know, we sent out a request for information because we want to 
work closer with the private sector. And by the way, one of the 
parts of the story that's not told is we've done about $1.5 
billion in disaster loans for businesses, but we've also done 
about $250 million in business loans through our banks.
    So we do have a relationship with the private sector 
working on a number of different fronts. But now what we're 
looking at is in the future whenever you have this kind of 
volume, basically what is five or six years worth of work in a 
few months, one of the things that we're also going to have to 
do is not just do this internally, but we're also going to need 
to look for ways that we can work with the private sector. And 
again, we have to be very flexible because we don't know where 
the next disaster is going to occur.
    Chairman Manzullo. Mr. McCotter.
    Mr. McCotter. Thank you, Mr. Chairman. Can you follow up on 
that coordination with the private sector?
    Mr. Barreto. Sure.
    Mr. McCotter. Because in many ways the response to Katrina, 
the aftermath, was much better by the private sector than by 
the government and I would be curious as to what you're talking 
about and what specifically.
    Mr. Barreto. I'm talking about the work that we do every 
day with the private sector. One of the things that we realized 
is, and by the way, let me take a step back. I think there's 
often times some confusion about what kind of loans the SBA can 
do. The SBA has only one type of disaster loan. It is a long-
term, rebuilding and reconstruction loan for physical damage to 
residences and physical damages to businesses.
    That's the only kind of disaster loan the SBA can provide 
and what we know is there's a lot of folks out there that 
that's not going to be enough. They're going to maybe need a 
smaller loan. They're going to need something that is more of a 
short-term cash infusion. They may need loans to buy equipment, 
etc. And that's really where we engage the private sector.
    I mentioned to you that we've already done approximately a 
quarter of a billion dollars in additional loans through our 
lenders, in other words, lenders working with us to approve 
small businesses in the Gulf area. If you put that $250 million 
with the $1.5 billion, you're getting pretty close to $2 
billion so far that we've been able to do for small businesses.
    The other thing I want to remind folks is that more than 90 
percent of the applicants are not small businesses. That's one 
of the things that makes this disaster very, very different. 
Usually you have a ratio of two or three to one which would be 
normal. The ratio here is nine to one homeowners to small 
businesses.
    Mr. McCotter. You also mentioned grants. Would you please 
explain the difference between a small business loan and a 
grant?
    Mr. Barreto. Sure. Small business loans must be paid back. 
Grants do not need to be paid back. SBA has no authority to do 
grants. We must underwrite loans and ensure that there is some 
opportunity for that loan to be paid back. That is something 
that our Oversight Committee also expects us to do is to be 
good shepherds of the taxpayer's money and we're endeavoring to 
do that.
    There is a balance though. We must do everything that we 
can to help the victims and as I mentioned, we've done $6 
billion in loans so far. But we also have to ensure that 
there's some opportunity that that loan may be paid back.
    Mr. McCotter. How quickly are you able to turn around? Say 
someone believes that they file for a small business loan, but 
they're in turn actually more eligible for a grant which does 
not have to be repaid. How quickly does that happen?
    Mr. Barreto. What happens is that it's going to be one or 
the other. In other words-
    Mr. McCotter. The determination, how quickly is the 
determination?
    Mr. Barreto. Right now, it's running a little over sixty 
days. We'd like it to be half that much and by the way, I want 
to state for the record that we have processed 95 percent of 
the loans to businesses which are referred to as economic 
injury loans. We've processed almost 90 percent of the physical 
damage awards to small businesses and we've processed over 70 
percent of the homeowner loans. By the way, one of the key 
indicators is also inspections. We've done 95 percent of the 
inspections of all the properties that we need to inspect.
    Mr. McCotter. I appreciate the statistical recounting of 
that. My question is that one of the problems, the concerns, 
that the people have is given the size of the disaster is that 
there are many people who are unable to receive help for the 
circumstances in which they find themselves, circumstances 
which in many ways were exacerbated by human failings both in 
the inception of the disaster and its aftermath and then the 
effort to recover much of the livable state the people had. My 
question is how many people are out there trying to get help 
either through a small business loan or through a grant that 
have to be processed.
    Mr. Barreto. Well, we've processed close to 300,000 of the 
applications and we receive applications every single day. In 
fact, I think you may be aware that the deadline-
    Mr. McCotter. Can you give me an estimate of the number of 
people who are out there that are still trying to receive help? 
I think that was the point of Mr. X's video.
    Mr. Barreto. I would be glad to do that, to tell you. We 
have something approximating 8,000 applications that are still 
in some form of processing for small businesses. That 
represents approximately ten percent of what we received.
    Mr. McCotter. And if these people do not receive 
satisfaction of a small business loan or are not eligible for 
that, are they then directed where they can go get grant money?
    Mr. Barreto. No. The only folks that are eligible for grant 
money would be homeowners, if those individuals have homes and 
they're not eligible for, that there is no other remedy for a 
small business person through our program, if they do not 
qualify for the disaster loan.
    Mr. McCotter. But they can be directed elsewhere. I would 
think it would speed the process when you talk about a recovery 
plan to clearly delineate between what is a grant, what is a 
small business loan, so the people who are not eligible for 
your loans can still go get the assistance they need somewhere 
else and relieve the burden upon your administration.
    Mr. Barreto. I'm not sure I completely understand it. If 
they're a homeowner that are going through our process, they 
have to be turned down by us before they can qualify for a 
grant from the Federal Government.
    Mr. McCotter. My point would be, and I know my time is up, 
is to make sure that if they're ineligible is that these poor 
people don't spend their time trying to get something they're 
not entitled to, but are instead directed to the proper place 
in the first place. That's all.
    Mr. Barreto. Understand.
    Chairman Manzullo. They would be directed to FEMA.
    Mr. Barreto. If they're a homeowner. If they're a small 
business, we have to underwrite them to determine if they're 
eligible for a loan.
    Mr. McCotter. Okay.
    Chairman Manzullo. Dr. Christensen.
    Dr. Christenson. Thank you, Mr. Chairman. I'm really glad 
that we're having this hearing. I thank you and the Ranking 
Member for it. Welcome, Administrator Barreto.
    Mr. Barreto. Thank you.
    Dr. Christensen. I've been to New Orleans several times. 
I've met with your disaster staff by phone and I hear your 
testimony, but the slow processing and the record low approval 
rates, low and slow disbursement even after approval, it's the 
same slow response that is represented by the entire response 
of the Federal Government in the face of what everyone agrees 
is the worse disaster this country's experienced. And it has 
been and remains an emergency and I'm extremely disturbed that 
people and businesses are continuing to be left to languish 
even though it's seven months later. And there is so much 
rebuilding to be done.
    I'm particularly concerned as you would imagine by the lack 
of responsiveness to the health care sector. And that's what my 
meeting was about. It seems like all other businesses are being 
treated like business is usual and in the face of such a 
catastrophe, I would think that the government would respond 
appropriately accordingly to the amount of disaster that's 
there, not business as usual which is what I'm seeing.
    How many health related businesses have you approved 
economic injury loans for? I'll tell you that I applied twice 
and didn't get it.
    Mr. Barreto. I can tell you, and I would be happy to go 
back and research exactly the number, but we have approved 
2,388 applications for economic injury disaster loans. That 
represents 95 percent of all of the applications that we 
received that we've already processed.
    Dr. Christensen. Let me just ask you also. Does SBA see 
restoring the health infrastructure in the Gulf region as being 
a priority and is there any coordination between the SBA and 
Department of Health and Human Services or any other agency to 
meet this priority need in the area?
    I'm going to tell you what I heard from SBA and every other 
agency as we've been trying to address is people are not coming 
back, that kind of an attitude, and I was definitely not 
satisfied.
    Mr. Barreto. People not coming back to the Gulf, New 
Orleans?
    Dr. Christensen. Yes.
    Mr. Barreto. Well, there's no doubt about it.
    Dr. Christensen. People are back. They are seeking health 
care in almost pre-Katrina numbers.
