[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
                      FULL COMMITTEE HEARING ON
                  THE SMALL BUSINESS ADMINISTRATION'S
               RESPONSE TO THE 2005 GULF COAST HURRICANES

=======================================================================

                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 14, 2007

                               __________

                          Serial Number 110-3

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


JUANITA MILLENDER-McDONALD,          STEVE CHABOT, Ohio, Ranking Member
California                           ROSCOE BARTLETT, Maryland
WILLIAM JEFFERSON, Louisiana         SAM GRAVES, Missouri
HEATH SHULER, North Carolina         TODD AKIN, Missouri
CHARLIE GONZALEZ, Texas              BILL SHUSTER, Pennsylvania
RICK LARSEN, Washington              MARILYN MUSGRAVE, Colorado
RAUL GRIJALVA, Arizona               STEVE KING, Iowa
MICHAEL MICHAUD, Maine               JEFF FORTENBERRY, Nebraska
MELISSA BEAN, Illinois               LYNN WESTMORELAND, Georgia
HENRY CUELLAR, Texas                 LOUIE GOHMERT, Texas
DAN LIPINSKI, Illinois               DEAN HELLER, Nevada
GWEN MOORE, Wisconsin                DAVID DAVIS, Tennessee
JASON ALTMIRE, Pennsylvania          MARY FALLIN, Oklahoma
BRUCE BRALEY, Iowa                   VERN BUCHANAN, Florida
YVETTE CLARKE, New York              JIM JORDAN, Ohio
BRAD ELLSWORTH, Indiana
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                         STANDING SUBCOMMITTEES

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               DEAN HELLER, Nevada, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia                VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             JIM JORDAN, Ohio

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


WILLIAM JEFFERSON, Louisiana         DAVID DAVIS, Tennessee, Ranking
HENRY CUELLAR, Texas                 ROSCOE BARTLETT, Maryland
GWEN MOORE, Wisconsin                SAM GRAVES, Missouri
YVETTE CLARKE, New York              TODD AKIN, Missouri
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma

        .........................................................

                                  (ii)

  
?

           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


WILLIAM JEFFERSON, Louisiana         LYNN WESTMORELAND, Georgia, 
RICK LARSEN, Washington              Ranking
DAN LIPINSKI, Illinois               BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois               STEVE KING, Iowa
GWEN MOORE, Wisconsin                MARILYN MUSGRAVE, Colorado
JASON ALTMIRE, Pennsylvania          MARY FALLIN, Oklahoma
JOE SESTAK, Pennsylvania             VERN BUCHANAN, Florida
                                     JIM JORDAN, Ohio

                                 ______

            Subcommittee on Urban and Rural Entrepreneurship

                 HEATH SHULER, North Carolina, Chairman


RICK LARSEN, Washington              JEFF FORTENBERRY, Nebraska, 
MICHAEL MICHAUD, Maine               Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana              DEAN HELLER, Nevada
HANK JOHNSON, Georgia                DAVID DAVIS, Tennessee

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


JUANITA MILLENDER-McDONALD,          LOUIE GOHMERT, Texas, Ranking
California                           LYNN WESTMORELAND, Georgia
CHARLIE GONZALEZ, Texas
RAUL GRIJALVA, Arizona

                                 (iii)

  
?

                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Chabot, Hon. Steve...............................................     2
Braley, Hon. Bruce...............................................     3
Jefferson, Hon. William..........................................     4

                               WITNESSES


PANEL I
Melancon, Hon. Charles...........................................     5
Baker, Hon. Richard..............................................    36

PANEL II
Preston, Hon. Steven C., Administrator, Small Business 
  Administration.................................................     8
Shear, William, Government Accountability Office.................    10

PANEL III
Francis, Edward G., On behalf of American Banker's Association...    39
Colosino, Donna, Small business owner, CRESCENT Power Systems....    41
McDonald, Bryan, Governor's Office of Recovery and Renewal, State 
  of Mississippi.................................................    43

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    56
Chabot, Hon. Steve...............................................    57
Melancon, Hon. Charles...........................................    59
Baker, Hon. Richard..............................................    61
Braley, Hon. Bruce...............................................    63
Shuler, Hon. Heath...............................................    65
Preston, Hon. Steven C., Small Business Administration...........    66
Shear, William, Government Accountability Office.................    72
Olivier, Hon. Michael, Secretary of Economic Development, State 
  of Louisiana...................................................    86
Francis, Edward G., On behalf of American Banker's Association...    92
McDonald, Bryan, Governor's Office of Recovery and Renewal, State 
  of Mississippi.................................................   105
Colosino, Donna, Small business owner, CRESCENT Power Systems....   111
Smith, Patricia, Small business owner PEMBA Lighting and 
  Automation.....................................................   117

                                  (v)

  


FULL COMMITTEE HEARING ON THE SMALL BUSINESS ADMINISTRATION'S RESPONSE 
                   TO THE 2005 GULF COAST HURRICANES

                              ----------                              


                      WEDNESDAY, FEBRUARY 14, 2007

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in Room 
2360 Rayburn House Office Building, Hon. Nydia M. Velazquez 
[Chairwoman of the Committee] presiding.
    Present: Representatives Velazquez, Jefferson, Shuler, 
Gonzalez, Grijalva, Cuellar, Altmire, Braley, Ellsworth, 
Johnson, Sestak, Chabot, Akin, Gohmert, Heller, Davis, Fallin, 
Buchanan, and Jordan.

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    Chairwoman Velazquez. Well, I call this hearing to order. 
Today we are holding a hearing on the Small Business 
Administration response to the 2005 Gulf Coast hurricanes to 
review various aspects of the SBA response on disaster relief 
programs.
    The Committee will hear testimony and comments from members 
of the Gulf Coast region, two of our colleagues, the SBA 
administrator, Steven Preston; Mr. William Shear from the 
General Accounting Office; as well as representatives from 
other government agencies and members of the small business 
community from the region.
    Over a year and a half ago, this nation witnessed one of 
our country largest natural disasters, Hurricane Katrina. The 
impact was enormous. And one thing we all learned is that there 
is nothing more critical than assuring assistance is provided 
immediately and efficiently to all of those in need.
    Today's hearing will examine the response of the Small 
Business Administration to Katrina, its system to effect the 
small businesses, and the current state of the SBA disaster 
loan program.
    In the aftermath of the Gulf Coast hurricanes, thousands of 
small businesses turned to the SBA for assistance. Many 
applications were stalled in an agency backlog that took months 
to process. Not only was there a buildup but a disbursement of 
funds was also significantly delayed.
    Those who were approved for loans often waited months to 
receive any funds. To date, of the 422,558 applications 
approved, only 22 percent, 22 percent, have been fully funded. 
Clearly we have a long way to go to make sure small businesses 
in the Gulf Coast are up and running again.
    I want to make one thing clear this morning. The agency's 
poor response to Katrina victims was not due to the severity of 
the storm or any unanticipated factors. The SBA failed Gulf 
Coast entrepreneurs due to poor planning, lack of training, and 
improper distribution of resources. This was unacceptable and 
cannot happen again.
    What I have appreciated about Administrator Preston is that 
he has recognized that changes must be made. Today we will 
review those changes. The goal must be to ensure SBA is 
prepared to provide a system the next time a disaster like 
Katrina occurs.
    The General Accounting Office report gives insight into 
where the agency is and what modifications have been made. As 
of today, the SBA has not fully implemented key elements of a 
disaster planning program, such as disaster simulation, office 
space requirement, and proper staffing. It is also unclear if 
the backlog problem has been corrected or if it will reoccur in 
future large-scale disasters.
    Today we will hear from small business owners and state 
officials who have seen firsthand the successes and failures 
under both the old and new systems. They will give their 
insight about the disaster program and what needs to be done so 
it better serves our nation's small businesses.
    Small businesses are the largest job creators and spur 
economy growth. There is no question that the Gulf region is 
still rebuilding and that entrepreneurs will play a critical 
role in that process.
    If we want businesses to make a full recovery, then we must 
have a well-equipped disaster loan program. It is crucial that 
the federal government does not fail entrepreneurs the next 
time there is a disaster.
    I look forward to hearing the testimony of today's 
witnesses. And now I recognize ranking member Chabot for his 
opening statement.

                OPENING STATEMENT OF MR. CHABOT

    Mr. Chabot. Thank you very much, Chairwoman. And I want to 
thank Chairwoman Velazquez for holding this important hearing. 
I also want to thank the witnesses that we will hear from 
shortly and look forward to their testimony as well.
    As has been well-documented, the unexpected nature and 
level of destruction caused by Hurricane Katrina was 
unprecedented. It is estimated that Hurricanes Katrina, Rita, 
and Wilma claimed 1,400 lives and caused more than $80 billion 
in property damage.
    The Small Business Administration, the SBA, was tasked with 
the difficult job of providing disaster loans to the affected 
individuals and businesses throughout the Gulf Coast. In 
response to the hurricanes and their devastation, the SBA 
provided more than 148,000 disaster assistance loans, totaling 
more than $9.7 billion in aid to the individuals and businesses 
devastated by these storms.
    After the storms had passed, it became clear that the SBA 
was processing the disaster loans far too slowly. An average 
loan application took 74 days to process, instead of the 
agency's usual processing goal of about 3 weeks. The SBA 
severely underestimated the number of employees needed for this 
considerable task and failed to provide enough office space for 
its employees on site. Their recruiting and training of 
emergency employees also proved to be a considerable obstacle 
for the SBA. Lastly, the Small Business Administration failed 
to spread the word to the residents and business owners of the 
Gulf Coast that the agency was there to help them.
    Amid the chaos and devastation caused by the storms and the 
alphabet soup of federal agencies there to help, it was 
critically important for the SBA to vigorously communicate what 
the agency is and how it could help through the services it 
provides.
    Some homeowners and small business owners did not receive 
the help they could have because they were unaware of the help 
the SBA could have provided. That is just not acceptable.
    While no one can say that the federal government's response 
to Hurricane Katrina is adequate, it is important to point out 
that the men and women in the SBA and the other agencies who 
went to the Gulf Coast faced an extremely difficult task under 
very challenging circumstances. This was one of the most 
powerful storms ever to hit our nation. And its destruction was 
compounded by the geographical uniqueness of New Orleans, the 
fact that it sits below sea level.
    The point of this hearing is not to assign blame for the 
inadequate response. That has already been done by others. We 
are here today to look for ways to ensure that in the 
unfortunate event of a future disaster, the SBA will be better 
prepared and equipped to respond to America's need for help.
    I would like to commend Administrator Preston for the 
efforts he has made to significantly improve disaster loan 
processing. I am sure it isn't lost on anyone here that the 
administrator was not serving in his current capacity during 
the Summer of 2005. That was a year and a half ago. And he has 
been on the job for about seven months.
    I would also like to thank our witnesses, who have traveled 
all the way from Louisiana and Mississippi, for taking the time 
to join us today. It is important to listen to the stories of 
those who sought help from the SBA in the aftermath of Katrina 
to determine how we may better improve the agency as we move 
forward.
    Again, I want to thank you, Chairwoman, for holding this 
important hearing. And I yield back the balance of my time.
    Chairwoman Velazquez. Thank you, Mr. Chabot.
    And now I would like to recognize Mr. Braley for an opening 
statement.

                    STATEMENT OF MR. BRALEY

    Mr. Braley. Thank you, Madam Chairwoman, Ranking Member 
Chabot. And thank you for holding this hearing.
    It is about time we take a hard, long look at this nation's 
response to the Gulf Coast hurricanes, particularly focused on 
how small businesses have fared since then. We have a lot to 
learn. And hopefully today we will learn some of these things 
that will help us be better prepared next time.
    Tens of thousands of businesses were destroyed by the Gulf 
Coast hurricanes. And the economic damages have been estimated 
at well over $150 billion. That region's small businesses have 
depended upon the Small Business Administration to help them 
regroup from this catastrophe. More than a year later, however, 
many of them are still dependent upon the Small Business 
Administration. In fact, many of them are still waiting in line 
at the SBA. That line needs to move a little faster.
    By looking at this country's response to the big disasters, 
we can also gauge how effective we are at responding to the 
disasters of less magnitude. Where I am from in Iowa, we have 
ice storms, something you are a little familiar with today, 
flooding, and tornadoes. Thankfully, they have not reached 
Katrina proportions. However, these disasters are major to the 
people whose lives are impacted by them and the substantive 
impacts on the communities and the small businesses in those 
areas. And I want to make sure this administration is prepared.
    Today I look forward to hearing that the Small Business 
Administration recognizes its shortfalls from the Gulf Coast 
response, is learning some lessons, and is applying those 
lessons in its disaster response efforts nationwide. This 
country's small businesses need to know that when disaster 
strikes, this administration will not abandon them.
    Thank you, Madam Chairwoman. And thank you to our speakers 
for enlightening us today. I yield back the balance of my time.
    Chairwoman Velazquez. Thank you.
    The Chair asks if there is any other member who wishes to 
be recognized for an opening statement.
    Mr. Chabot. Madam Chairwoman?
    Chairwoman Velazquez. Yes?
    Mr. Chabot. On our side, our members have indicated they 
would withhold any opening statements in order to get to the 
witnesses as soon as possible.
    Chairwoman Velazquez. Okay. Yes. Without objection, I will 
recognize the gentleman from Louisiana, Mr. Jefferson.