    Mr. Barreto. Right. Our understanding is, and I've been 
down there five times and in constant contact with our folks, 
something in the order of 60 percent plus of the individuals 
that lived there before are not there right now and that's 
something that's also affecting a lot of the small businesses 
about whether or not they can come back. Can they get 
employees? Will there be customers? What are the conditions on 
the ground for them?
     Dr. Christensen. But the question was given the enormity 
of the disaster and its devastating impact on health care and 
affecting private providers as well, has SBA worked with the 
Department of Health and Human Services or any other agency to 
address this dire need in the area?
    Mr. Barreto. Well, we're in regular communication with 
them. It's kind of coincidental, but I have two meetings 
scheduled with senior people in HHS next week at their offices 
to discuss this issue and we're in regular communication with 
them. I know that they're putting a lot of focus on it and one 
of the individuals is the Surgeon General of the United States 
who has been down there and is working on a number of different 
initiatives. So we're looking at ways that we can do that.
    I don't know how many, and I'll find out for you, people in 
the health care industry have applied for economic injury 
assistance, but we've received very few over all applications 
so far. We've received very few.
    Dr. Christensen. Or any kind of loan to help them restart 
their business, I would appreciate the data.
    Mr. Barreto. Sure.
    Dr. Christensen. You know I'm one of the districts that 
loans were sold and you know the problems we've had and I want 
to know if after the people who are so devastated received the 
loan, can they expect that SBA is going to continue to hold 
those loans or are they going to be sold and have you learned 
from any of the past experience on how to do that better?
    Mr. Barreto. We've learned a lot and I appreciate the 
opportunity to have worked with you on some of these issues. As 
you know we've had a moratorium on selling any loans for a 
couple of years now and we have-
    Dr. Christensen. Yes, that's because my Chairman and 
Ranking Member have supported me on that.
    Mr. Barreto. And we have no plans on selling any loans. No 
plans.
    Dr. Christensen. Thank you.
    Chairman Manzullo. Mr. Bradley.
    Mr. Bradley. Good afternoon, Mr. Chairman. Mr. Barreto, 
good to see you.
    Mr. Barreto. Good to see you.
    Mr. Bradley. I apologize for being detained before I could 
get here. The subcommittee that I chair on Taxes, Finance and 
Export held a hearing last week on looking at SBA finances and 
the Ranking Member participated and Congresswoman Millender-
McDonald. So I certainly appreciate that.
    I'd like to focus in for a moment on the 7(a) loan program. 
I have to admit, Mr. Chairman, I supported you in my first year 
in Congress in voting to continue the 7(a) subsidy and then 
continued to support that in my second year and now according 
to the testimony of your witnesses last week as well as some of 
the other panel members, I think it was a split view on the 
effectiveness or the necessity if you will for the subsidy for 
the 7(a) loans.
    And so you're here and I certainly would like to get you 
impression. I'm pretty sure I know what it's going to be and 
why. But if you could illuminate a little bit on what your 
prepared remarks were on why you don't feel it is necessary and 
why we can do without it.
    Mr. Barreto. Well, let me approach that question in two 
different ways. One of them is that some of the concern before 
we had zero subsidy was that lenders were going to leave the 
program, the average loan size would go back up, minorities 
would get no loans and just a complete erosion of what we'd 
accomplished over the couple years before that.
    Now we didn't believe that that would happen and since last 
year when we were testifying on this, now we have the facts to 
prove it. Last year was the all-time high for loans at the SBA 
in its 53 year history. We did close to 100,000 loans. That's 
double what we were doing four years ago. We guaranteed almost 
$20 billion worth of capital for small businesses. That's more 
than twice of what we were doing four and a half years.
    And one of the things that we knew because our lenders were 
telling us this and our small businesses were telling us this 
is they said ``Look. The most important thing for us with the 
7(a) program is for it to be continuous, for there not to be 
starts and stops. We don't want to hear that you don't have 
your budget approved by the beginning of your fiscal year and 
that you're feeling pressure on the loan program and that 
you're going to have to put a cap on the loan program and if 
you really run tight, you may even have to close it down.''
    Lenders were very, very concerned about this. They said to 
us, ``Look. You got us excited about doing loans to small 
businesses through your program and now we dedicate a lot of 
resources to small business lenders, millions of dollars, a lot 
of personnel. So we can't afford for you to put a cap on the 
loan for one day and we certainly can't afford for you to close 
down the loan program for one day.''
    So now that there is continuity, consistency. Now that 
there is more stability in the program, not only have we not 
lost lenders. We have new lenders that have come on board. So 
we've very optimistic about our prospects. We believe that this 
is going to be another banner year. So we're able to do both 
those things, meet the needs of small businesses and save the 
American tax payer close to $100 million in appropriation that 
is not necessary to be able to support that program.
    Mr. Bradley. Perhaps you could illuminate for me at least 
or other members of the Committee why with the 7(a) subsidy is 
it that it creates the stops and starts that you were talking 
about because I remember in 2003 I called you directly because 
I had a constituent that was trying to close on a loan and buy 
a business that he had a purchase and sale on and it was 
capped. Why is it that subsidy leads to a capping?
    Mr. Barreto. Well, I think probably a better reason for 
that has to do with the fact that if the beginning of the 
fiscal year we don't have our budget approved which we never 
have since I've been here, then we're operating on a continuing 
resolution and that continuing resolution is basically an 
estimate, not an estimate, but it is an amount similar to what 
happened in the year before.
    When your loan program is growing as fast as our program is 
growing, I mean our program was up 30 percent last year, the 
504 loan program is up 30 percent this year, it puts a 
tremendous amount of pressure. I know of liken it to a small 
business owner who you would say to them, ``Look. You need to 
run your business and you need to write checks. But I'm not 
going to tell you what you have in your bank account '' and a 
small business owner would say ``That's impossible.'' And I 
would say, ``Sometimes that's kind of the way we had to run the 
SBA 7(a) loan program in past.''
    So now that we do not have a subsidy, that's not an issue 
for us anymore. That program is self-sufficient. The lending 
authorities, the critical aspect, this budget that we submit 
for 2007 has $28 billion in lending authority. For a lot of 
small businesses and lender, that is really the bottom line.
    Chairman Manzullo. Thank you. Ms. Bordallo.
    Ms. Bordallo. Thank you, Mr. Chairman and Ranking Member, I 
want to thank you for holding this important meeting on SBA's 
disaster loan programs and disaster response and welcome, Mr. 
Barreto. The response to the hurricanes not only by SBA but 
other Federal departments certainly everybody will agree in 
this room remains a source of ongoing significant concern. I 
represent the territory of Guam. The people of Guam are no 
strangers to natural disasters, Mr. Barreto. We are in Typhoon 
Alley. We have super typhoons, in one instance, six months 
apart with 200 an hour mile winds. So we certainly know how to 
deal with these typhoons and this is why the Government of 
Guam, the military on the island, all government agencies and 
SBA meet quarterly to discuss disasters.
    So it is my question to you, planning is everything and 
without it, any response effort is certainly doomed to fail. So 
I would like to know. Can you comment on whether the SBA would 
implement a program aimed to coordinate with local governments, 
chambers of commerce, your SBA office, to discuss disaster 
program response and could you conduct it or would you be able 
to conduct it in a regular basis?
    We wouldn't be caught like we were and this is why Guam is 
so successful. We don't have debts. Our homes are built strong 
to withstand these winds and I'm just wondering if somehow you 
could get the word out. Your people would be ready. Everyone 
would be ready when these disasters come about.
    Mr. Barreto. I think it's an excellent recommendation and I 
mentioned before that we're in the process right now of putting 
together a comprehensive plan for another large scale event. 
Not to belabor the point, but it's just that never anything 
like this has ever happened before and that's not an excuse. 
It's just what happened.
    And I mentioned before that for us to be able to respond to 
a disaster immediately, we literally would have to have assets 
deployed all over this country and in Guam and other places 
ready for that disaster. Now we don't have those type of 
resources. The way that the SBA works, we have a small cadre of 
disaster employees, before this last disaster, less than 900 
employees. We have 4,500 employees now working in the disaster 
operation.