                   STATEMENT OF MR. JEFFERSON

    Mr. Jefferson. Thank you, Madam Chair. I will be very brief 
in my remarks.
    I am very pleased to see my compare in arms here. Mr. 
Melancon is one because we fought a lonely battle down our way 
with the SBA and so many other federal agencies to get help to 
our people. I am sure Mr. Baker will show up here in a minute, 
but our districts adjoin each other. We have impaired in a 
common suffering.
    I have looked through the testimony, some of the testimony, 
that will be rendered today. And I will get to the questions 
about it a little later. But what has been most important to 
our people in the recovery is you are getting things done 
quickly and not looking at this as a normal set of 
circumstances or a normal disaster. This is one where when the 
SBA sits down and tries to figure out how it gets paid back, in 
looking at it in the normal way, it is awfully tough because 
you can't decide. The customers aren't there. You don't know 
when they are going to return. It is hard to make projections.
    And, as you have said, Madam Chair, sometimes in this whole 
processing of things, we need to just say, ``Well, it's time to 
think about how we get grants down here to people, as opposed 
to how we make loans in the regular way.`` We look for the 
normal indicia of ability to pay back.
    It is very tough if you are going to have recovery without 
any people there to get businesses set up so they can start 
working and get themselves back in shape and have the normal 
processes in place.
    We have been very concerned about the slow process of 
getting loans out. And I know it is going to be talked to you 
about the process of integrating various aspects of agencies' 
work and relying on the private sector and all of that. But I 
think for us, all the rules about how we might make things work 
more efficiently is trumped by the idea of how do we get things 
done so that people can have a chance to recover.
    And so it is not just a matter of how we bring all the 
resources together and how we better apply them as how we 
actually get a product out, how we get things done, how we get 
people back in shape to come back to work, jobs to come back to 
the--and the other part of it, of course, is how we get our 
small business people as the major part of this recovery to 
make sure that they are the ones who are leading the recovery 
effort who are bringing back the employees who are making this 
thing work.
    So I look forward to the testimony of all of the witnesses 
today. And I thank you, Madam Chair, for letting me make brief 
remarks.
    Chairwoman Velazquez. Thank you.
    And now I will recognize Congressman Melancon from 
Louisiana, who has worked closely with this Committee in 
addressing problems on the disaster assistant program. My 
colleague, you have five minutes for your testimony.

STATEMENT OF THE HONORABLE CHARLIE MELANCON, CONGRESSMAN, U.S. 
                    HOUSE OF REPRESENTATIVES

    Mr. Melancon. Good morning. Thank you, Chairwoman 
Velazquez, Right Ranking Member Chabot. I want to thank you for 
the opportunity to speak about the SBA's response to Hurricanes 
Rita and Katrina.
    My Congressional district spans the destructive path of 
both of these storms. Early in the morning of August 29th, 
2005, Hurricane Katrina made landfall in South Plaquemines 
Parish. Subsequent levee breeches flooded much of Plaquemines 
and St. Bernard Parishes along with the City of New Orleans and 
the communities of Lafitte and Grand Isle. Less than one month 
later, Hurricane Rita made landfall in southwest Louisiana, 
with much of the coastal area already affected by Katrina 
receiving yet another unneeded and damaging blow, and then 
creating storm surges though all the coastal Louisiana parishes 
and into east Texas.
    Today's hearing focuses on one of many facets of federal 
government failures, both before and after these storms. In the 
weeks and months following the storms, critical small business 
grant and loan assistance was delayed. Our economy continues to 
suffer as a result.
    We may never be able to pinpoint an exact number of jobs 
lost to the inaction or the lack of assistance. However, I have 
witnessed many instances where small business owners have been 
frustrated to the point of giving up on the SBA. And I hope 
that we can work together to change the negative perception 
that currently exists towards SBA's programs and the entire 
federal response.
    As time moves on, we are beginning to quantify some of the 
missed opportunities following the 2005 hurricane season. For 
instance, 9 months after Katrina and Rita, in May of 2006, the 
SBA had disbursed only 14 percent of the $9.7 billion in loan 
dollars that were approved for disaster assistance. And even 
today, my numbers show that only 38 percent of the loan 
applications had been approved and funded. After Hurricane 
Andrew, over 60 percent were approved.
    Immediately following the storms, an understaffed, poorly 
managed, and poorly trained, particularly in customer service, 
administration effectively discouraged small business owners 
from applying for business or home loans.
    In December 2005, the backlog for loan verification and 
processing on average exceeded one and a half months. In most 
instances, the wait was much longer. Inadequate and inaccurate 
communication from SBA employees kept many customers from 
finishing applications. Many clients lost paper business 
records in the storms, creating an additional hurdle for SBA 
employees that were not able to adjust for these storm-
inflicted realities.
    How do we make SBA better? One of the first issues that 
must be addressed is staffing. SBA's unwillingness to 
immediately and effectively delegate responsibility to 
qualified lenders created a critical choke point in loan 
disbursements following the hurricanes.
    To address this issue, today I am joining with my colleague 
Congressman Richard Baker to introduce the Small Business 
Disaster Response and Loan Improvements Act of 2007. This 
legislation will improve upon the less successful gulf 
opportunity loan pilot program administered by the SBA. It 
would allow for larger maximum loan amounts and a more 
streamlined application process that will be administered by 
the SBA-approved lenders.
    Before staffing, Congress must take a close look at the 
laws and regulations that currently govern the SBA's disaster 
loan programs. SBA's unwillingness or inability to provide 
maximum flexibility in the administration of disaster loans 
continues to hamper recovery efforts in Louisiana, specifically 
homegrown and family-run businesses, such as those in the 
shrimp industry that we have in south Louisiana. They often do 
not fit the mold of the current SBA loan.
    And in the resourceful, self-sufficient economy in south 
Louisiana, oftentimes the best and only mechanic or towboat for 
these shrimping vessels are the owners themselves and/or family 
members and fellow shrimpers. However, the SBA would not allow 
payments to family members or fellow shrimpers for the expense 
of removing the vessels from dry land. The SBA would loan the 
money for mechanical repair, hull repair, net repair, and 
acquire the needed fuel and supplies to begin the shrimping 
season, but it doesn't do the owner much good if he or she 
can't get the vessel back into the water. Community express 
loans should be allowed eligibility for commercial fishermen to 
go back to work.
    In addition, SBA's current physical disaster loan program 
allows for a waiver of the $1.5 million loan limit. This waiver 
is reserved for businesses that are determined to be a major 
source of employment before the disaster. However, in a 
disaster the magnitude of Katrina and Rita, the SBA should 
allow for waivers for businesses that will be a major source of 
employment following the storm.
    I am aware of instances where existing business owners 
could greatly expanded or refocus existing businesses to meet 
strong post-storm demand. However, because these opportunities 
did not fit the normal SBA disaster rules, they were turned 
away, causing untold hardship on many businesses and subsequent 
reemployment and the new employment losses.
    A final recommendation for making the current and future 
disaster recoveries better would be to provide more flexibility 
for loan use in conjunction with the Homeowners Assistance 
Grants. Homeowners in south Louisiana who took the initiative 
to apply for SBA loans following the hurricanes are now being 
penalized for this action. If these homeowners qualify for the 
Louisiana road home rebuilding grants, then they must use the 
road home money to pay down the SBA loan first. This leaves 
these storm victims with a larger financial burden that they 
would not have otherwise and no better off, if not worse off, 
than before they applied for the SBA loan.
    In closing, I want to thank you, Chairwoman Velazquez and 
Ranking Member Chabot and the Committee, for the opportunity to 
testify this morning. I look forward to working with you and 
all of our other colleagues to enact common sense, meaningful 
reform to current SBA disaster loan programs. Thank you.
    [The prepared statement of Mr. Melancon may be found in the 
Appendix, on page 59.]
    Chairwoman Velazquez. I want to thank you for your 
testimony, your passion, and I just want for you to make sure 
that we do understand your pain and the human suffering in the 
Gulf Coast region. The intent of this Committee in today's 
hearing is to see where we are, to make sure that this doesn't 
happen again, and if there is a need to fix through legislative 
actions, we will do that. And we will continue to work with you 
to see that we can bring relief to the small business people 
that are suffering still in the Gulf Coast region.
    With that, I will ask if the members have any questions 
for--
    Mr. Chabot. Madam Chairwoman?
    Chairwoman Velazquez. Yes?
    Mr. Chabot. Just a brief comment. I think apparently Mr. 
Baker was affected by the inclement weather today and is on his 
way here but running late. It is good to see this work in a 
bipartisan manner, especially with those that have been it most 
directly, the folks in the area. So I would commend both of you 
for working together to put together legislation in a 
bipartisan manner that will help to assist the people who have 
suffered this terrible disaster in your area.
    I yield back.
    Chairwoman Velazquez. I guess that today is a reminder of 
Mother Nature. And this is why we have to make sure that we are 
ready for the event of any other future disaster.
    I would like to thank the Congressman. We will now proceed 
with the second panel. I will ask Mr. Steven Preston, 
Administrator of SBA; Mr. William Shear, the Director of 
Financial Markets and Community Investment, to please take your 
seats.
    And, to the members, please, I want you to know that we 
have a third panel with witnesses who are coming here from the 
Gulf Coast region. And given the weather conditions and 
everything that they have gone through, I will ask for you to 
please stay here. And if you have any other commitments, please 
come back so that we could listen to their stories.
    Good morning, Mr. Preston and Mr. Shear. I would like to 
welcome the Administrator. And he will be recognized for five 
minutes for your testimony. And I just want for you to know 
that I have noticed the fact that you have been before this 
Committee twice this year. And I think that is the most of any 
other Administrator.
    Mr. Preston. Thank you very much. Would you like me to 
begin or Mr. Shear? Okay. Great.

   STATEMENT OF STEVEN C. PRESTON, ADMINISTRATOR. U.S. SMALL 
   BUSINESS ADMINISTRATION; ACCOMPANIED BY WILLIAM B. SHEAR, 
    DIRECTOR OF FINANCIAL MARKETS AND COMMUNITY INVESTMENT, 
                  GOVERNMENT ACCOUNTING OFFICE

    Mr. Preston. Good morning, Chairwoman Velazquez, Ranking 
Member Chabot, other members of the Committee. Thank you for 
inviting me to discuss the GAO report and what the SBA has done 
to re-engineer our disaster assistance program. I would also 
like to thank Bill Shear and his team at GAO for the time and 
effort they put into this report.
    My written statement addresses GAO's recommendations. SBA 
concurs with the primary recommendations in the report. We have 
already made some progress in addressing them. This morning I 
would like to talk a bit more about what we have done to re-
engineer the disaster assistance program since Hurricanes 
Katrina, Rita, and Wilma hit the Gulf Coast.
    While we concur with the assessment of SBA's past problems, 
I am here to tell you today that since last summer, we have 
made dramatic progress in reforming SBA's disaster program and 
attained truly impressive results.
    Like so many other Americans, in 2005 I watched the images 
of what was happening in the Gulf. I prayed for the people. I 
sent funds. And I wished I could do more. And, sure enough, I 
got an opportunity to do that when I received the offer to come 
here to the SBA last summer.
    Since then, I have visited the region many times, meeting 
with disaster employees, business owners, homeowners, as well 
as state and local officials to hear about their experiences 
and understand their issues.
    Today 98 percent of the approved borrowers have received 
all of their money, some of their money, or chosen not to 
borrow. Of the 7 billion in approved disaster loans that people 
have chosen to take, we have over $5 billion at work rebuilding 
homes and businesses in the Gulf. Approximately 2 billion in 
additional commitments are available to be disbursed to about 
23,000 borrowers, 20,000 of whom have begun receiving 
disbursements. Many of these people, we believe, are 
experiencing a number of outside challenges, resulting in 
delays in their ability to draw down funds.
    I came to the agency 11 months after Katrina. And in that 
time, the agency had processed over 420,000 loan applications 
and had worked very hard to address the unprecedented nature of 
this disaster by expanding capacity in three areas: information 
systems, people, and facilities. And while the loan approval 
process was largely completed, SBA at that point faced a very 
different challenge: closing loans and distributing funds. Over 
120,000 borrowers were still in the process, representing over 
$7 billion worth of loan commitments. So we quickly dug into 
the issues to understand why.
    First we listened to our customers. Next we listened to our 
employees to get their perspective. And then we dug deep into 
the operational processes, where we found a number of issues 
leading to high error rates, steep backlogs, and decision-
making bottlenecks.
    With this information, we began to re-engineer the program 
to address them. We invested thousands of man-hours and 
launched a new process that was complex to implement but simple 
to conceive. We called over 90,000 borrowers to do 2 things: 
introduce a new process where they would have a single 
relationship manager to help them to complete paperwork 
accurately, eliminate confusion, eliminate rework and 
frustration, and to ensure that we understood their status so 
that we could provide the right kind of support.
    We also moved 1,300 staff and changed our entire work flow 
from a production line with inadequate coordination between 
different functions to 15-person integrated teams, where each 
function is represented with authority and competency to make 
decisions, ensure accountability, and manage for results.
    This outreach enabled us to build a database to track the 
issues our customers have and to address them better. One thing 
this database showed us is that our customers were having 
difficulties obtaining records from their local clerks' 
offices. So SBA placed employees in the Records Office in 
Orleans Parish, and we have reached out to other parishes and 
counties across the region, offering the same support.
    Because we now have regular conversations with our 
customers, we can also informally poll our case managers on 
their issues. Our people have become an advocate for the 
borrowers that they serve. And we are now able to connect a 
loan and a document to a face and a story.
    One of the major challenges surmounted in this process was 
our loan modification process. This summer we had a backlog of 
50 to 80 thousand loan modifications, with an average age of 
over 70 days. This was a major cause of delays in 
disbursements. Today, with about 4,000 modifications in 
process, the average age of the backlog is 8 days.
    We are seeing benefit of the new processes in the more 
recent disasters, where we see 98 percent of our loan approvals 
being completed within 14 to 16 days, which I have been seeing 
most recently after my trip last week to Florida taking place 
as well.
    Do we still have hurdles? Absolutely. We are still 
improving the process. I still hear directly from customers. I 
give my e-mail in public forums all the time. So I know 
directly. But the feedback we're getting from local leaders; 
legislators; employees; and, most importantly, the disaster 
victims we are striving to serve has been very positive.
    We continue to focus on better training for our employees 
so they can serve better. We continue to improve the IT 
infrastructure. We have put metrics and mechanisms in place to 
identify issues and address them as they arrive. But, most 
importantly, we have put methods in place for greater 
interaction with our customers.
    In the coming months, our efforts are going to be focused 
on a number of activities: first, ensuring that we are 
responding and providing the states with information to support 
their grant programs; second, completing the process 
reengineering and continuing to improve automation to ensure 
that it is fully in place for future disasters; third, 
finalizing surge plans so that we have clear, well-documented 
road maps and implementation models in place based on the size 
and the nature of the catastrophe; and, finally, exploring ways 
to work with the private sector to provide more efficient and 
effective support in certain circumstances.
    The 2005 hurricanes overwhelmed disaster response at all 
levels. Certainly we were no exception. Our people worked very 
hard, often around the clock, to try to help the disaster 
victims whose lives were torn apart. But these are not the same 
people who have since fixed the process and are today enabling 
the SBA to play its role in rebuilding the Gulf and improving 
our ability to respond in the future. And I am very thankful 
for their dedication and their resolve.
    Thank you.
    [The prepared statement of Mr. Preston may be found in the 
Appendix, on page 66.]
    Chairwoman Velazquez. Thank you Administrator.
    And now we will recognize Mr. Shear. He will be presenting 
the report from the General Accounting Office. Mr. Shear is the 
Director of Financial Markets and Community Investment from the 
Government Accountability Office. Welcome.

 STATEMENT OF WILLIAM B. SHEAR, DIRECTOR OF FINANCIAL MARKETS 
     AND COMMUNITY INVESTMENT, GOVERNMENT ACCOUNTING OFFICE

    Mr. Shear. Thank you. Madam Chairwoman, Representative 
Chabot, members of the Committee, it is a pleasure to be here 
this morning to discuss SBA's response to the 2005 Gulf Coast 
hurricanes.
    My testimony is based on two reports that we issued under 
the Comptroller General's authority. The first report, which 
was release in July 2006, discussed SBA's plan for and 
implementation of the disaster credit management system called 
DCMS, which the agency uses to process disaster loan 
applications.
    The second report, which is being released today, discusses 
SBA's disaster planning for other logistical areas, such as 
hiring and training a capable workforce and acquiring necessary 
office space.
    As we all know too well, the Gulf Coast hurricanes were 
truly catastrophic. They resulted in extensive property damage, 
human suffering, and loss of life. SBA's Office of Disaster 
Assistance makes loans to households to repair or replace 
damaged homes and personal property and for businesses to help 
with physical damage and economic losses. SBA faced 
unprecedented demand for its disaster loan services as a result 
of the hurricanes.
    Today I will discuss first challenges SBA experienced in 
providing victims of the Gulf Coast hurricanes with timely 
assistance; second, factors that contributed to these 
challenges; and, third, steps SBA has taken since the Gulf 
Coast hurricanes to enhance its disaster preparedness.
    In summary, we identified several system and logistical 
challenges that SBA experienced in responding to the Gulf Coast 
hurricanes that undermine the agency's ability to provide 
timely disaster assistance to victims. For example the limited 
capacity of DCMS restricted the number of staff who could 
access the system at any one time to process disaster loan 
applications.
    In addition, SBA staff who could access DCMS initially 
encountered multiple system outages and slow response times in 
completing loan processing tasks. As of late May 2006, SBA 
processed disaster loan applications on average in about 74 
days, compared with its goal of within 21 days.
    While the large volume of disaster loan applications at SBA 
we see clearly affected its capacity to provide timely disaster 
assistance to victims, we found that the absence of a 
comprehensive planning process beforehand limited the agency's 
initial response.
    For example, in designing the capacity of DCMS, SBA 
primarily relied on historical data, such as the number of loan 
applications that the agency received after the 1994 
Northridge, California earthquake.
    SBA did not consider disaster scenarios that were more 
severe or used the information available from disaster 
simulations or catastrophe models used by insurance companies 
to estimate disaster losses. SBA also did not adequately 
monitor the performance of a DCMS contractor or completely 
stress test the system prior to its implementation. Moreover, 
SBA did not engage in comprehensive disaster planning prior to 
the Gulf Coast hurricanes for other logistical areas, such as 
workforce planning or space acquisition.
    As discussed by the SBA administrator, in the aftermath of 
the Gulf Coast hurricanes, SBA has planned or initiated several 
measures that SBA, the administrator, and other SBA officials 
said would enhance the agency's capacity to respond to future 
disasters.
    For example, SBA has completed an expansion of DCMS' user 
capacity to support a minimum of 8,000 concurrent users as 
compared with just 1,500 for the Gulf Coast hurricanes.
    We have made recommendations to SBA in both our July 2006 
report and in a report we are issuing today. For example, we 
recommended that SBA, one, reassess DCMS' maximum user capacity 
in light of lessons learned from the Gulf Coast hurricanes, 
information available from catastrophe with modeling firms and 
disaster simulations, and related cost considerations; two, 
strengthen its DCMS contractor oversight and further stress 
test the system; three, analyze the disaster loan process and 
identify ways to more efficiently process loan applications, 
including an evaluation of the feasibility of implementing a 
secure Internet-based application feature for home loan 
applicants; and, four, develop time frames for complete and key 
elements of its disaster management plan.
    We are encouraged by SBA's agreement with these 
recommendations. We hope that the agency can move forward to 
develop and implement a comprehensive disaster management plan 
that will help SBA respond to future disasters.
    It is an honor to present our work before this Committee. I 
would be happy to answer any questions from Committee members.
    [The prepared statement of Mr. Shear may be found in the 
Appendix, on page 72.]
    Chairwoman Velazquez. Thank you, Mr. Shear.
    Katrina and Rita, both of them were monumental disasters. 
There is no doubt in our minds. And it netted a monumental 
response from the federal government, particularly the disaster 
loan program.
    Mr. Shear, given everything that you have reviewed in 
creating your report and in reference to what the SBA has done 
in response to the General Accounting Office recommendations, 
are you comfortable that the SBA is now prepared to meet the 
challenges of another disaster on the scale of the 2005 Gulf 
Coast hurricanes?
    Mr. Shear. There are two parts to my answer to your 
question. One would be a matter of as we referred to disaster 
simulations and catastrophe risk modeling, that one of the 
first steps that is needed is an evaluation of the risk 
exposure of the agency in terms of meeting its needs to 
disasters. We are not quite sure how the agency is going to use 
those tools and the lessons from the Gulf Coast hurricanes to 
evaluate its risk exposure.
    The second part to my answer is that if it is a matter of 
having the capacity to meet another series of Gulf Coast 
hurricanes, we know they have expanded their capacity to DCMS 
and they have initiated some other steps.
    The answer is a little bit that we don't know yet. It is 
kind of too early for us to know yet as far as whether they 
have stress tested DCMS and taken other actions to ensure that 
they could meet the challenges of another catastrophe of this 
magnitude.
    Chairwoman Velazquez. Mr. Shear, is your answer a no?
    Mr. Shear. The answer is that we are not sure. We are not 
sure if there was another hurricane or another disaster of this 
magnitude. And so the answer is we are not sure on that.
    As I say, the first part is we think a fuller risk kind of 
evaluation of risk exposure is needed.
    Chairwoman Velazquez. Okay. Thank you.
    Mr. Shear, again, we have heard how the SBA has implemented 
changes to improve its disaster assistance programs. Some of 
these changes have come as a result of your recommendations 
while others were initiated by SBA. To what extent are these 
changes premised or predicated on a comprehensive assessment of 
the agency's risks, including a disaster?
    Mr. Shear. Okay. I will add to what I called my first part 
to the first question. It is not clear to us based on our 
interactions with SBA. And they have raised questions a number 
of times, ``How could we use catastrophe risk models? How could 
we use disaster simulations?'' And it has been a constructive 
dialogue, but, nonetheless, we are not quite sure how far along 
the agency is in really evaluating its exposure to its risk.
    Chairwoman Velazquez. Thank you.
    Mr. Preston, I would like you to provide me with specific 
time frames for when the SBA will have implemented the 
following elements: formed a comprehensive written disaster 
plan that integrates the agency's needs in a variety of 
disaster situations with the results of disaster simulations 
and catastrophic modeling; completed cross-training agency 
staff to provide backup support for the disaster assistance 
function; completed stress testing to the DCMS system at 
maximum use or capacity. What is your time frame when these key 
elements of a disaster plan will be completed?
    Mr. Preston. Well, you and I have not discussed this 
previously. So I think we should work together to determine 
those time lines.
    Now, let me tell you we have had conversations about the 
need for time lines. This agency in certainly the six months, 
seven months I have been here manages extensively with time 
lines. We could have never achieved these results without daily 
time lines on achievables in every aspect of our operation.
    We are currently--and this is in support of GAO's comment--
evaluating time lines for putting in place a much broader 
integrated play book. The protocols exist internally. The 
institutional knowledge, especially after the last year and a 
half, exist internally. What we are doing now is going through 
the process of working through getting it documented and having 
something that will serve us in three or four years.
    Chairwoman Velazquez. Mr. Preston, my concern right now is 
that we are six months into the next hurricane season, summer. 
And based on your answer, then we can conclude that you still 
do not have a written plan, disaster plan, based on the key 
elements that were recommended by the General Accounting 
Office.
    Mr. Preston. What I would tell you is we have an ability to 
respond to disasters today, whether they be hurricanes or 
earthquakes, like never before. We have a system capacity that 
is about four times what we needed for Hurricane Katrina. And 
indications are that it could expand beyond that.
    We have facilities in place right now. We have an extremely 
large existing workforce, recently trained workforce, that is 
no longer with us that we could bring back in, and reserve 
corps. We have relationships throughout the federal government 
that are dramatically improved. And our coordination has 
improved.
    Now, what I don't have is all of that documented in a play 
book for you. If something hit tomorrow--
    Chairwoman Velazquez. Well, it is not only for us. It is 
just for your agency and for everyone. We saw. And we were 
here. We saw the disarray of the agency, the confusion, not 
only in the Gulf Coast region, where people were suffering and 
lost their properties and didn't know where to go and then the 
disarray that was going on at the agency because DCMS wasn't 
working at capacity because the training of the people was not 
in place because you didn't have the manpower on the ground in 
the region.
    It is not only a plan for us, the Committee. It is a plan 
for the agency to be effective. And it is the plan that has to 
be predicated on the simulations and the kind of needs based on 
whatever scale of disaster we will be confronted.
    When you mention now that you are going to have 8,000 
capacity on the DCMS, what do you base that number on?
    Mr. Preston. Extensive stress testing by IBM, who is the 
contractor. And the stress testing that they did to the system 
went up to the 8,000 level. And it had indicated that there was 
significant additional capacity above that.
    Chairwoman Velazquez. Mr. Shear, do you really think that 
8,000 will handle a large-scale disaster?
    Mr. Shear. There is a trade-off between capacity and how 
much we have to worry about could the SBA serve victims of 
another major disaster? The question becomes, well, SBA is in a 
better position now, certainly, with 8,000, than it was before. 
It is relative. Whether it could meet its goal of 21 days to 
process loan applications, it would be hard to say.
    In terms of the 8,000, I certainly am encouraged if, in 
fact, IBM has done the stress testing to ensure that there are 
8,000 concurrent users. But this has to be a part of a broader 
framework of not only risk evaluation but how do the different 
tools fit together. The reserve corps, office space, and other 
elements of technology really have to fit together to see, you 
know, how that 8,000 would play out in that broader framework.
    Chairwoman Velazquez. Thank you.
    Mr. Preston. Can I comment on that just for a second? Madam 
Chair, I am not as concerned about the 8,000. The 8,000 with 2 
shifts would give us 16,000 users. And in that center, we never 
had even 3,000.
    The issue I think is exactly what Mr. Shear mentioned, 
which is expanding the people, expanding the other issues. And, 
as I have told people, I am pretty comfortable today based on 
the expansive situation that we have in place. We are very 
well-prepared today. My concern is three or four years from 
now.
    And if the agency shrinks in size, if our facilities shrink 
in size, and then we have to ramp again like we did last year, 
that is what we need to focus on.
    Chairwoman Velazquez. Well, let me just say--and I am going 
to make this statement and then move to Mr. Chabot--if 8,000 is 
good enough, then why do you still have unprocessed 
applications to this day?
    Mr. Chabot?
    Mr. Chabot. Thank you very much, Madam Chairwoman.
    Mr. Preston, as I mentioned in my opening statement, you 
are in a difficult position obviously because you have only 
been at the SBA now for about seven months. And this happened a 
year and a half ago. So you are essentially trying to fix 
someone else's problem. So it is a difficult situation.
    But let me ask you first, has the DCMS system been tested 
at its 8,000-user capacity? And is the majority's concern about 
a full-blown test well-founded?
    Mr. Preston. DCMS has been tested. And I would be confident 
that it can handle that and potentially additional, which is 
significantly beyond Katrina.
    I would also like to say, just to your opening comment, 
that I know I am coming after the event, but that is one of the 
reasons I am here. And it is my privilege to serve.
    Mr. Chabot. Thank you.
    Next, what coordination did the SBA have with other 
agencies, like FEMA or state and local governments?
    Mr. Preston. Well, the day after Katrina, our district 
director had set up office in the state capitol. We had people 
very quickly. Most of our people had lost their homes coming 
back to work. We were meeting with small businesses very soon 
after that.
    We have consistently had I think fairly extensive 
coordination with agencies, both federal and local. And where 
we have had problems with that coordination, up front we did 
have some issues in getting the applications from FEMA. There 
were some issues that caused a lot of applications to come to 
us that probably shouldn't have. And we have worked through 
those issues with FEMA so that it won't happen again.
    Other than that, I think our coordination has been pretty 
extensive and continues to be.
    Mr. Chabot. Thank you.
    Ten billion dollars in loans were approved, but how many 
were canceled? And how many loans are actually to be disbursed?
    Mr. Preston. Okay. 3.7 billion loans have been canceled or 
reduced. These are people who get insurance payments, so they 
no longer need or are allowed to get the loans under the 
federal law; grants; they have access to private resources. And 
that is very much in line with other disasters we have seen.
    About 5.1 billion has actually been disbursed. That last 
1.9 is what remains to be disbursed. These are people we are 
ready to disburse funds to. And in many cases, these people are 
not ready to move forward. They don't have insurance in some 
cases. They can't get access to records. They have not chosen 
to move back into their neighborhoods in some cases, for 
reasons that all of you are familiar with.
    So when we look at our backlogs and we look at our time 
lines, we are for the most part being very responsive to those 
people.
    Mr. Chabot. Can you tell me what the approval rate for the 
four 2004 Florida hurricanes was?
    Mr. Preston. I don't have that exact percentage for you. It 
was 32 percent. I am sorry. I just got it.
    Mr. Chabot. Thank you.
    Mr. Preston. I knew it was significantly lower than the 
current hurricane, than the 2005.
    Mr. Chabot. Right. And isn't your approval rate largely 
affected by the financial demographics of the area?
    Mr. Preston. Very much so. This was in line with the 
Northridge earthquake. It is much higher than the 2004. It is 
lower than Hurricane Andrew, for example. It very much has to 
do with demographics.
    Mr. Chabot. Thank you.
    Mr. Shear, let me turn to you for a couple of questions. 
Should the SBA consider contracting out disaster loan 
processing to other entities as they supplement to its own 
office? And would the SBA have the capability of providing 
oversight to private loan processing contractors while still 
performing disaster loan processing itself?
    Mr. Shear. It is really an excellent question. And I will 
answer it based on the work I am testifying on today and other 
work we have done at SBA. In this work, we do not evaluate the 
efficacy of such of including private sector partners, namely 
financial institutions. So we didn't look at that avenue in 
this work.
    I will just make an observation based on a lot of work we 
have conducted over the last decade dealing with SBA's Office 
of Capital Access if that we had many concerns going back with 
oversight of lenders, loan monitoring, and the tools that SBA 
had when it delegated authority to private sector lenders. And 
SBA has made great improvements over the last decade in that 
arena.
    And what I would hope is that if SBA is again, as I think 
the agency is planning to do to partner with private sector 
lenders that they will be very cognizant of the oversight 
structure you need when you have private sector lenders that 
are able to basically become a distribution mechanism for 
government guarantees.
    Mr. Chabot. Thank you. My final question, Mr. Shear, has 
the SBA been at all defensive in dealing with the GAO or have 
they been forthcoming about their inadequacies and willing to 
change to ensure an improved response for the next catastrophic 
disaster?
    Mr. Shear. It is a difficult question to answer because it 
is kind of like it is all relative as far as different 
agencies. One thing I will say is that the interaction 
currently--and I am glad to be here with Administrator 
Preston--is that it has been a very constructive engagement in 
terms of interaction of us providing information from our 
evaluations that might be helpful in helping SBA get to the 
next level of coming up with a comprehensive plan and 
implementing our recommendations.
    So I would certainly say that it has been very 
constructive. I know behind me Herb Mitchell, who through this 
whole trying period has been in charge of the Office of 
Disaster Assistance, has already been very cordial, very 
professional, and very constructive in our relationship with 
each other.
    So it has been positive, what we call constructive 
engagement.
    Mr. Chabot. Thank you. So what I hear you saying is it is 
improving?
    Mr. Shear. It has improved. And I think it certainly has 
the elements of what we call constructive engagement.
    Mr. Chabot. Thank you very much. I yield back.
    Chairwoman Velazquez. Now the Chair will recognize Mr. 
Jefferson for five minutes.
    Mr. Jefferson. Thank you, Madam Chair Lady.