    Now what will happen after we finish responding to this 
disaster if there's not another one right after it and we don't 
know when the next one will be, but we now have thousands of 
individuals who are going to be part of our network. We have 
like our own reserve corps and whenever there's a disaster, we 
bring up experienced people that have worked with us before 
that know our program. One of the benefits, if you want to call 
it a benefit, is the fact that we have now identified thousands 
of people. We've trained them. We've equipped them and they 
will be part of our reserve corps.
    Now I totally agree with you with regards to the 
communication because a lot of times people are not clear. If 
you've never gone through a disaster, you have a lot of 
experience with this, but if you've never gone through a 
disaster, never filled out an SBA disaster application, you 
could be lost. You may not understand what's going on. You're 
almost in a state of shock. I mean we saw small business people 
in a state of shock months afterwards.
    So what I would like to explore is utilizing our network of 
SBA district personnel across the country and for that matter 
in Guam and other places to assist us in communicating that and 
to be in relationship. It's one of those things that they 
always talk about. You need to develop a relationship before 
you need that relationship and I think that that is very 
important and I would like to work with you on that and to 
include that kind of ongoing interaction with the assets that 
we do have every single day, working with the local folks that 
are responsible for disasters.
    Ms. Bordallo. Thank you, Mr. Barreto, and I hope you will 
be able to implement it. And if I have any time left, Mr. 
Chairman, I would like to yield it back to the Ranking Member.
    Chairman Manzullo. You have 39 seconds left.
    Ms. Velazquez. She's yielding to me?
    Ms. Bordallo. Yes, I did.
    Ms. Velazquez. Oh okay. Thank you. Mr. Barreto, the SBA 
recently went through a work force transformation where it 
reassigned as well as eliminated employees. As a core Federal 
disaster response agency, why didn't you take this opportunity 
to create a full-time disaster planner within the SBA?
    Mr. Barreto. I'm not sure I understand the question. When 
you say ``disaster planner,'' what are you specifically 
referring to would be the responsibilities?
    Ms. Velazquez. Someone to put together a plan that will 
respond to the disaster.
    Mr. Barreto. Well, the person that would be responsible for 
that is the Director of the Office of Disaster Assistance.
    Ms. Velazquez. Is he a planner?
    Mr. Barreto. He has 30 years worth of experience dealing 
with every disaster.
    Ms. Velazquez. But isn't he the person in charge of the 
disaster loan program?
    Mr. Barreto. Well, he's responsible for all aspects of 
disaster response. Everybody that works in disaster reports up 
to him and I will tell you. We're fortunate to have him because 
he's somebody as I said with 30 years experience working at the 
SBA, working in the disaster operations. So there is not a 
disaster that he doesn't have experience with and understand.
    Chairman Manzullo. The gentle lady's time has expired. Mrs. 
Moore.
    Ms. Moore. Thank you, Mr. Chairman. It's always good to be 
here with you and thank you, Mr. Barreto, for appearing today. 
When I walked in the door, you were bragging and talking about 
how proud you were of the 97 percent loans that were processed 
and then it went down to 95. But all that being said, I guess 
I'm curious about what processing these loans means. Since I 
voted for all this disaster money, you've only disbursed about 
$440 million.
    Sixty percent of the businesses down, affected, by Katrina 
have had to close their doors forever. And I just want to know 
what's the major reason. Like this processing, it's almost 
seems like they go to the circular file. I think I'm going to 
process some of the junk in my house like that, just throw it 
away. Is that credit score or lack of ability to pay or what 
would be the reasons? You're bragging about processing them, 
but the fact is that these businesses, we're not helping to 
regenerate businesses in the area by merely processing them 
into the circular file.
    Mr. Barreto. Okay. There are a number of different points 
to that question I would like to address for you. Please know 
that we're not bragging. I'm not bragging. We're not done yet 
with the response and until we finish with the response, we 
will not be satisfied. I'm simply letting you know what the 
current production rates have been and remember that we do 
three different kinds of loans.
    Actually, I think you could say we do the economic injury 
disaster loans and that's the one that had approximately 90 
percent processed. We do physical damages to small businesses 
and there we've processed about 90 percent of the applications. 
We do homeowners that have had physical damage. There we 
processed about 70 percent of the applicants. We do personal 
property loans for people that don't own a home or a business. 
We can do those loans up to $40,000.
    Also remember that the percentage is constantly changing 
because we're always getting more disaster applications in. And 
in fact, the disaster deadline has been extended now for 
another month.
    Ms. Moore. Thank you, Mr. Barreto. I think you've clarified 
the point because when I came in, you were talking about how 
proud you were and it just didn't fit with the pictures that I 
see. I'm from Milwaukee, Wisconsin. Thank you. The UEP is going 
to be the sixth city.
    I'm wondering since you say that this is such a wonderful 
funding strategy. To zero fund, all the programs that would 
help minority businesses, the 7(a) loan program you were 
telling Mr. Bradley about that. The SBDC, the Women's Business 
Centers, these things have been flat funded, cut and I'm going 
to yield the balance of my time to the Ranking Member because I 
guess I just don't get it, how less money is going to help 
minority businesses. I do understand what you shared with us in 
terms of the funding cycle, but overall, I think more money 
would help since we've seen a steady decline of minority 
business lending and resources available to us in Milwaukee. 
How are you going to fund the UEP?
    Mr. Barreto. Sure. Well, great questions and I would love 
to talk to you about that. First of all, when I talk about the 
zero subsidy for 7(a), all we're saying is that those loans now 
are self-sufficient. They don't require additional money.
    Ms. Moore. We don't need-We need more money.
    Mr. Barreto. No, the lending authority is all time highs. 
What I'm proposing in this budget is $28 billion in lending 
authority, $28 billion and last year you probably might know 
this-
    Ms. Moore. I want to yield my time to her. So thank you for 
that.
    Mr. Barreto. But last year, we did almost 40 percent of 
those loans to minorities. So minorities are benefitting now 
more than ever before and then the UEP is a public/private 
partnership and the funding comes from several different 
sources. One of the key sources is the Kaufman Foundation who 
is a large underwriter of that program. We work very closely 
with Kaufman, with the Urban League and with other partners in 
that initiative.
    Ms. Moore. Okay. Now, Mr. Chairman, please don't take-
Please. I wanted to yield it to the Ranking Member because I 
was satisfied with his answer.
    Chairman Manzullo. You can use your ten seconds plus we'll 
give her an extra couple of minutes.
    Ms. Moore. Okay.
    Ms. Velazquez. Thank you. Mr. Barreto, we have heard that 
the decline rates associated with Hurricane Katrina are an 
anomaly, but that is not the case as we see in this chart. We 
have heard the excuse that it is due to computer system 
changes, but it is not. In fact, SBA's response to hurricanes 
since you have been in office has actually been very similar 
with nearly all hurricanes having an SBA loan approval rate of 
50 percent. The big difference is that major hurricanes that 
occurred in previous administrations had much higher approval 
rates, often near 60 percent, Andrew 50 percent, Opal 58 
percent, George 61 percent, Charley when you were there 47 
percent, Frances 36 percent, Ivan 53, Jeanne 37, Katrina 37, 
Rita 15, Wilma 13 percent. Why is SBA under your administration 
approving loans as a percentage of applications, percentage, 
then previous administrations?
    Mr. Barreto. Well, first of all, I think it's important to 
do an apples-to-apples comparison. The approval rate is 
different in every disaster. I have some approval rates here 
for Allison and Frances which were 32 and 24 percent, 
respectively.
    But one of the things that is also important to note is 
that a few months back, we were talking about an approval rate 
of about 14 percent and the reason again is because most of the 
folks that were applying for us ended up being grants, not 
loans. And by the way, many of those didn't want a loan. They 
would say to us ``I don't want a loan, but I'm going to go 
through process so that you can turn me down and I can go back 
to FEMA and get a grant.'' That's why FEMA has done $1.7 
million grants for over $7 billion.
    Ms. Velazquez. So you're telling me that when George, 
Andrew and all those during George H. W. Administration and 
Clinton's Administration, they didn't apply for grants. They 
approved for home loans and disaster because the loan approval 
was 60 percent.
    Mr. Barreto. No, they definitely would prefer to grant. 
Most people would rather not pay the money back. They would 
definitely like a grant, but they weren't able to go get a 
grant because if we could do a loan for them, in other words, 
if they qualified for a loan, they have the option to go back 
for a grant.
    And one of the things that you're seeing this disaster is 
that the income levels of the individuals, this has been said 
over and over again, some of the folks that were effected were 
in some of the lowest incomes area in the country. So they're 
not going to be able to qualify for a loan immediately. We do 
everything that we can to approve them.
    By the way, the approval rate since the very beginning now 
has more than doubled and we thought that was going to happen 
and it's going to continue to go up because a lot of the 
individuals that applied in the beginning who really didn't 
want loans and ended up getting grants, they're out of the 
system now. So most of the folks that we're looking at right 
have higher credit scores. They have higher repayment ability. 
They have much more means to be able to qualify for a loan.
    Chairman Manzullo. Thank you.
    Ms. Velazquez. You know that is not what the data.
    Mr. Barreto. Well, it's not an apples-to-apples comparison 
and one last thing I want to make sure that you do understand 
is that in the past when we received applications-
    Ms. Velazquez. It is a hurricane and another hurricane-
    Chairman Manzullo. Let the witness answer the question.
    Mr. Barreto. I will explain this, Ms. Velazquez. You may 
not be aware of this, but for all the disasters in the past 
what would happen is there was no system and so applications 
would come in, a lot less applications would come in. Somebody 
would look at the application and say ``That's never going to 
become a loan '' and that would never appear in the system. 
What we do now is everything that we receive goes into DCMS, 
everything, and that's one of the things that also skewing the 
percentage of approvals.
    Chairman Manzullo. Thank you, Mr. Barreto. Appreciate your 
being here. Ms. Smith, if you would like to take the stand. 
You're excused, Mr. Barreto. Thank you very much.
    Mr. Barreto. Thank you very much. I appreciate the 
opportunity to testify.
    Chairman Manzullo. Mr. Mitchell, you're going to stick 
around in case we need you. Thank you. Would somebody get Ms. 
Smith a glass of water there, a fresh glass? There you are. Ms. 
Smith, we welcome you to our Committee. The first thing I want 
you to do is take a sip of water and take a deep breath.
    Ms. Smith. How did you know?
    Chairman Manzullo. And then normally the time is five 
minutes. We could give a little bit more than that. I just want 
you to be relaxed and you're here to tell your story.
    Ms. Smith. Okay. Thank you.
    Chairman Manzullo. Please proceed. Thank you.

   STATEMENT OF PATRICIA SMITH, PEMBA LIGHTING AND AUTOMATION

    Ms. Smith. I did try to get it down to five minutes though 
for you, actually less hopefully if I don't elaborate too much 
and to do that, I'll try to read it more.
    Chairman Manzullo, Ranking Member Velazquez and Members of 
the House Small Business Committee, I am Patricia Smith. I am a 
co-owner of my business, along with my husband, of PEMBA 
Lighting and Automation in New Orleans, Louisiana. PEMBA is a 
small business with five to seven employees. We've been in 
business for eight years.
    Before Katrina hit, our business was doing well. In fact, 
we were expanding. My husband and I were relying on PEMBA to be 
the family' primary source of income. The day that Hurricane 
Katrina hit our city, the livelihood of our business came to a 
sudden halt. The building was flooded. We had no electricity 
for a month. No phone or internet services for months. The 
city's whole economy stopped. It seemed as if our business was 
doomed.
    Today I would like to share with you our experience in 
trying to get assistance from the SBA and recover our business 
after the disaster. But the truth is that my experience is not 
unique. You could bring in hundreds of small business owners 
from the Gulf Coast region and these ordeals would be echoed.
    Within a few weeks after the hurricane, I placed calls and 
I visited the Disaster Recovery Center to meet with the SBA 
personnel. They strongly, they the SBA strongly, encouraged me 
to apply for both a personal and business loan. On September 
19, 2005, I hand-delivered my complete SBA loan application 
including tax returns. I had questions about the process 
obviously and I was told that someone would contact me within 
three weeks and I could ask questions then.
    While waiting to hear if our loan was approved, we 
continued to struggle with the mounting losses of our business. 
We could no longer pay salaries and had to let employees go. My 
husband had to get another job for us to be able to pay the 
bills. Work continued to come in, but with lack of staff, we 
were not able to handle the work load.
    I waited over two months to hear the status of my loan 
application. In late November, I was told that the SBA did not 
have all of the information needed to file my request. They 
could not locate my tax returns. My heart sank.
    About a week later, I received a phone call from another 
SBA employee telling me that he had all of my information and 
did not know why I was asked to refax the tax information. I 
did begin to wonder about the organization and thoroughness of 
the SBA loan process.
    Again, about a week later, I received a request regarding 
the depreciation method used on our property in 2004. An SBA 
employee contacted me to tell me that we may not be able to get 
a loan since our property, the property that had been flooded, 
had been depreciated by 50 percent.
    December 9th is when this sad reality sunk in. We were 
denied a loan for both our home and business. We had 
insufficient collateral and therefore, were denied any 
possibility of getting an SBA loan. This was devastating news 
and it did not seem appropriate criteria for a loan after such 
a natural disaster. Of course, we had problems with our assets. 
They were flooded. After hearing from friends and associates 
that everyone was being denied assistance from the SBA and that 
people were beginning to appeal those decisions, I went on a 
letter-writing campaign to get the SBA to consider my loan.
    On February 16th, I faxed a letter of appeal to the SBA. I 
pointed our creditworthiness, number of years in operation, 
company growth and that we were indeed responsible individuals 
who pay our bills, things which you would expect to be 
important with a disaster loan.
    On February 24th, I was able to confirm receipt of my 
appeal letter.
    On March 3rd, I received a message to call the SBA. It took 
me two days to get through and leave a message for the person 
who called me. I received a call back later that day and was 
asked to send an updated profit and loss statement. Frustrated 
by how simple communications take enormous effort, I lectured 
that SBA employee. I was amazed how the delays affecting the 
livelihood of my small business did not seem to be important.
    This process began for me and my husband on September 19, 
2005. Time is critical in these situations and today nearly six 
months later, we're still waiting for assistance from the SBA. 
The fact of the matter is that there are thousands who have 
also been denied but they haven't gone on a letter writing 
campaign to get the agency's attention.
    I am a registered Republican. So I'm not here to play 
politics. I don't care. I'm here to represent the needs of 
thousands of small business owners just like me in the Gulf 
Coast. We need assistance now and we need a champion for our 
interest. The SBA has not been that champion.
    Instead throughout the ordeal, the Agency, while it has a 
lot of good people has been wasting my time. I can tell you 
from first-hand knowledge, the assistance they talk about is 
not reaching the people that need it.
    Thank you very much for allowing me to appear before the 
Committee today and letting me share my story. At this time, I 
would greatly appreciate it if you would ask me questions. Feel 
free to challenge my story and allow me to respond by what is 
truly happening and providing suggestions about improving the 
process for small businesses like mine. Your Committee is the 
only hope for small businesses whether it be from the Katrina 
disaster or future ones. Thank you.
    [Ms. Smith's testimony may be found in the appendix.]
    Chairman Manzullo. Thank you, Ms. Smith. Ms. Velazquez and 
I also belong to Financial Services Committee. So if you see us 
get up and leave, it's because we have some votes that are 
pending there. I'm going to try to get through some questions 
here. First of all, thank you for coming up from New Orleans. I 
appreciate it very much.
    Besides the SBA, could you tell us what other agency or 
what other individuals you contacted?
    Ms. Smith. Right. Good question. Actually, I contacted a 
lot of people.
    Chairman Manzullo. Okay.
    Ms. Smith. FEMA is obviously the first contact.
    Chairman Manzullo. Could you give the order that you did it 
in? Your house was flooded?
    Ms. Smith. No.
    Chairman Manzullo. Or the business was flooded that day? 
Okay.
    Ms. Smith. My commercial property was flooded.