    There is so much to talk about here. I thank you for the 
work you have done. And I know it is a big job. Mr. Preston, I 
guess, or either one of you -- I don't know which I should ask 
this. There is a -- we are very concerned about the training 
that people had who came down to make loan decisions.

    We have a very limited staff, as I pointed out last week. 
We went in the last six years from 30 people down to 9 people. 
We don't have a loan director. We don't have information to 
direct and a few other very key people.

    Yet, when the SBA disaster relief people came down, they 
were to be trained by our small office. After that, the office 
had no real interaction with them. They went on their way.

    Have you looked at the impact on the efficacy of this whole 
process by -- this goes back to how folks may be better trained 
and how our office offices may better integrate with the 
dispensation of that work, as opposed to just kind of saying, 
``Hi,`` ``Good-bye,`` a little training, and they go away? How 
do we make this thing get a small business hometown kind of a 
feel to it, as opposed to what we have this time around?
    Mr. Preston. Yes. This was an issue that came up shortly 
after I came into the agency. We had an off-site with all of 
our leadership. And we are very close to completing a plan to 
have much better integration between the district offices and 
the people that come in from outside the area to help process 
loans.

    The other issue that you address -- and this is something 
that is being driven by people in those district offices based 
on what they think needs to happen. So we are getting that 
feedback from the field.

    The other issue you mentioned, which was a big challenge we 
had, was training. We had to ramp up very quickly. And there 
were challenges on the training side. There are just no two 
ways about it.

    And the way that we are dealing with that is two ways. 
Number one, we are expanding the number of people in our 
reserve corps that are kept up to date in training. They don't 
work for us. They come in several days a year for training. And 
then when they get deployed, they are up to speed.

    The other thing as part of this field engagement plan is we 
are beginning to look at how to train people in the districts 
more effectively because they don't always have the training 
they need to help those people. So we are hitting it from both 
angles.
    Mr. Jefferson. How many people are in the pipeline now?
    Mr. Preston. already in the operation today we have about 
2,200, which is still very large. We have a reserve corps of 
another 750, which is these continually trained people. And 
then we probably have close to another 1,000 who are no longer 
with us who have recently been trained.
    Mr. Jefferson. I know I don't have much time. On the turn-
down rate, I mean, everything else having been looked at, the 
big issue is, how do folks get loans approved? And folks, 98 
percent of those approved have gotten their money, but how many 
were turned down of the ones who applied? Have you looked at 
how we can improve in this area because that is really where 
the rubber meets the road there.
    Mr. Preston. Yes. It is a challenge because we are a 
lending institution. Ultimately we want to make sure that we 
work with people to be able to repay.

    The thing I would mention is we have very low interest 
rates, right now under three percent. And we can go out 30 
years, which generally means for a life-sized loan, a borrower 
is going to have 70 to 80 percent lower monthly payments. And 
so we do still look for those people to be able to make that 
level of monthly payments because we don't want them to take on 
debt that they can't repay. So what I would tell you is --
    Mr. Jefferson. What was the turn-down rate in our storm? Do 
you know --
    Mr. Preston. The decline rate in your storm was 55 percent. 
The approval rate was 45.
    Mr. Jefferson. Did it apply with homeowners and businesses 
equally or was it more in one?
    Mr. Preston. Homeowner was about 44 or 43 percent. 
Businesses, which are many fewer, was a good bit over 50 
percent.
    Mr. Jefferson. What was the major reason for the turn-downs 
if you can just categorize it in some sort of a way?
    Mr. Preston. The major reasons for the turn-down would have 
been credit history and ability to repay.
    Mr. Jefferson. Now, the ability to repay, how did you judge 
that in this storm?
    Mr. Preston. We look at ability to repay based on where 
they have been historically. If they have been impaired by the 
storm or are going to take a period of time to get back to 
work, we generally do not take that into account. We give 
people leeway for that.
    Mr. Jefferson. Well, the big complaint has been that people 
are saying that it is going to take a long time to get back on 
their feet, a long time to get folks back home. And the agency 
is saying, ``Well, we don't know if you are going to be able to 
make it.``