    Chairman Manzullo. Okay.
    Ms. Smith. My house was damaged, but it was livable.
    Chairman Manzullo. Okay. Go ahead.
    Ms. Smith. First contacts, and I didn't apply until we got 
back to see the damage. We couldn't even get to the commercial 
property because that was just a restricted area. But to the 
home, we could get there.
    We applied with FEMA, let them know I had both a business 
and home losses and they told me at that time to go ahead and 
apply through them. They could help me with the application for 
the residential side, but that I would have to speak and 
contact the SBA for any help with the business losses.
    So that's what I did. I went through the process of 
contacting the SBA which just like anything else when we say I 
called someone on the phone, it's not what you and I think 
about calling someone on the phone. That might take me two 
weeks. So these ordeals when I'm telling you it's taking me 
time to get through to FEMA or it's getting me time through 
that and it's not necessarily a fault of theirs. It's a 
disaster issue.
    So I get through with the SBA and filed that application.
    Chairman Manzullo. That was your first contact with the 
telephone call. Is that correct?
    Ms. Smith. Yes.
    Chairman Manzullo. Go ahead.
    Ms. Smith. And so I contacted them. Actually, when I 
contacted them, I was also trying to get internet service up 
and running and trying to find out where to go. But I 
understood that, okay, this is what you need to do. You need to 
fill out an application. I downloaded an application and then I 
went over to a disaster recovery center.
    Chairman Manzullo. And you met with an individual there?
    Ms. Smith. Yes, and I have to tell you. I was very pleased 
when I met with that individual.
    Chairman Manzullo. Was that in Baton Rouge?
    Ms. Smith. No, that was actually in Bell Chase, Louisiana 
which is Plaquemines.
    Chairman Manzullo. Okay. Go ahead. That's where my dad is 
from.
    Ms. Smith. Oh, really.
    Chairman Manzullo. Yes. He was born in Donaldsonville.
    Ms. Smith. Not Plaquemines, Louisiana. Plaquemines Parish.
    Chairman Manzullo. Okay. And then he moved there to-but go 
ahead.
    Ms. Smith. But the SBA person told me that not only should 
I apply for a business loan, but that I should apply for a loan 
for my home and I said I don't really need one for my home. I 
really want to focus on getting help for my business. He said, 
``No, no. Trust me. Apply for both of them. You don't know that 
you might not need it.''
    These days I'm not so happy that everyone's being told to 
apply for a loan whether you need it or not, but I went through 
that process and I applied for the loan. He told me to fill out 
the application. It told you a lot of attachments you needed to 
have. I had four years history of the company showing the 
growth. He told me to make copies of all of my three years tax 
returns because it would make the process go faster.
    So I did that. I took all of that over a period of days 
while I'm trying to get my business going and pay bills. I 
brought that back to him. He checked my packet over and said he 
would overnight that I think through the Baton Rouge office. So 
that was my next contact.
    Chairman Manzullo. Do you recall what the date was?
    Ms. Smith. September 19th.
    Chairman Manzullo. Okay. Go ahead.
    Ms. Smith. So at this point, I can tell you. We were very, 
I guess, hopeful thinking we were depressed, we were 
overwhelmed, but we were hopeful. It's a real mix. I heard 
someone say that it was really months that businesses were 
really maybe not back, what to do, still overwhelmed. It's 
true. It really was true.
    Truthfully, I don't think that the SBA needs to be in there 
Day One because you're not ready. But when they do get 
contacted, they need a fast response. Because when they told me 
three weeks, I said, ``Okay. That's difficult, but I can plan 
my business around a schedule.'' Understand. He's not just 
talking about a home, but I have employees that I had to let go 
and I was trying to decide do I keep them. These aren't 
employees that just work in a retail establishment. These are 
30 year engineering people. These are people with electronics 
and audio-video skills. These are not just something that you 
just find. A business like mine, key employees and losing them 
is important.
    So after about four weeks, I called, I tried to call the 
SBA. I could get them. I actually emailed them to find out the 
status.
    Chairman Manzullo. It was the same individual you tried to 
contact.
    Ms. Smith. You don't have an individual. There isn't 
anybody that, there's nobody assigned to your case which is the 
problem of not having a champion. You don't get somebody 
assigned. You just get different people.
    Chairman Manzullo. The person that took your application 
didn't tell you to check back with him. Was that it?
    Ms. Smith. No, in fact you can't. There's a number you're 
told to call which is very busy. You can reach it. So I was 
eventually able to send an email. I did have a nice lady that 
called me back and told me, yes, they had the application.
    Chairman Manzullo. Did you apply to any other agencies in 
the state, any banks for any bridge loans or anything?
    Ms. Smith. No, I didn't apply. There was a $25,000 bridge 
loan. The problem is, and you all know this, is that $25,000 
bridge loan, I would have to pay that back. Well, I already had 
mortgages that I had to pay back and we were worrying about the 
continuation of the business. I have lost my property. I had 
mortgaged my home to buy the property.
    Chairman Manzullo. You had to pay back the SBA loan also.
    Ms. Smith. Right.
    Chairman Manzullo. Was the bridge loan paid back faster?
    Ms. Smith. I don't really know the terms, but it wasn't 
enough. Anyone that knows about borrowing, you borrow not just 
the minimum amount needed.
    Chairman Manzullo. Just wasn't enough to take care of you.
    Ms. Smith. Right.
    Chairman Manzullo. Okay.
    Ms. Smith. So why have to turn that around and pay that 
back? It didn't handle it. But I did apply for grants. I was 
reading a lot about anyone that had any kind of loan. I 
contacted Louisiana Business and Industry, applied for grants 
with them.
    Chairman Manzullo. I need to interrupt you because I want 
Ms. Velazquez to have some time here before we're called off 
for some votes and hopefully we'll get the rest of your story 
out here. Thank you. Ms. Velazquez.
    Ms. Velazquez. Thank you. Thank you, Ms. Smith, for sharing 
your story with us. I would just like to ask you. If you have 
gotten this loan in the first three weeks like you were 
originally led to believe, how would things have been different 
for your business?
    Ms. Smith. I would not have lost those key employees. I 
really could have continued and planned. I have a backlog of 
workload. I can't keep up with it. I don't have those people. 
You can't just say ``Oh, well maybe I'll be able to keep you 
on.'' You can't just say ``Hang in with me and don't make any 
money.'' I needed to know the plan and I needed some help with 
that or either I had to decide to let them go.
    Ms. Velazquez. So you were here and you listened that 
Administrator said that they are meeting the challenges in 
responding to Hurricanes Katrina, Rita and Wilma. Do you agree?
    Ms. Smith. No, he doesn't understand the challenges and I'm 
not being ugly because truthfully I listened to a lot of what 
he said and you know I think he means well. I really, really 
do. I wanted to give him some feedback, but he's not. And I 
heard a couple people ask questions that have been there, that 
have seen as you call your constituents. But he almost doesn't 
have a clue.
    We look at it as the SBA has all the wrong measures and 
goals. The mission of the SBA, truthfully I'm not sure what it 
is and I'm not sure that he has a clear understanding. Probably 
if we went around this room here, we might all think of it for 
different things. If you don't have a clear mission, then 
you're not going to be able to succeed. Well, you asked a lot 
of other questions that I could comment on.
    Ms. Velazquez. What sort of specific reasons did SBA 
provide you regarding your denial?
    Ms. Smith. Okay. It was a little confusing because first of 
all, they started with looking at the depreciation method used 
on my property which was flooded. So it wasn't a valuable asset 
anyway, but since my accountant had taken a 50 percent 
depreciation the year prior because our income was up enough, 
so from a tax standpoint, we needed to take that depreciation. 
So he told me that if I had not taken a 50 percent depreciation 
on that building, that I could have gotten a loan.
    But he then followed up and said ``You're going to receive 
a letter saying that you've been denied for lack of repayment 
ability '' and that's what I've gotten in the letter.
    Ms. Velazquez. And what follow-up did SBA do after they 
denied you?