    It has nothing to do with credit history and that sort of 
thing. It has to do with the toughness of making a decision 
about how successful the business is going to be going forward 
given the nature of the disaster. And that is something that is 
a problem for us.
    The last thing is, if I might, Madam Chair Lady, the banks. 
Many banks were clamoring to get involved here to help get 
these loans out. They were local banks. You talk about the idea 
of getting a face with an application and making sure that 
people are treated, you know, with courtesy and with 
understanding. Banks are there ready to do this. Many have 
already been approved by the SBA as banks they work with every 
day. Yet, they couldn't get fully involved.
    Why don't you look at some way you can meet these concerns 
Mr. Shear expressed about how these banks could be monitored 
better and then put them in the business of helping you get 
these loans out, helping to make approvals?
    Because years ago, 1,000 years ago, I served on a bank 
board. The questions used to always come up this way. When 
everything else was equal, you would ask somebody around the 
table, ``Do you know this person?`` And that would be the basis 
many times of making the decision.
    If somebody said, ``Yeah, I know such and such and such, 
know a little bit about what he is doing,`` it would make some 
sense. This thing gets sort of moved from what is happening 
down on the ground until you really don't get decisions out of 
it. And I just want to know if we can't use our banks more 
effectively.
    Chairwoman Velazquez. Time expired. Now I recognize Mr. 
Buchanan for five minutes.
    Mr. Buchanan. Thank you, Madam Chair.
    Let me mention being the only member here on this Committee 
from Florida and also being very much a part of the Gulf Coast. 
And my wife was up at Katrina with our church. So we are very 
sensitive to what is going on there.
    We had eight hurricanes in two years. And obviously I am 
very concerned about, you know, anything that borders the Gulf 
Coast or any of the coastal communities.
    Also, my experience last year I was Chairman of the Florida 
Chamber and a board member. We had in our chamber 137,000 
businesses. Ninety percent of those businesses were 50 
employees or less and created 90 percent of the jobs in 
Florida.
    So I guess my question is really a couple of things, really 
one of capacity. Thank God we didn't have many storms last 
year, but we had this tornado caused about $80 million worth of 
damage just outside of Orlando a few days ago. Normally we 
don't get those that time of the year, but it is capacity.
    What is the underwriting criteria during SBA normal loans 
somewhere else, in Montana or somewhere, compared to when you 
have a disaster? And then my question is you might get the 
funding. How do you have the capacity to process those loans. 
You know, Florida is 18 million people. I am just looking at it 
from that standpoint. You look at the whole Gulf Coast. So it 
is a capacity issue I would like to know and underwriting 
criteria as well.
    And then the next thing is you have offices in Jacksonville 
and Miami. I would like to know how those offices are 
functioning and how well are they staffed because, as someone 
mentioned, we are coming back to hurricane season June 1, but 
ideally most of the hurricanes seem to hit in August and 
September.
    Thank you.
    Mr. Preston. In terms of capacity, let me just tell you, as 
I mentioned, I was down last week surveying the tornado damage. 
Those loans are being approved within a week or two. We have 
gotten very good feedback from the area. Obviously, as 
devastating as that was, it is not a Katrina. Just I wanted to 
mention that.
    Capacity comes in a number of ways, but it is primarily 
having the systems in place that can handle the volume, having 
the people, and having the facilities, and then having the 
integration with other agencies where you need to kind of 
interact with them. I think the Chairwoman was articulate in 
kind of describing kind of the broader elements of that.
    On the credit side, when we do typical small business 
loans, we are not actually making the loan. The bank makes the 
loan, and we guarantee it. So the bank issues the credit 
criteria. They can dip deeper into the credit pool with our 
guarantee, which goes anywhere between 50 and 85 percent. So 
they generally do go deeper.
    In the disaster loan program, I would tell you we go very 
deep. And we look specifically at an ability to repay on a loan 
that is generally going to have a much smaller monthly payment. 
And we are really trying to press, push as hard as we can 
because we are trying to help people get back to work or get 
their homes back or whatever. So you would see us dig deeper in 
that program than we typically would.
    Now, with respect to your question about Jacksonville and 
Miami, we think those offices are functioning well, but what I 
would tell you is in hurricane season, where we really get the 
most support--and this gets back a little bit to Congressman 
Jefferson's comment--is people coming from outside setting up 
multiple sites--we have five sites right now in the Orlando 
area, some in tents, some retirement centers. That is where 
most of the local horsepower comes to help people.
    The district offices work with them on media and outreach 
and getting in touch with local chambers and that kind of 
thing, but a lot of the horsepower comes from outside the state 
when a disaster like that happens. I shouldn't say ``outside 
the state'' because we have so many reservists in Florida they 
are generally from inside the state, but they are not in those 
two district offices.
    Mr. Buchanan. I guess one thing I wanted to understand is 
in a normal loan underwriting by the SBA compared to a disaster 
situation, what is the timing difference normally between those 
two situations?
    Mr. Preston. The credit criteria or the time to get the 
loan?
    Mr. Buchanan. Well, time someone comes in and makes the 
request to the time where they get the money.
    Mr. Preston. Right now 98 percent of our loans are being 
approved within 14 days for homeowners and 16 days for 
businesses. We put out there a goal of 21 days, but internally 
we manage to do a tighter goal. In Florida, many of those are 
happening right now and under a week.
    Mr. Buchanan. Thank you.
    Chairwoman Velazquez. Recognize Mr. Shuler for five 
minutes.
    Mr. Shuler. Thank you, Madam Chairwoman.
    Mr. Preston, thank you so much again for coming back and 
speaking in front of the panel again. We can look back at all 
of the decisions that were made in the past, if you will, the 
armchair quarterback decisions that we could possibly make of 
the decisions that were both wrong, lack of resources, but, 
going forward, what area of the agency do you feel has the 
largest room for improvement and/or the resources that are 
needed in order to accomplish the next major disaster that we 
could possibly have and looking forward, instead of looking 
back so often, as we do, we can certainly see in front of us by 
looking forward, instead of looking in the rear-view mirror, 
but we can certainly learn from the decisions that were made in 
the past.
    What areas do you feel that would deserve the most room for 
improvement or the resources or the obstacles to overcome?
    Mr. Preston. I think what we need to do is--you know, we 
are talking a lot about today. I think what we need to do is 
talk about three or four years from now in addition.
    And I am concerned about the fact that today we have over 
2,000 people in this operation, expansive facilities. A lot of 
people have been recently trained. But if over the next 3 to 5 
years this operation winnows down to 800 people again or 1,000 
and we have another catastrophe, we will need to look at a 
ramp-up again. Today ramp is less of an issue because we have a 
lot of trained people.
    And so what we need to do in the coming months is say, 
``What does that ramp look like? How do you get people quickly 
trained? How do you get facilities quickly? And also,'' to Mr. 
Jefferson's comment, ``how do you engage banks potentially to 
come in and help out when our capacity gets maxed out? And what 
as a government should we be doing internally? And what should 
we be doing with the private sector?'' That I think is the 
longer-term issue that we need to address. And it is very 
important for us to work closely with this body in determining 
that. But that is where I see kind of where we still have a 
fair amount of work to do.
    Chairwoman Velazquez. The Chair will recognize Ms. Fallin 
for five minutes.
    Ms. Fallin. Thank you, Ms. Chairwoman. I appreciate that 
and Ranking Member.
    And Administrator Preston, I appreciate you coming today. I 
know you took over during a very difficult time and are trying 
to do your very best to make this agency work to its best 
possible. And I also appreciate the fact that this is my first 
time in Congress and I have seen you twice. So you have been 
pretty bold to come before this Committee two different times.
    I had the opportunity to serve 12 years as Lieutenant 
Governor of Oklahoma. And we had several different major 
catastrophes in Oklahoma with the Murrah Federal Building 
bombing, in which we had a lot of small businesses that were 
hurt. And, of course, we had some major tornadoes that came 
through Oklahoma. And I will tell you that during my years as 
Lieutenant Governor, the SBA has been very responsive to our 
small business community in the past to step forward.
    And specifically I would call them the day of the disaster. 
And they would meet with me that day. And we would be out at a 
press conference the next day talking about what Oklahoma would 
do with the SBA to help our small businesses get back on track.
    You know, sometimes in government, we do things to help 
business. Sometimes we do things to hurt business. My question 
to you today is, do you see anything from your past experience 
in working through a major catastrophe that we do in Congress 
that hampers you in your role at the SBA or processing 
allowances or any room for flexibility waivers? Is there 
anything that we can do? Are there any laws that we have put in 
place that impede you and your agency from serving the public 
to the best of their ability?
    Mr. Preston. Thank you. I think this body has been pretty 
responsive. And much of that responsiveness preceded me. But 
the nature of disasters is unpredictable. And I know the 
funding of them is kind of episodic. And this body has come 
through with supplemental funding when the agency has needed 
it, which has been very important.
    Also, I think increasingly this body has been helpful in 
thinking about ways to get that support outside the agency 
through private sector support. And we did reach out to the 
private sector to an extent with some of our operations last 
year. And now I think we will be reaching out to talk to the 
bank sector as well.
    What I would say is to the extent that we can continue to 
have a constructive dialogue and that we can continue to look 
creatively at how best to handle a disaster that hits with a 
fury in a scale that is just something--you know, it is very 
difficult to have 4,000 people on your staff when you need 800 
or 600 all the time but ultimately if something like that hits 
you need 4,000. So what I would ask for is to have a 
constructive ongoing dialogue to come up with creative 
responses. And that is really all I can ask.
    Ms. Fallin. Ms. Chairman, if I can just further? I would 
like to encourage you. I know in Oklahoma during our disasters, 
we always turned to the private sector, too, to help us because 
going from 800 to 4,000, as you suggested, is something that is 
quite a challenge. But any way that you could work with the 
private sector, especially the loans, as we have discussed 
earlier in processing things or identifying even private sector 
people that could help in time of a crisis--
    Mr. Preston. Yes.
    Ms. Fallin. --to get your work done would be helpful.
    Mr. Preston. Thank you.
    Chairwoman Velazquez. Mr. Braley?
    Mr. Braley. Thank you, Madam Chairwoman.
    Mr. Preston, thank you for returning and answering 
questions for us here today on these very important subjects. 
When I was talking to Congressman Melancon out in the hallway 
between a new panel taking its seat, one of the concerns he 
brought to my attention was the reverse direction that 
technology moved in as a part of the processing of these loan 
applications.
    And as someone who in my business depended extensively on 
technology in my daily work to be able to provide services to 
the people that I represented in an efficient manner, one of 
the things that was disturbing to me about his comments was 
that we were going from a system that was designed to allow for 
the fast and orderly processing of loan applications back to a 
paper form of loan application processing, where people were 
filling out applications in pencil.
    One of the things that impacts that is the agency's ability 
to provide access to technology in the midst of a disaster. And 
I am wondering whether your analysis of some of the failings of 
your predecessor and the administration as a whole during this 
crisis led you to any conclusions about how the Small Business 
Administration can provide greater access to technology in a 
crisis situation to the small business owners who are in 
desperate need of loan processing in a timely fashion.
    Mr. Preston. Yes. Well, certainly, in fact, it is in our 
early budget, and we are working on it right now. I think over 
time an online application will be very important for us.
    I will tell you straightforward I reallocated all of our IT 
resources in disaster to focus on a lot of the deeper systems 
issues we had because, as you have heard from Mr. Shear's 
report and other comments, we had a new system that was 
implemented just before this storm. And there are just bugs to 
work out. And we needed to get that thing operational.
    We are focused on getting an online application in place 
which we think will dramatically simplify people's ability to 
fill it out, our ability to get data input, and our ability to 
be efficient responders. But you are right. It is a very 
important point and one that we are focused on.
    Mr. Braley. One of the components of the GAO report talking 
about recommended changes, which apparently the agency is 
embracing, is with this new contractor dealing with technical 
support, software changes, and hardware upgrades. I would be 
interested in knowing your thoughts about how your agency 
approaches the concept of hardware.
    As someone who has never had a desktop computer in my life 
and who when I had the opportunity to purchase my computer for 
my office here in Congress was able to get a notebook computer 
with remote dial-up that can allow me to access the Internet 
anywhere any time with battery power, have you factored that 
into your agency's planning on the types of technology that 
will be more beneficial--
    Mr. Preston. Yes.
    Mr. Braley. --in crisis management and response to the type 
of problems we have been talking about here today?
    Mr. Preston. Yes, absolutely. You know, a great example of 
that is--and let me just say these systems problems had to do 
with major servers. And they were a different kind of system 
than laptops. But on the laptop side this past year, we worked 
very hard to upgrade the infrastructure in our district 
offices.
    So those district offices now have personal computers that 
would be able to work in most cases remotely if we needed 
somebody, for example, in Oklahoma to help people in New 
Orleans. And so upgrading those components of hardware will be 
important in us going forward and being able to provide a much 
more creative response to large disasters.
    Mr. Braley. As part of the loan application processing, did 
the SBA provide kiosks or other types of remote access to 
technology in these disaster-stricken areas, where people did 
not have access to their existing technology systems?
    Mr. Preston. What we did is we had about 120 sites that 
people could come to meet with loan counselors to go through 
all of their documentation to give help filling out all of 
their forms. It was a very extensive effort in the field. And 
we still have a handful of those offices in place where people 
come in to ask questions.
    Frequently what we find is people very understandably are 
distraught. This is a somewhat complicated process getting 
another home loan. And by having on-site locations where people 
can go to and sit with a counselor is very, very helpful.
    Mr. Braley. Thank you.
     Mr. Shear, I am looking specifically at page 8 of your 
remarks dealing with SBA steps that have been taken to prepare 
better for future disasters. So much of the first portion of 
that section of your report deals with the areas of technology 
and contracting, which happens to be the subcommittee I am 
chairing on this Committee.
    Do you have any suggestions for further oversight that need 
to be done to address some of the concerns that have been 
identified and make sure that the SBA is moving forward in a 
direction of responsive management of those issues so that we 
are not back here in the future discussing them?
    Mr. Shear. I greatly appreciate that question. One of the 