    Ms. Smith. Oh, well, they didn't do anything, but they 
mistakenly told me to go apply to FEMA for a grant. At that 
point, I'm thinking maybe this was a blessing. Maybe this is a 
good thing. So I had to get paperwork in order for them because 
they want to compare with what's going on in your insurance. I 
contacted FEMA to find out. FEMA doesn't do anything for 
businesses. They were like ``Are you crazy? Who told you 
that?'' I said, ``The SBA told me to come see you.'' And they 
said, ``No, we can't help you with that.''
    Ms. Velazquez. SBA's Collateral Policy in 13 CFR 123.11 
states that SBA will not decline a loan if the applicant lacks 
a particular amount of collateral as long as it is reasonably 
sure that you can repay the loan. With this standard in mind, 
do you believe that you were treated fairly?
    Ms. Smith. Not on purpose. I don't know if it's because 
they brought new people in. But they didn't discuss with me 
pledging any type of collateral. That was not something that 
was discussed at all. In fact, that's the problem until this 
day is that no one has talked to me about what do we need to 
get this loan to get the help. There is no one out there doing 
that. They keep handling paperwork and getting one or two more 
questions answered.
    But as far as the whole collateral side of that, there's a 
lot of things that we have. I mean you could ever do a pro 
forma. In general business loans, you could do a pro forma. But 
I have IRAs. I may and I probably will end up taking my IRA 
money.
    Ms. Velazquez. What is your perspective on SBA's 
encouraging individuals to apply for loans?
    Ms. Smith. That to me, and I heard this a lot about the 
number of individual loans applied for, during a disaster is 
not the time necessarily to be doing that. Okay. What they've 
done is that they've created a large queue of people that are 
waiting for assistance and there's no real separation between 
business and how it's affecting economy versus someone that 
wants to improve and change the siding on their house so that 
it will withstand the next hurricane and there's clearly a 
difference between those two. And they continue to encourage 
more and more people to this day to apply for SBA loans.
    Ms. Velazquez. So would you say that there was a lack of 
planning for a large disaster like the one that we encountered 
here?
    Chairman Manzullo. I think her answer is obviously. Mr. 
Bradley.
    Mr. Bradley. Thank you very much. I'm having somewhat of a 
difficult time understanding how in a disaster situation the 
depreciation schedule is assumed to be a non disaster situation 
I guess and well, maybe comment on that first.
    Ms. Smith. The word-
    Mr. Bradley. Because isn't that your problem? Isn't that 
key problem why you were denied?
    Ms. Smith. Confusion is the key problem in some cases 
because at first, that's what I thought. But then it says lack 
of repayment is the idea and collateral versus lack of 
repayment could necessarily be the same, but is not necessarily 
the same and we all know that. They related the two as they are 
one and the same. I could not, and I challenged the guy when he 
told me this. I said, ``I don't understand what the paper 
depreciation of my business that's flooded has anything to do 
with a disaster loan.'' And his answer was, ``I'm sorry. If you 
hadn't done that, we could have given you a loan.''
    Mr. Bradley. So to go from your case to the larger case 
here and generalize it and where we can go from here because I 
think that's why you're here, SBA has to show more flexibility 
on the box, to begin with just the depreciation. Right? 
Wouldn't that be No. 1?
    Ms. Smith. I think that's true because if we all look at 
what a true disaster means it's almost nothing left. Right? So 
in that sense, you have to be looking at what the future or the 
potential holds and not necessarily what the current assets 
are.
    Mr. Bradley. Because it's all based on repayment schedules 
in the future and your potential earnings capability.
    Ms. Smith. Exactly.
    Mr. Bradley. Which you were able to prove based on your 
eight year track record.
    Ms. Smith. That's what I would have assumed.
    Mr. Bradley. Right.
    Ms. Smith. But that's the point they never discussed.
    Mr. Bradley. And it seems like, Ms. Smith, listening to 
your testimony that one of the real significant problems that 
you had was that there wasn't one person to help you, walk you, 
through the process and that you kept banging up against brick 
walls not only in terms of like the box of how your loan was 
going to get looked at but one person to help you through the 
maze of problems. Is that it?
    Ms. Smith. That is very much correct. In fact, what you 
heard is a portion of the story. I may have talked to a dozen 
SBA people at different times for different things. It really 
gets a whole lot worse than I painted.
    Mr. Bradley. And you said a couple of different times that 
you had to wait a couple of weeks just to get a phone call 
answered and didn't have internet capabilities. I don't know if 
that was on your end or on the SBA end, but either way there 
was not one person and seemingly incapable to being able to 
communicate quickly.
    Ms. Smith. Yes. You know the point is that you try to tell 
people ``Just keep trying. Just keep calling them and you'll 
eventually get through.'' So you go ``Okay. Am I sitting around 
doing nothing? No, I'm not. I'm trying to succeed on my own. 
I'm trying to handle my customers. I'm trying to do my payroll. 
I'm trying to do my taxes.'' So you're constantly trying at 
different times and it takes quite a while and the internet 
service down was on our part. Internet was months before it 
came back.
    Mr. Bradley. In the couple of minutes that I have 
remaining, are there any other issues that you think would 
improve the situation out of your experience in how you 
interacted with the SBA?
    Ms. Smith. The champion you keyed on, I think that's key. 
That is very key, but it's not just one person there. I think 
whoever heads the SBA needs to be a champion for business. 
Okay. I really do, you all. They can't be a champion for 
themselves so they look good. All right. And people don't do 
that because they're trying to beat the system or do a bad job. 
They just don't want to fail. But the problem is he has to 
measure his success by the success of the businesses.
    I heard someone say ``You're giving me, you're bragging on 
statistics and the loans.'' Would it be nice if we'd heard him 
bragging about the number of businesses they helped to bring 
back? That's probably the key.
    And then I've heard things about the planning process. That 
lack of planning process is evident. It is clear to me. I can 
see that. They don't have processes. They don't have measures. 
You know they don't have the right goals. So that's why we can 
sum up that there isn't the correct mission statement for that 
company.
    Disaster planning, which I have a background in by the way 
because I'm on the IT side, isn't something that is not easy to 
do and I understand that. But I guess I expect it of a 
government agency and the problem is that we have to quit 
saying how wonderful we're doing and saying ``Oh, gee. I'm 
trying to do good'' and let everybody admit ``Okay. I'm trying 
to do good, but we can't handle disasters.'' But let's use that 
and learn from that for the future.
    Mr. Bradley. I just have one more quick question, Mr. 
Chairman. I think you said in your initial testimony that by no 
means were you the exception to the rule, that your story is 
very similar to-
    Ms. Smith. It may be similar. It might actually be better. 
I'm still there. Many aren't.
    Mr. Bradley. Okay.
    Chairman Manzullo. Thank you, Ms. Smith. I'm going to ask 
Herb Mitchell to take the stand up there and you can stay 
there, Ms. Smith. You're sitting next to the man in charge 
there if that's okay with you. Could you please state your name 
and your capacity at the SBA.
    Mr. Mitchell. Herbert Mitchell. I'm the Associate 
Administrator for Disaster Assistance at SBA.
    Chairman Manzullo. And you've been there for how long?
    Mr. Mitchell. I've been with the Agency for a little over 
28 years, been in the Office of Disaster Assistance for ten, 
been head of the Disaster Loan Program for five.
    Chairman Manzullo. Okay. Mr. Mitchell, you've heard Ms. 
Smith's very compelling testimony. Is there anything that you 
want to add to that?
    Mr. Mitchell. First of all, I certainly apologize for some 
of the confusion and one of the challenges in every disaster is 
that for the first part of it, and this is what a lot of people 
don't understand, most of the time when you go to buy a house 
or buy an automobile, we don't fill out applications in this 
country in terms of our loan process. It's the real estate 
agent or the finance folks working with us and recognize that. 
What we try to do is to make sure we have customer service 
representatives in the disaster recovery centers, in the field 
locations, to help people through that process. We try to 
enlist the aid of the Small Business Development Centers to 
help people through that process.