roles we often play is when we are asked to go back and look at 
what progress has an agency made. And I hope what is clear from 
not only page 8 of the statement but from our testimony, we 
think technology can be a large part of the solution, 
assessment of the risk exposure.
    But one of the situations here that was very different than 
when you have localized flooding or weather problems is the 
size of the disaster and how do you come up with a scaleable 
plan. And there can be certain efficiencies when you deal with 
very large catastrophes that can be addressed.
    And even the problems with saying how many loan processing 
people do you need, to what degree do you have to be 
transferring from a paper system into an automated system back 
into a paper system, all the things that occurred over this 
period. If you are really trying to reach with the largest 
disasters, even an Internet-type function, which reduces the 
amount of paperwork, you know, they were scanning in documents, 
things like that, this can be a big part of the solution. And 
it would be something that certainly we would be more than 
pleased to have serve this Committee and your subcommittee if 
you asked us to in terms of following up on these initiatives.
    Mr. Braley. Thank you. I yield back the balance of my time.
    Chairwoman Velazquez. Mr. Gohmert?
    Mr. Gohmert. Thank you, Madam Chairman. And I do appreciate 
you all being here and testifying.
    I would like to follow up on something that came up 
earlier. And that is with regard to the approval rates for 
applications for assistance from the 2005 Gulf Coast 
hurricanes. You had mentioned, Mr. Preston, that the approval 
rate was around 45 percent. I was wondering since we had 
different states hit, we had, of course, Louisiana, Alabama, 
Mississippi, and then my own state in east Texas, do you know 
what those approval rates were as broken down by states?
    Mr. Preston. I don't have those breakouts here, but we have 
those internally. And I could provide those to you.
    Mr. Gohmert. I am just trying to get to what would be a 
major reason for having, say, under Hurricane Andrew a 60 
percent approval rate compared to a 45 percent rate of the 2005 
hurricanes. Do you have any idea why there was such a disparity 
in those rates?
    Mr. Preston. Well, it would most likely be a different 
ability to repay on the part of the borrower, different 
demographics.
    Mr. Gohmert. So you feel like there are more deadbeat 
borrowers in these areas needing assistance than perhaps after 
Andrew?
    Mr. Preston. First of all, I certainly wouldn't use a term 
like that. And the other thing that I think is important to 
understand is many of these people who come to us have to come 
through us before they can get a FEMA grant. Okay? So they have 
to come through our process. Many of them don't even want a 
loan. So I think that is important. Okay?
    So they come to our process before we send them to FEMA. In 
some cases, if they can't repay, our view is we should not 
saddle somebody with a very large piece of debt that they can't 
repay. Just that is--
    Mr. Gohmert. That goes without saying, but sure. You are 
not assisting them if you are loaning them money that is just 
going to take them into--
    Mr. Preston. That is right. And if you are lending them the 
money that is substantially easier to repay, as I said, we will 
go out 30 years. We have very low interest rates. Often this is 
70 to 80 percent below a typical amortization.
    Mr. Gohmert. Right. But, here again, those are the same 
concerns you would have had, not you personally but the 
indefinite you, speaking of this, with Andrew.
    Mr. Preston. Also in Andrew, the amounts were much lower. 
They were significantly lower. The loan amounts were 
significantly lower, which generally means people had much more 
insurance or the damage wasn't as much.
    Mr. Gohmert. Okay. That is helpful.
    Well, I am also curious. You know, we are aware that so 
much of the damage in Louisiana was caused by the levee 
flooding. And so much of the area adversely affected so 
tragically was actually below floodplain. I didn't know if that 
might have been a factor because I know in east Texas when a 
river floods, we get all of these federal agents running in and 
saying, ``This is now wetlands. You can't build. You can't do 
anything on it.''
    I didn't hear anybody running into New Orleans and saying, 
``These are all now duct blinds. And you are not going to be 
able to rebuild or improve.'' Did that come into consideration 
at all, areas that may be in flood plains?
    Mr. Preston. The biggest issue with respect to floodplain 
areas I think really relates to the 23,000 people we still have 
in the process, which is are they ready to rebuild? Have they 
gotten building permits?
    Generally people have guidance on this, but I know there 
are a couple of areas where people are concerned that the 
elevation requirements may raise, I think in two zip codes 
right now. So there are people that are withholding decisions 
based on some of those issues, but that does not come into the 
credit decision.
    Mr. Gohmert. When you say there are still 23,000 people in 
the system, are these 23,000 applicants still waiting for 
action?
    Mr. Preston. These 23,000 applicants, 20,000 of whom have 
already begun receiving disbursements. We are waiting in most 
cases for feedback from them on how they want to proceed.
    Mr. Gohmert. So 20,000 have gotten letters saying--
    Mr. Preston. They don't get letters. We talk to them.
    Mr. Gohmert. Okay.
    Mr. Preston. They get letters, you know, obviously 
documenting these things.
    Mr. Gohmert. So according to your files, the ball is in 
their court? You are waiting for them to respond?
    Mr. Preston. I have a record on every one of those 23,000 
people that shows what we are waiting for or what they are 
waiting for. This is a new process we kicked off five months 
ago so that we know status. I have got data that shows me all 
of that.
    Generally what is happening is many people are waiting to 
decide what to do. What you have to understand is we provide 
people reconstruction loans. If somebody hasn't started 
reconstructing their home because they can't find a contractor, 
they haven't decided to move back in, or whatever reason, we 
are not providing the money unless they have got a use for that 
money.
    Mr. Gohmert. All right. Thank you. And I do acknowledge and 
realize you were not in this current position when the 
hurricanes hit. A lot of cars have seat warmers. Apparently 
yours was really hot when you came into it, but we appreciate 
your work.
    Mr. Preston. Also I do want to highlight, though, that the 
people in this department that were in the seat at that point 
are the same ones who have worked to re-engineer this process 
and take it forward. And they have stuck through it. We have 
people who have been in this operation many years who will help 
take it forward. I think they have learned a lot, and they have 
grown a lot.
    Mr. Gohmert. Thank you. And thank you, Madam Chair.
    Chairwoman Velazquez. Mr. Gonzalez?
    Mr. Gonzalez. Thank you very much, Madam Chairwoman. And 
welcome back, Administrator Preston. We do appreciate the 
effort that you display. Thank you, Mr. Shear, in, of course, 
the fine work that you do.
    I am just going to have a couple of observations and try to 
figure out what we are really dealing with here today in some 
of the testimony that is anticipated later today.
    It seems to me Mr. Shear and from your viewpoint that there 
is no agency or department in the federal government that has 
received a passing grade for the manner in which they responded 
to Katrina and Rita. Is that a fair statement? I mean, if you 
look at FEMA. I mean, just go down the list. Do you know of any 
that basically passed the test in adequate response?
    Mr. Shear. We have devoted a very large effort to looking 
at Hurricane Katrina and the aftermath involving multiple 
agencies. So we at GAO are looking across the board. And 
certainly there are shortcomings in leadership and execution 
involving a number of agencies, including FEMA, including the 
Small Business Administration.
    We have a report we call a capping report that we kind of 
issued halfway through this work last summer where we do know 
some of the kind of better practices of agencies that were 
well-equipped to adjust to the demands created by Hurricane 
Katrina: The Coast Guard, Social Security to some degree, even 
as federal workers the financial center that issues our 
paycheck, that they were able to make adjustments based on 
really sound strategic planning to respond. So we do have some 
examples, but we certainly have many examples of what didn't 
work well in responding to Hurricane Katrina.
    Mr. Gonzalez. And I appreciate the guidance that you give 
us because many times it does have to come from outside the 
agency or the department, but much of this, of course, is just 
the very scope of Katrina, something that has never been 
experienced or nearly never experienced in the United States. 
And I want to be fair to SBA and everyone else.
    So we have yesterday, when the disaster struck. We weren't 
prepared. We didn't perform well. And you have today. And I 
would like to focus on somewhat today.
    We are going to her testimony later. And the way that some 
of this testimony will go, I am sure, are personal experiences 
and the frustration. This testimony is based on careful notes 
that I kept throughout this long and painful process. We are 
talking about the loan process. So I hope that I will be able 
to listen to that testimony and not be called to another 
hearing.
    But, Mr. Preston, you have brought out a very important 
point. And I think we all should be very sensitive to it, 
whether it is SBA or any other department or agency. And that 
is you are concerned three or four years down the road. We have 
to distinguish and be able to identify that which you need on a 
permanent basis so that you will be able to again, as you say, 
ramp up, enhance, or whatever, to meet the immediate needs of a 
particular disaster.
    Things can't be as they were in the past. Of course, you 
can't be at the capacity that you presently find yourselves for 
the obvious reasons because we are working through responding 
to this disaster.
    Once you get that caseload through, obviously you will ramp 
down, but you are pointing out that you as an administrator of 
SBA would like to plan prospectively and figure out what you 
need on a permanent basis that will enable you to ramp up 
easily, quickly, and efficiently. Is that correct?
    Mr. Preston. That is correct.
    Mr. Gonzalez. And I want to tell you that I don't think 
there is anyone on this Committee that will not join that 
effort and that we appreciate the sensitivity that you are 
bringing to that.
    Now, I know many things went wrong and hopefully that we 
will learn from them. Right now it is really not about fixing 
the blame. I think President Clinton would say, ``Let's fix the 
problem first. Then we will fix the blame later. And we will 
have plenty of time for that.''
    But, again, I just appreciate the efforts that both of you 
have demonstrated. And I would hope that we can work together 
so that when we hear the testimony from the other witnesses 
that were personally touched by this disaster, that we won't 
have a repeat performance in the future.
    Thank you. And I yield back.
    Chairwoman Velazquez. Thank you.
    And Mr. Akin?
    Mr. Akin. Thank you, Madam Chair.
    In a separate hearing in a different committee, GAO 
mentioned, among other things, that what they had found was 
that they had identified 22,000 people who had cheated the 
government out of money relative to Katrina. These they said 
were the dumb ones. These are the ones that photocopied their 
driver's license when they sent in the bogus claim. People 
didn't even live in the area.
    That elevated my blood pressure a little bit. Then when I 
asked them off the record, ``What do you think will happen to 
most of them?'' they said, ``Oh, they will keep the money and 
get away with it.''
    I guess my question is, in terms of the loans and the 
aspects that we are talking about in this Committee, are we 
putting into place practices so that we are just not wasting 
government money and allowing criminals to take advantage of 
the good-heartedness of Americans trying to take care of people 
who have been hurt? Because if I had anything to do with it, I 
would put every one of those suckers in jail for five years. 
Louie says I am being a little bit soft, but, anyway--
    [Laughter.]
    Mr. Preston. Would you like either?
    Mr. Akin. Either one, both. I have got enough time. You can 
both answer probably.
    Mr. Preston. I think what I would say is it is probably a 
lot more difficult to engage in fraud in a process like ours 
because we have loss employees going to homes. We do title 
searches on property. We require a significant amount of 
documentation, like you would on any home financing.
    So I think the challenge we have had historically is a 
different one, which is how do you take a relatively complex 
process, requires a lot of documentation, and simplify it for 
people. So although fraud does exist, it is not nearly as 
prevalent in other processes that wouldn't require as much 
documentation and oversight.
    Mr. Shear. I would echo that when we do a program 
evaluation, such as the ones that we did here, there are 
certain flags we look for. Do we have to bring in our 
investigators that really look for fraud investigation? And 
those flags then go up in this program. And I think it is the 
nature of the program, as Mr. Preston said, that caused us to 
not worry about it. It is more prevalent with grant programs.
    And so our resources, including our investigators, who 
really investigate in a different fashion, forensic 
investigators in our program evaluators, have focuses on FEMA 
and other grant programs.
    Mr. Akin. It would just seem naturally in that people have 
to pay back. The people that are looking for just taking money 
and don't want to have to pay anything back, they are going to 
go to other places probably. So you don't have too much trouble 
in that area, then.
    Mr. Shear. No.
    Mr. Akin. Thank you very much. Thank you, Madam Chair.
    Chairwoman Velazquez. Mr. Altmire?
    Mr. Altmire. Thank you for being here. Mr. Preston, this is 
the second time I think in a couple of weeks. Thank you for 
coming before us.
    And we have talked at length--and we are going to with the 
next panel as well--about all the problems. And we know what 
those are. I just want to say that I do have a comfort level 
with Mr. Preston and Mr. Shear that you understand the problems 
that took place and that you want to remedy that and make sure 
that it doesn't happen again.
    So my first question would be, because this Committee is 
going to continue to take a look at this situation and my 
Subcommittee on Oversight and Investigation is going to 
continue to take a look at it, how can we work together 
productively to: a) take care of everything that has happened 
in the past and resolve those issues but to make sure in the 
future that nothing like this ever happens again?
    Mr. Shear. Okay. I will go ahead. I hope what becomes 
apparent from the testimony and our two reports is that we are 
very fact-based. We were looking at what happened in response 
to the Gulf Coast hurricanes.
    But much of our attention, especially in the latter stages, 
even before the July report was issued, is what lessons can be 
learned from this. How can we work going forward? How can we be 
prospective in terms of thinking that we shouldn't let this 
happen again? How can we as an agency better prepare SBA and 
the Congress to serve victims of very major catastrophes, such 
as the one that we posed with? So I think that process is 
occurring and it is a matter of time will tell as far as how 
well that process works.
    I am encouraged by what has been evolving as of late in 
terms of our interaction with the Small Business 
Administration.
    Mr. Preston. What I would say is I am encouraged by the 
dialogue. I have full confidence that this Committee under 
Chairwoman Velazquez's leadership will stay heavily engaged 
with us on these issues, which I think is a very good thing. 
And so it really is I think maintaining that dialogue, 
understanding what we are trying to get to here.
    I think the Committee has already acknowledged kind of 
where we are trying to go. But, you know, I feel very good 
about the support and engagement of this group in getting us to 
the right place.
    Mr. Altmire. And I do want to say again that I do get the 
sense that you definitely are sincere in that and you do want 
to work with us. And I would just say we return that and we do 
want to work together and hopefully improve this moving 
forward.
    The one other issue, in the GAO report, it says that the 
SBA had not effectively planned for the space requirements that 
would be warranted by a large-scale disaster and had not 
developed a long-term strategy to help ensure that it could 
acquire necessary and suitable space in the case of an 
emergency, which leads to the question--I am sure you have 
given this some thought--what is the SBA's plan to acquire 
necessary and suitable space in the event that a large-scale 
disaster disables the agency's primary processing facilities in 
Fort Worth?
    Mr. Preston. Right. We have significant additional space 
right now relative to our requirement. And as we look to reduce 
that space based on the current capacity, we are working 
closely with GSA to institute sort of an expansion capability. 
And those are discussions we are having right now.
    Chairwoman Velazquez. Mr. Sestak?
    Mr. Sestak. Thank you very much.
    Mr. Preston, thanks for your time. I wanted to ask, it 
appears as though the demand that was so overwhelming had a lot 
to do with, as you had brought up, capacity. So my question 
is--and to some degree, I know you have addressed it--the 
difficulty is predicting the capacity that is needed for the 
future. What are the factors that you used or are using in 
order to predict the needed capacity for the future?
    Mr. Preston. Yes. I think there are a couple of different 
predictive tools that are relevant here. Once a disaster hits, 
we need to be able to very quickly implement a staffing and a 
facilities plan that would enable us to handle an anticipated 
scale.
    We have internal models that look at that. And generally we 
do a pretty good job of anticipating the volume that comes out 
of that. What I would tell you is underneath that, it is much 
more critical to ensure that you have the underlying processes 
and the systems, etcetera, etcetera, to enable you to meet that 
scale.
    So one piece is predictive. The second piece is 
implementation. The underlying implementation is critical.
    Mr. Sestak. The reason I asked is it seems to me that you 
have a different philosophical approach than what GAO has asked 
you to do, I think. They felt that the two primary things that 
needed to be done as you go into the future were good planning 
based on simulation. They also said that you needed time frames 
laid out for producing this.
    When you read your testimony, it is not that you are 
dismissive of that, but you make a very strong statement, like 
you just did, that while addressing these issues, those two 
overall, planning, predicting for the future, as you just said, 
they help improve SBA's preparedness.
    And then you turn immediately to the underlying processes 
that when something happens, are we ready? And you do have 
those models that predict that the characteristics of this 
ongoing disaster is this, so we need to do that.
    It seems to me--and the hardest thing that I ever saw to do 
after 31 years in the military--what really hurts the most is 
that difference in the philosophical approach is you are 
backing away, it appears, from the predictive side. You looked 
into the insurance models, for instance, and seemed to dismiss 
them because they are based on 100-year types of occurrences. 
And, yet, that is what FEMA uses, 100 years and 500 years 
predictive, to come up with what flood plains are. And you 
can't get FEMA's loans unless sometimes you go through Small 
Business first in a disaster.
    And so philosophically my concern is while you are able to 
go through your testimony and see how much you have improved 
based upon what happened in Katrina, is that what you should be 
planning upon in the future?
    And so my real concern, sir, is that you have kind of 
nodded at GAO's predictive modeling and said, ``I am going to 
gear up when it happens because I now know I can gear up to 
2,200 employees for disaster of which 750 are my reserve 
disaster core'' and, yet, there is really no predictive 
planning for the future on this.
    Mr. Preston. Let me address that. I think what GAO came up 
with is a very important set of issues in planning. And I think 
when we talk about surge plan, what we need to be able to do is 
specifically with the kind of models that the GAO report 
suggests is be able to say--you know, Katrina was somewhat over 
400,000 applications--what could happen to bring a million 
people to our doorstep? And we have already begun looking at 
insurance models.
    We have talked with a number of other outside modeling 
groups to look at their model. We are having discussions with 
FEMA. So I apologize if in any way I seem dismissive of that 
because I think it would be very important for this 
conversation for us all to be able to say, ``What does it mean 
to be able to surge to X? And does that meet the need in any 
kind of eventuality or are we agreeing that it wouldn't?''
    So I concur with GAO's recommendation there. And we already 
are beginning to investigate those types of external modeling.
    Mr. Sestak. Have you put money into that modeling? I mean, 
modeling is pretty expensive.
    Mr. Preston. We haven't--
    Mr. Sestak. I just know from the ones I have done in the 
military. I mean, I know you are talking. But if this is so 
important and GAO's recommendation is so important, are there 
millions of dollars placed or hundreds of thousands or 
something against, I mean, actually besides talking doing and 
investing in the right models?
    Mr. Preston. Well, obviously this recommendation is 
relatively recent. And we're already getting out there and 
talking to people. So what I would tell you is no, we have not 
invested money in it.
    But I think there are many others. As you mentioned before, 
FEMA looks at things. I think we need to understand what is out 
there, what is the cost, should we be leveraging what other 
people in the federal government do.
    I am not sure that this kind of predictive modeling is the 
kind of thing that changes every month and requires a 
tremendous amount of rework all the time. I think it's the kind 
of thing where when you look at the potential events that could 
happen out there and get your head around that, you get a 
pretty good sense of the operation you are going to have to 
build.
    Mr. Sestak. You also just mentioned working with others. 
And in your testimony, you have mentioned how you are reaching 
out to locales in other areas. What cities specifically now, 
major U.S. cities, have you sat down with in order to enhance 
your coordination?
    Mr. Preston. Well, we have 68 district offices that are--
    Mr. Sestak. Yes, sir. But, I mean, is there a new concerted 
type of effort that has now taken on to enhance the locale 
since that was critiqued pretty harshly in the sense of what 
happened in Katrina?
    Mr. Preston. Well, my view is we did a good job of that in 
Katrina. So if that was heavily critiqued, I know there were 
some issues. But I think generally the people in our district 
offices are very close to local leaders, local development 
authorities. They have very consistent relationships with them.
    Now, what has happened--and I think this may have preceded 
your entrance here.
    Mr. Sestak. I am sorry.
    Mr. Preston. No, no. I just want to repeat it.
    --is what we have done--and we are in the final stages of 
working through this--is worked through a model to integrate 
those district offices because they have such good local 
coordination more effectively with our disaster people when 
they get on site. And this is a comment that Mr. Jefferson had 
earlier.
    So what I would say we have done is because we have that 
good local presence and good connectivity, we need to leverage 
that better when disaster goes into those areas.
    Mr. Sestak. My last question is, in your business 
intelligence tools, you have mentioned about the expanded use 
of performance metrics. What are they?
    Mr. Preston. The expanded use of performance metrics have a 
lot to do with looking at what is happening in our operations, 
getting deeper into looking at cycle times so we understand, 
you know, what aspects of the operation are backing up or not 
backing up, having much deeper data on all of the individuals.
    For example, we would never have known to put people in a 
records office if we hadn't seen data that indicated that 
people we having a hard time getting their records done because 
there was such a backlog.
    Chairwoman Velazquez. Time is up.
    Mr. Preston. I am sorry.
    Chairwoman Velazquez. All right.
    Mr. Sestak. Thank you.
    Chairwoman Velazquez. We have other members here. But 
before I proceed in recognizing Mr. Jefferson, Mr. Chabot, if 
they have any other questions, I just would like to ask Mr. 
Shear what is your reaction to Mr. Preston's answer to Mr. 
Sestak regarding the agency investing in disaster simulation 
and disaster modeling?
    Mr. Shear. It is a very important point. And we are very 
conscious of the cost of investing in that. But part of what we 
observed in our work over the period at SBA was non-attention 
to even what is available in the public domain that could be 
implemented in a pretty practical and straightforward way. But 
part of what we are looking for in a plan is to what degree can 
you leverage those resources? So we have certain ideas about 
how those resources can be leveraged. And it is a question of 
come up with a plan for a comprehensive assessment.
    I want to make one observation on this because I think it 
is a very important one. I think what is clear is that a lot of 
attention has been paid to a very important issue, which is 
let's try to resolve issues associated with service to the Gulf 
Coast hurricane victims.
    I mean, our hearts go out for those who have suffered 
through this. And certainly SBA and others should be trying to 
reach those victims. And certain improvements have been 
initiated to improve that. But I hope that there is a real 
emphasis on what do we do over the long haul going forward.
    I just want to make one more observation. It has to do with 
some of the transformation plans that have been around SBA. 
Many of the transformation plans have a focus on the 7(a) and 
other major business programs that they have where over time, 
due to technology and changes in the marketplace, there has 
been greater centralization of a lot of resources. And the idea 
is that we are trying to get rid of redundancies.
    But one of the most important things I think to recognize 
for all of us is that disaster planning involves contingencies. 
It involves in some case what you could say, backup facilities. 
They entail a cost. We are not calling for SBA to waste money. 
But at the same token, there has to be a recognition that you 
need to go through some cost to be prepared. And I think that 
so the framework, the thought process for disaster planning and 
for how to run a disaster program I think has to be different 
than SBA's overall operation.
    Chairwoman Velazquez. In the investigation that you 
conducted based on the budget submission of the administration 
for the SBA, do you consider that the resources are there for 
the long-term disaster preparedness plan?
    Mr. Shear. Okay. You will get a grin out of me because we 
haven't evaluated the budget submission to see whether we think 
it would be sufficient, but one of the things we are looking 
for is the idea is come up with a plan which is effective. We 
want a cost-effective means, but we want SBA to be able to 
recognize and have resources in place or at least contingencies 
in place that also entail some costs to try to position itself 
for not just the next hurricane season or the next earthquake 
but looking down, as Mr. Preston has referred to, what happens 
if a few years from now the reserve corps decline, as they did 
after 9/11. We are looking for that sort of approach.
    Chairwoman Velazquez. Thank you.
    Mr. Chabot?
    Mr. Chabot. Madam Chair, in the interest of getting to Mr. 
Baker and the witnesses that have come all the way from 
Louisiana and Mississippi, if we have any additional questions, 
we will submit them in writing.
    Chairwoman Velazquez. Thank you.
    I will recognize Mr. Jefferson for two minutes.
    Mr. Jefferson. Yes, ma'am. God knows I don't want to be 
disrespectful to the folks who came from Louisiana nor Mr. 
Baker, but I just want to ask this one thing. It will take a 
half second. The SBA has insinuated in this process because we 
can turn here by recovery, as opposed to the traditional 
lending programs the SBA has. And there are certain things that 
are going on now which are inflexible. I want to just ask you 
about looking at these from the point of view of flexibility 
that will help to facilitate the recovery.
    One, Mr. Melancon mentioned earlier, the road home program. 
If you get a grant from road home, you automatically must pay 
off the SBA loan. Okay. Not so?
    Mr. Preston. No.
    Mr. Jefferson. But the second one is this. On the 
subordination issue, we have had folks down there who had 
equity in their homes before the storm. They go out and get an 
SBA loan.
    They get the house fixed up using that and insurance, plus 
using other things. Now they get it re-appraised, and they have 
some equity there. They want to borrow money to go reestablish 
a business, let's say. And when they do that, they go back. The 
SBA says, ``You can't subordinate unless you pay off the 
loan.'' That retards the idea of recovery, and it makes it more 
difficult.
    I just wanted you to think about--
    Mr. Preston. Thank you.
    Mr. Jefferson. --these issues of flexibility so that people 
can have a real chance to get back on their feet and get their 
businesses back, stood up, as opposed to just having a hard and 
fast rule that says, ``If you have a refinancing and you take 
cash out, you must pay off the SBA loan, as opposed to being 
able to invest it in your business and get that back, up and 
going.''
    So those are the issues I am really concerned about, these 
issues of flexibility. That would put a sound decision we made 
to a recovery.
    Mr. Preston. Thank you. I would love to get with your team, 
Congressman. I meant to take you through the road home 
situation because I think there is a lot more to that. And I 
will also look into this other issue.
    Chairwoman Velazquez. Okay. I recognize that there are 
witnesses who came all the way from the Gulf Coast, but it is 
not every day that we have the administrator here. And we need 
to ask the questions that needed to be asked so that we prevent 
or avoid another situation where we will have to have not one 
more hearing but two or three or four. I wish that the 
situation that we witnessed in the Gulf Coast region doesn't 
occur again. And that is why we need to take the time to ask 
the questions.
    And some of the witnesses that were coming from the Gulf 
Coast region because of the weather didn't make it. And so I am 
going to be asking a question based on some of the written 
testimony. And that will be my last question. But also, Mr. 
Preston, I will be submitting written questions to you.
    One of the primary benefits, Mr. Preston, that you 
described for the improved disaster program is increased 
accountability. And, despite these efforts, we have heard from 
disaster victims who are here today that these benefits haven't 
materialized under the case management model. What will you do 
to address this problem and improve accountability?
    Mr. Preston. Okay. Well, I, as I do in all of these cases, 
try to understand what the underlying issue is. But 
accountability I think has been increased dramatically. And I 
don't think we could have ever achieved the results that we did 
without much greater accountability.
    Now, with dealing with these numbers of people, obviously 
it is a new process. As I mentioned in my testimony, we're not 
perfect yet. And I give out my e-mails. I get those e-mails 
from people directly. I follow up on every one of them. And I 
see what those problems are. So we continue to have them. But 
accountability in this program is dramatically higher. And I 
don't think we could have ever shown these results without 
that.
    Chairwoman Velazquez. Mr. Shear, any reaction to the case 
management model that they have?
    Mr. Shear. I am sorry. We haven't evaluated it.
    Chairwoman Velazquez. Well, we are going to hear from some 
other witnesses that they are still being passed from one case 
manger to the next, the documents still have been lost, that 
they have been submitting and resubmitting those documentation. 
And, yet, they do not get an answer.
    Mr. Preston. Let me address something. I have held public 
forums in the Gulf. I was with 70 borrowers from the New 
Orleans area a couple of months ago, public forum, open mike. 
Come and tell me exactly everything you are doing wrong.
    Believe me, I talk with people on the phone. I correspond 
with them. There are still going to be issues. And there is no 
doubt within 23,000 people you will find people that aren't 
happy that we have not dealt with appropriately because 
somebody wasn't trained well or we didn't have somebody on the 
phone that was effective.
    The other thing that we are going to find is we have begun 
shrinking our operations because we have handled so much of the 
demand. So some of these case managers are leaving and we are 
handing them over to new case managers. And there are cases 
where that hand-off isn't as effective as it should be.
    So I have no doubt you will be able to find people, but I 
will tell you by the meetings I have had--I have talked to many 
local leaders--we are getting an overwhelmingly positive 
response from people and people that we wouldn't necessarily 
expect to get those responses from.
    Chairwoman Velazquez. Well, I want to thank both gentlemen. 
And I will ask Mr. Preston that some of you will stay here so 
that they could listen to the witnesses' testimony. And now I 
just want to welcome our colleague Congressman Richard Baker.