    But it is challenging. I've gone there and I've seen the 
expression on people's face in terms of just the confusion of 
what does all of this paperwork mean, what does it mean that I 
can't use the money that I got from my insurance recovery to 
pay off my mortgage and if I do that, I'm not qualified for an 
SBA loan. It can become very confusing.
    Just quickly. Congresswoman Velazquez is absolutely right. 
There is no requirement. There is a requirement for collateral 
only best available. If you have no collateral, you should not 
be declined and nobody in SBA should tell you that, one.
    If the issue, and I'm not sure what the issue around 
depreciation schedule, the primary factor in getting an SBA 
disaster loan is cash flow. One of the things that has to 
happen is that the loan officer needs to evaluate how much cash 
flow is available to make the loan. So if you're reporting a 
net income of let's say $100,000, but you've written off say 
$50,000 in taxes, they only need to know that depreciation 
amount because that amount gets added back to the cash flow to 
determine how much is available in terms of actual cash. That 
should be happening in the process.
    I haven't had a chance to take a look at your application. 
I know that the credit history is excellent. I know that there 
may be some challenges in terms of how the cash flow is being 
calculated. You have my personal commitment that I plan to 
personally take a look at that application to make sure that 
it's done correctly.
    But I certainly apologize if there was any confusion around 
the fact that that somehow you're being declined because of the 
50 percent depreciation. That is not the case and should not be 
the case. It's only a matter in terms of finding out that 
number to determine what the exact cash flow is available to 
repay the loan.
    Chairman Manzullo. Thank you. Ms. Velazquez, do you have 
any questions you want to ask?
    Ms. Velazquez. Mr. Mitchell, will you do that with the 
other 60 percent that has been declined?
     Mr. Mitchell. I can tell you this. This past weekend I 
have personally answered 12 emails. On the average I get 
probably about anywhere from 15 to 20 cases referred to me 
personally every day. I will try my best to make sure that 
those cases are reviewed properly and make sure that people get 
a response.
    Ms. Velazquez. Thank you. And I hope that you understand my 
frustration. My frustration is that too many families are 
suffering that lost their businesses. She was lucky because she 
is still there standing. But you know that they made a mistake 
because contrary to the statute, they're saying that she needed 
collateral. How many others were denied for the same reason?
    Mr. Mitchell. I'm not acknowledging a mistake. What I'm 
saying is that if she was declined for lack of repayment 
ability, that's the reason. If there was any communication 
around the fact that you were declined because of lack of 
collateral or the 50 percent depreciation rule, then that's 
miscommunication and that's what I plan to clarify.
    Chairman Manzullo. I think Ms. Smith wanted to add 
something. Ms. Smith, go ahead please.
    Ms. Smith. Thank you very much. When I was listening to 
your explanation, it also goes back to the right measures in 
trying to help businesses through disaster and I'm hoping maybe 
we'll get a chance to talk because you can apply not only for 
your loss of property, but an economic injury loss. Now I'll 
ask you this. Why is there on the form for the SBA that you can 
apply for an economic injury loss as well as for your loss of 
assets when what they're saying is that ``Okay, you lost your 
assets. Maybe it shouldn't be that we're looking at your loss 
of assets but as long as you show repayment.'' From what they 
looked at for repayment for us was that immediate ``okay, we 
don't have any income.'' And I know we didn't have any income. 
We had applied for economic injury loss also at that time.
    So I think while I know we're trying, I think someone needs 
to revisit that with the spirit of what we want businesses to 
succeed. I mean if you look at the overall success for me, the 
taxpayer, what I really would like to see is the economy grow. 
And do I agree that you can invest money? Yes. Do I agree that 
you should throw it away? No. So I think there needs to be some 
procedure, but at the same time, we're talking about disaster 
loans for getting businesses back and up and I think there is a 
lot of confusion and even maybe within the SBA about that.
    Ms. Velazquez. Ms. Smith, we have, the Committee, to 
reauthorize the Disaster Loan Program. Based on your own 
experience, what would you tell us that we need to do to fix 
how the program has been run?
    Ms. Smith. I would bring in a few people that truly 
understand the problems. All right. I would not just bring in 
this disaster planning expert that they referred to earlier 
because they don't really see the impact. Let's look at this 
just like you might take any process to try to fix this and say 
what is the outcome that we want to try to achieve. Have a team 
of people that sit there and develop a plan. Let them start 
with a mission statement and I think this Committee probably 
should approve that mission statement and give them some 
guidelines on how to proceed.
    I think we need a revamping of the whole SBA process if you 
should think that the SBA should be involved in disaster loans. 
Now maybe you make the decision that they shouldn't be involved 
in disaster loans.
    Ms. Velazquez. If you allow me. When I address the issue of 
having a planner in charge of the natural disaster and then the 
Administrator said that Mr. Mitchell is the person in charge, I 
said he is running the Disaster Loan Program. That is not the 
same to be the person in charge of planning the response.
    Ms. Smith. Where I come from, every department has their 
own disaster plan. Every company, every department, has that. 
The head of that department should be responsible for its 
disaster plan and being able to succeed in its mission. Just 
the fact that you say that someone else handles disaster 
planning doesn't mean that that is going to effect how the SBA 
should operate.
    Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
    Chairman Manzullo. Did you want to respond to that?
    Mr. Mitchell. Well, just a couple things. There's no 
question that throughout the Federal Government there have been 
lessons learned and we need to do a better job of planning and 
doing contingency planning. But the SBA already has a lot of 
flexibility already built in to terms of how we respond to 
disasters.
    We have special authority in terms of how we hire and how 
we're able to get people on board quickly. We have contracts in 
place that allow us for example. We not only hired an 
additional 4,000 people, but we were able to equip them, get 
space. We have special arrangements with GSA in terms of how to 
do that. I have special authority in getting priority for 
telecommunications equipment. So we have a lot of that.
    The question is what do we need to do to deal with 
catastrophic events beyond what we currently have in place to 
deal with.
    Chairman Manzullo. Anybody else have any questions or 
comments? Good. Mr. Akin.
    Mr. Akin. Thank you, Mr. Chairman. I've been trying to be a 
good listener here and I guess I sense a little bit of kind of 
almost two different stories about what's going on. I'm not 
quite clear. The first thing that I got the impression of, 
Patricia, was that you gave us the impression that there were 
lots and lots of small businesses that needed help and needed 
loans and couldn't get them. Is that fair to say?
    Ms. Smith. It's correct. It's too difficult and it's not 
timely enough. You have to make a decision to keep your 
employees and let them go. You can't wait months.
    Mr. Akin. So you're saying that perhaps the specific reason 
that you didn't get your loan may have been more unique. But 
what is not unique is that there is lots and lots of small 
business that needed loans in a disaster situation and couldn't 
get them. Is that a fair summary of what you said?
    Ms. Smith. That's a very fair summary. In fact, one of the 
things that I've heard is there's a statistic that very early 
in the process a number were denied and they're saying that was 
given artificially, I was quoting a Rich Carter who is a 
spokesmen, high rejection rate. I thought if you read that, 
he's expecting that they're going to have some rejections early 
on because the businesses aren't back and going again.
    Mr. Akin. Okay. I just want to make sure I wasn't putting 
any words in your mouth. This is what I'm trying to reconcile. 
Now what I think I heard you say, Herb, was that the fact that 
the businesses in a disaster situation and that threatens their 
ability to repay the loan is not in and of itself a reason to 
deny a loan. Is that correct?
    Mr. Mitchell. That's exactly right.
    Mr. Akin. Let me try and do it one thing. I'm kind of slow 
at working through this. Be patient with me. So if that's not a 
reason, now next of all, would you say that it's true that 
there are lot of people that wanted loans down there that you 
weren't able to give them loans?
    Mr. Mitchell. I don't know the exact figures for the 
decline rate on the business side but I would say it's probably 
well over 50 percent that have been declined. Yes.
    Mr. Akin. So if you have people who are applying for loans 
and 50 percent of them were told no, then that would 
corroborate what Patricia is saying, wouldn't it, to some 
degree?
    Mr. Mitchell. Well, there's no question. First of all, I 
think we sent out over 300,000 applications and we've gotten 
back a little over 50,000. So obviously, there's a gap between 
those who initially expressed a need and those who actually 
applied and there being a lot of reasons of why they didn't 
apply.
    Mr. Akin. Okay. So there is a need for these loans. Now is 
part of the reason why they're denied just because you're 
buried down there because you talked about personally you met 
with all these people. Are you just overwhelmed by the demand 
or is the fact that 50 percent of them were denied. Why would 
the other 50 percent be denied?
    Mr. Mitchell. The primary reason for denial is lack of 
repayment ability. You don't have sufficient cash flow to repay 
the loan or the unsatisfactory credit history. Those are the 
two primary reasons for declines.
    Mr. Akin. So your lack of ability to repay, I would think 
that storm damage would be the main thing that would effect 
that. You're saying you don't put that into the equation and 
they still couldn't repay. In other words, if we went to a time 
before the storm and they asked for a loan, you're saying they 
wouldn't get one then either.
    Mr. Mitchell. The disaster program-
    Mr. Akin. Is that what you're saying?
    Mr. Mitchell. No. The Disaster Program is very unique in 
that regard. We're taking the risk and we're basing the 
repayment ability on predisaster financial condition.
    Mr. Akin. Okay.
    Mr. Mitchell. So we're not holding anything that impacted 
them as a result of disaster against them. It's all 
predisaster.
    Mr. Akin. So you're saying of these businesses that have 
applied for loans then, the situation is that prior to the 
hurricane half of them financially were shaky enough that you 
just couldn't give them a loan based on the parameters that you 
either grant or don't grant loans.
    Mr. Mitchell. If they had cash flow prior to the disaster 
and their credit history is satisfactory prior to the disaster, 
they qualify for a loan.
    Mr. Akin. Okay. So that may be an explanation. Now in your 
particular case, Patricia, you could have gotten a loan 
beforehand, couldn't you?
    Ms. Smith. Well, that's a good question. I took out a loan 
when I bought my property and I borrowed against my home in 
order to buy my property. So in that case, would I say I could 
go out and get another loan? No, but I didn't need it. My 
business was operating fine. I was expanding just on current 
cash flows. I was using day-to-day cash flows just to make my 
expansions happen.
    Now could I have afforded to go and get a loan? No. I 
didn't see any revenues coming in for that. The whole issue was 
this was a disaster. I lost my building and now I needed help. 
Prior to the disaster, I didn't need help. That's the 
difference and maybe that's a measures issue.
    Mr. Akin. So we're talking this is where the two trains 
seem to be passing each other a little bit. On the one hand, 
you said I can run my business, but I might not have qualified 
for a loan before the hurricane. After the hurricane, I can't 
run my business without a loan and I'm hearing SBA, Herb, 
saying the parameter we're using is you had to qualify ahead of 
time and that could explain half of the places where we're not 
able to help. That sounds like something we probably should 
focus a little attention or energy on.
    But see that little red light. You know they have a shocker 
in our chair if we go beyond the time.
    Chairman Manzullo. Let Mr. Mitchell go ahead and respond to 
that.
    Mr. Mitchell. And what you're raising is the challenge in 
every disaster. Obviously, there is a disaster and certainly 
businesses and individuals have been impacted and the federal 
design right now is the loan program. So there's a balance 
between the two and obviously, certainly we're taking risks 
that no other lender would take. We have very lenient criteria, 
but at the end of the process it is a loan program.
    Chairman Manzullo. I just have one question. You've been 
very, very patient, Ms. Smith, and I appreciate your time. Did 
the person that gave you this 50 percent, whatever, 
depreciation, I don't understand it because when my brother ran 
his restaurant he didn't depreciate anything because he had all 
used equipment that had been paid for for about 40 years. Did 
that person tell you or did the documents say that you had the 
inability to repay the loan and that's why you're being turned 
down?
    Ms. Smith. The document that I received said lack of 
repayment ability.
    Chairman Manzullo. And then if you had gotten the loan, how 
much had you asked for?
    Ms. Smith. At that time, I have to tell you I haven't 
reread the paperwork, but it was $250,000 in property losses 
and I think $100,000 in economic injury losses.
    Chairman Manzullo. And did you have the ability to repay 
that $350,000 if after the disaster the business picked up to 
where it was prior to the disaster?
    Ms. Smith. Well, when I applied for the loan, I said I 
don't just want to apply for a loan. I want to talk about 
terms. I want to talk about repayment schedule and that was the 
first thing and that's when they told me just fill out the 
paperwork and in three weeks someone will call you. I've never 
had that discussion.
    Chairman Manzullo. So no one told you how long it would or 
any terms.
    Ms. Smith. No, I eventually found out that you have 12 
months to repay it and then that's when I told them, I said, 
``You understand right now''-By the time I got, that's in 
November now, many months after. I said, ``Do you understand 
now if I start fixing that building back, the construction 
process, construction is crazy right now in New Orleans, that 
construction process may take longer than that.'' So now in 
November, I told them, ``I'm not sure that I want the loan.''
    I said, ``You know you have to understand. It was important 
to me when I had my key people on board. I've let people go now 
and now you're talking about a loan. I have to plan this. I 
can't say I'll take the money. If you'll award me that loan, I 
have to relook at this.'' And that was an issue for me of how 
to repay that back. But no one said, ``You qualify for X number 
of dollars.'' No discussion with that. That's what I would have 
expected in a disaster loan.
    Chairman Manzullo. So you were turned down based on 
inability to pay $350,000 but if you would have gotten perhaps 
$150,000, you would have been able to do that.
    Ms. Smith. Probably get the building corrected.
    Chairman Manzullo. I think you probably needed somebody to 
talk to to walk you through it.
    Ms. Velazquez. But, Mr. Chairman-
    Chairman Manzullo. In that case, you may not even have 
decided to take the loan. That would have been your option at 
that point.
    Ms. Smith. It would have been my option. Right.
    Chairman Manzullo. Okay.
    Ms. Smith. I would have probably matched it with my IRA 
money to it easier on myself.
    Chairman Manzullo. Okay.
    Ms. Velazquez. You said that an employee told you that you 
have only 12 months to repay.
    Ms. Smith. Yes. Before you start paying the loan.
    Ms. Velazquez. Okay. But isn't it true that you have up to 
30 years to repay?
    Mr. Mitchell. Yes, the maximum term can be up to 30 years. 
What we do is for this disaster we've already authorized a 12 
month deferment period before payments start. On an individual 
basis, that can be extended based on how long it takes to 
actually rebuild that particular business. So the field can 
extend up to 24 months in terms of the first payment due.
    Ms. Velazquez. Isn't it true that it can be deferred up to 
two years?
    Mr. Mitchell. Under current process, the field office can 
defer payments for two years. Anything over that comes to 
Headquarters and certainly we can take a look at that on a 
case-by-case basis.
    Ms. Smith. That would have been helpful.
    Chairman Manzullo. Well, thank you very much. Maybe you can 
help out the folks at SBA with some planning. You've certainly 
had a lot of experience. Are you operating now, Ms. Smith?
    Ms. Smith. Yes, I am.
    Chairman Manzullo. How did you get up and going?
    Ms. Smith. That's hard to say. We eventually just started 
getting customers calling, saying they needed. We're somewhat 
in the construction industry, but we were new construction. Our 
market has changed severely, but they now have people that are 
trying to bring their houses back and in that case, we do the 
lighting and automation and all the control systems in there. 
So you would think they would want it fixed. In addition to 
that, now people while they're fixing their homes, maybe they 
want to put some of those systems in. They want to improve the 
lighting. They want the home theaters to come in. So we're 
getting that work.
    It's just I'm struggling because I don't have my key people 
back fully yet until I can kind of plan all of that. I'm a 
planner. Okay. I want to plan my strategy out and that's why 
I've been asking to sit down, in the queue applying for my 
loan. How can we work? What kind of repayment schedule? So I 
can kind of get this next phase because right now, I'm out of 
pocket for the work I'm doing on my building.
    Chairman Manzullo. Okay. Thank you very much for coming. I 
appreciate it very much.
    [Whereupon, at 4:45 p.m., the Committee was adjourned.]

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