  STATEMENT OF THE HONORABLE RICHARD BAKER, CONGRESSMAN, U.S. 
                    HOUSE OF REPRESENTATIVES

    Mr. Baker. Thank you, Madam Chair. I appreciate the 
Committee's courtesy in allowing me to be able to make brief 
remarks. I know Mr. Melancon appeared here earlier in the day.
    Just a quick infomercial about Katrina's response and 
community rebirth in light of comments I have heard from 
members. If you were to imagine every person in this room 
represented a household and that the morning after the storm 
you were to come into this room and everything is gone, not 
just a question of the house, it is a question of the car, you 
know, the pets, the grocery store, the school, the policemen, 
the firemen.
    In Mr. Melancon's district, there was a community of 67,000 
people that 6 months after the storm had 212 operating utility 
meters, 67,000 people gone. So the magnitude of this is really 
beyond anyone's comprehension.
    And I don't personally fault government entities for their 
failure to respond in the most efficient manner possible, but 
it does present this Committee and this Congress with 
opportunities to do the thorough examination that you are 
engaged in. And for that, I am very appreciative.
    I would like to point out that in the case of rebuilding, 
the road home that has been made reference to this morning is a 
very troubled road home. I am now calling it home alone. The 
reason is that as of last week, there were 501 closings for a 
disbursement of $31 million or an average payout of $62,000 for 
a program that is funded by this Congress at the level of $7.5 
billion.
    We now have an almost $2 billion additionally for hazard 
mitigation funding, which is to take property out of commerce 
and to preclude rebuilding on those sites forever. Not a dime 
has been spent.
    We have a total of $9.5 billion, of which 31 million has 
been put into the hands of individuals. If you are wondering 
why nothing is happening, that is a good place to start.
    But even, Madam Chair, if you had the money and you lived 
in your neighborhood and Mr. Chabot and Mr. Jefferson were your 
neighbors and you did not know what their plan was to return, 
would you actually spend your disposable income on that house 
in that desolated neighborhood not knowing what the future 
economic value would ultimately be? Many people are simply not 
choosing to come back.
    As the administrator indicated, there are 23,000 people 
looking to decide what to do on their SBA loan for which they 
may have been approved. They can't come back until there is a 
systemic resolution to this problem.
    Today the funding is made available to individuals. And 
individuals make decisions about whether they should come back 
to a community for which they do not know if there will be a 
school for their child or a policeman to respond. That is a 
recovery which is, at best, on very weak legs.
    I come this morning to join with Mr. Melancon on a bill 
that has been introduced in the Senate that I think would 
greatly aid the resolution of SBA lending assistance. There 
exists now a preferred lender program with qualified banks, 
which I am sure the Committee is aware of, where we hand off as 
an SBA to the banker the right to make expedited loan decisions 
and the bank has the right to extend the government guarantee 
without the government formally being involved in the process 
prior to closure. That is based on a relationship the bank has 
built successfully with the SBA.
    The bill we are proposing models after that program very 
similarly in that it allows the SBA to pre-clear approved banks 
to be able to make loans to disaster victims without the 
necessity of having to go through a burdensome or lengthy SBA 
pre-approval process. I think it would make great sense. It 
would avert the problem that many of my colleagues have about 
ratcheting up employee levels to an unwarranted amount and not 
having a concurrent disaster that justifies the presence of 
those employees.
    Where will the next disaster fall? We don't know. Does it 
make sense to have a lot of people in the Gulf and, yet, we are 
worried about an earthquake in California? How do we deploy? 
That is one thing, unfortunately, nobody has the ability to 
predict.
    However, what we do know, in the State of Louisiana, 90 
percent of the businesses employ less than 30 people. Louisiana 
is a tourism, arts, crafts, personal services type of employing 
entity. And those people all have relationships with some form 
of the bank customer. And so by deploying the banker to be able 
to be the emergency responder subject to oversight and 
supervision of the SBA seems to make a lot of strategic sense 
to me. And in most cases, the banker has a better understanding 
of that ability to repay than a newly trained SBA employee, who 
may not have been on the job 30 days prior to arrival in the 
city to respond to the emergency.
    Getting people, as Mr. Jefferson said, who know each other 
to make judgments about creditworthiness is a far superior 
methodology than to a government-imposed, very expensive, often 
inefficient, and certainly very lengthy process that doesn't 
give us the response that we would all like to see.
    So I strongly recommend the approach. Certainly there are 
areas where the Committee may choose to modify slightly. We 
were back and forth on whether or not the fees should be 
artificially set. We know on the home loan bank side, where 
lending occurs through that system, that there is a capped 
amount of fees the bank can make. A strong argument has been 
made by the banking community that it should be a negotiated 
item depending on the terms of the event in which you are 
engaged.
    Don't forget that in the midst of our devastation, we lost 
the banks, too. And the only way that we had the capacity to 
engage in financial services was through automatic teller 
machines or via the Internet through remote locations. And so 
institutions which were entirely domiciled within the region of 
the disaster were without service, period. That created 
enormous problems for people in rural communities who only had 
that banking relationship.
    We strongly recommend the Committee's consideration of the 
approach. And I would be happy to answer any questions the 
Committee may have.
    [The prepared statement of Mr. Baker may be found in the 
Appendix, on page 61.]
    Chairwoman Velazquez. Mr. Chabot?
    Mr. Chabot. Thank you, Madam Chair.
    I would just like to commend the gentleman and his 
colleague who testified earlier because we are seeing two 
gentlemen who are from the area who have seen this firsthand 
and they have come up with a bipartisan solution. It doesn't 
mean it is a perfect plan, but this Committee will look at it. 
And I want to commend you for bringing this forward.
    Mr. Baker. Thank you, sir.
    Mr. Chabot. Thank you for testifying.
    Chairwoman Velazquez. Do you have any more?
    Mr. Jefferson. I just want to commend Mr. Baker, too, for 
the efforts that he has made going back to the last session, 
when we had the Baker bill here that had the idea of bringing 
back communities as you brought housing because people can't 
live in places without communities. And I appreciate his 
observations, and I appreciate the efforts he is making to 
extend his work. Thank you.
    Chairwoman Velazquez. Mr. Gonzalez?
    Mr. Gonzalez. Just briefly. Again, thank you for your 
patience. And, of course, for those who may not be aware, 
Congressman Baker is a highly regarded and esteemed member of 
Financial Services. And he knows what he is talking about.
    Just as a member to member, when things go wrong and a 
federal agency or department is not responding, we get those 
calls. What has been your experience from individuals in the 
area that have expressed their concerns, complaints with SBA, 
if any?
    Mr. Baker. A very high level of frustration. And I can 
honestly say, though, in defense of the SBA, it is not a 
singular complaint about a particular agency. People are mad 
about everything. It is not Democrat/Republican. It is not 
federal, state, or local. If you say, ``I am from the 
government,'' you don't get any further before they give you an 
earful.
    And they have every right to be feeling that way. When you 
go back to the numbers that I outlined at the beginning aimed 
at housing and how small, infinitesimally small, percentage of 
dollars have actually been put into the hands of people, you 
can understand if you are sitting there with debris still on 
your lot living in a trailer, which, by the way, that is 
another whole chapter of our lives, it is certainly a very 
depressing outlook for people who are trapped in a seven or 
eight hundred-person trailer park with no prospect of going 
back to a job which used to exist with no alternative training 
to get education or skills to go off in another direction.
    And this is true whether you would be fairly well to do or 
whether you are poor. I had a distinguished senior member of an 
architectural partnership sitting in my Baton Rouge office just 
weeks ago. He is now living in a rental property north of the 
City of New Orleans in a very rural community. All of his 
receivables for work that was in process are not being paid 
because you can't go out and sue somebody because their 
business is gone, their plans to rebuild are over. All of his 
employees have disbursed.
    It is truly an amazing set of circumstances to think that 
almost two years after the effect of landfall in this country, 
we still view significant ruins. I don't know if there will be 
historic ruins or something that will be turned about in a 
short period of time, but this goes to the core of questioning 
how this government works. And certainly what we pay or what 
the people who lived and worked in Orleans and the surrounding 
areas paid in the way of taxes, what were they waiting to rely 
on when devastation occurred? And there is great room for 
improvement at all levels.
    I don't make this comment specific to SBA. I just think 
there has got to be a better way to handle the extraordinary 
amount of money you have made available with the best of 
intentions to help people recover and seeing what we now have 
in front of us.
    Chairwoman Velazquez. Thank you.
    Mr. Gonzalez. Thank you very much. And thank you for your 
service. Thank you, sir.
    Chairwoman Velazquez. I want to thank you and commend you 
for all your efforts, your passion, and your concern. This is 
just not about the Gulf Coast region. This is how can we best 
be prepared to assist small businesses when a natural disaster 
strikes again.
    We will be looking at legislation. One of the concerns that 
I have is how affordable those types of loans will be for 
victims who have lost everything.
    Mr. Baker. Madam Chairman, I appreciate your attention and 
interest. My grave concern is that going forward we simply 
cannot let this happen in another community and have a similar 
outcome. Any way I may be of service I certainly want to be. 
Thank you.
    Chairwoman Velazquez. Thank you.
    And now I would ask the third panel to please take your 
seat: Mr. Edward Francis; Donna Colosino; and Mr. Bryan 
McDonald. Good afternoon to all of you. Welcome. And thank you 
for your patience.
    I will introduce Mr. Edward Francis. He is the Chief 
Operating Officer of the Hancock Holding Company in Gulfport, 
Mississippi. Hancock Holding Company, established in 1899, is a 
certified SBA lender that was itself impacted by Hurricane 
Katrina with the loss of its headquarters and several other 
businesses that were impacted through its lending programs. Mr. 
Francis is here today on behalf of the American Bankers 
Association.
    Then we have with us Ms. Donna Colosino, who along with her 
husband owns CRESCENT Power Systems. They sell electrical power 
generation equipment to large industrial clients in three 
states. The Colosinos' business property and documentation were 
destroyed after the 17 street levees in New Orleans broke. They 
are trying to secure an SBA loan to repair their facilities. 
They, too, have been in the process with SBA for a year and a 
half and will share their experience with the Committee.
    And now I will recognize Mr. Chabot, who will introduce his 
witness, Mr. Bryan McDonald.
    Mr. Chabot. Thank you, Mr. McDonald. My understanding is 
that you are the Director of the governor, Governor Barbour's, 
Office of Development. We appreciate your testimony here this 
morning and look forward to hearing it. Thank you.
    Chairwoman Velazquez. Mr. Francis, you may proceed.

STATEMENT OF EDWARD FRANCIS, CHIEF COMMERCIAL OFFICER, HANCOCK 
HOLDING COMPANY, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION; 
    ACCOMPANIED BY DONNA COLOSINO, CO-OWNER, CRESCENT POWER 
 SYSTEMS; AND BRYAN McDONALD, DIRECTOR, MISSISSIPPI OFFICE OF 
                          DEVELOPMENT

    Mr. Francis. Madam Chair and members of the Committee--
    Chairwoman Velazquez. I am sorry, but let me just state 
that every witness will have five minutes to make your 
presentation. And then you can enter your whole presentation 
for the congressional record.
    Mr. Francis. Thank you.
    My name is Edward Francis. And I am the Chief Commercial 
Officer of Hancock Holding Company. Hancock is a $6 billion 
institution that is headquartered in Gulfport, Mississippi. It 
has been in existence since 1899. We operate over 100 branches 
in Louisiana, Mississippi, Alabama, and Florida. I am pleased 
to be here today to represent the American Bankers Association.
    When Hurricane Katrina struck the Gulf Coast in 2005, 
Hancock's headquarters building and numerous branch offices 
along the Gulf Coast were wiped out. Our entire computer 
operations center, loan operation, and deposit operations shops 
were lost. Despite the devastation, we were able to open some 
branches the very next day to service our customers.
    It took weeks before we learned the fate of our associates, 
but one by one they were all accounted for and were willing to 
do whatever it took to ensure that our customers were taken 
care of.
    When a disaster like the Gulf Coast hurricane strikes, the 
most immediate need that small businesses face is money, money 
to pay for cleanup, money for building repair and supplies, 
money to pay their staff, and money to keep their businesses 
and the local economy moving. However, several problems 
inherent in the SBA's disaster lending program prevented the 
agency from meeting this need in a timely and efficient manner. 
Many of these problems still exist today.
    The hurricanes were followed by an extraordinarily high 
volume of SBA disaster loan applications, more than 2 million 
by last May. To handle the large volume, the SBA was forced to 
hire and train temporary staffers that had no prior loan 
experience or familiarity with the SBA's policies.
    This required precious time. It was largely responsible for 
the long delays in application processing. Disaster victims had 
to wait an average of 74 days for the SBA to process their loan 
applications, a far cry from the SBA's stated goal of 21 days.
    The ABA believes that a practical solution is for banks to 
be more directly involved in SBA disaster lending process, much 
like Mr. Jefferson and Mr. Baker had mentioned.
    Banks are well-suited for this purpose. Banks, many banks, 
are certified SBA lenders and are familiar with the SBA 
procedures, placing them in a good position to help the agency 
and disaster victims.
    Integrating banks directly in disaster lending will allow 
the SBA to take advantage of the licenses that banks already 
have with individuals and businesses in the communities. It 
will also allow the SBA to rely on the existing expertise of 
our bank loan officers and will avoid problems associated with 
hiring temporary staff.
     Capitalizing on these existing assets is the most 
effective way to get disaster lending into the greatest number 
of victims' hands in the shortest time possible.
    The SBA's disaster lending program should be modeled after 
the agency's 7(a) lending program. Because of the nature of 
disaster loans, some of the elements will have to be different.
    We recommend that the SBA offer a higher loan guarantee, 
waive some collateral requirements for smaller loan amounts, 
and allow longer repayment terms for disaster loans. This will 
prevent the cash flow problems the victims face immediately 
after a disaster. Giving them adequate time to rebuild would 
create a stronger incentive for banks to get involved in 
disaster lending.
    Madam Chair, at Hancock Bank, we had a longstanding culture 
that we would be the first to open and the last to close after 
any hurricane. Immediately after the Gulf Coast hurricanes, we 
created an outreach program so that we could thoroughly assess 
the needs of our business clients. These efforts helped ensure 
that the relationships we have built over the many years would 
not be simply swept away with the tides of the disaster.
    We are proud of our accomplishments and know that other 
banks are just as committed to the long-term economic stability 
of their communities. Improving the SBA disaster loan program 
will help us rebuild our communities quickly and efficiently in 
the wake of disasters. We look forward to working with the 
Committee toward that goal.
    [The prepared statement of Mr. Francis may be found in the 
Appendix, on page 92.]
    Chairwoman Velazquez. Ms. Colosino, you will be recognized 
for five minutes.

 STATEMENT OF DONNA COLOSINO, CO-OWNER, CRESCENT POWER SYSTEMS

    Ms. Colosino. I want to express my thanks, Madam Chairman, 
and to all the members of the Committee for holding this 
hearing, first, and for allowing small business also to give a 
face and a voice to our experience.
    Can I ask a question? Is there anyone from SBA in the room? 
I am part of an organization called Second Wind. Second Wind is 
a grass roots organization that was formed post-Katrina in the 
New Orleans area. It is small business people helping small 
business people. So I am proud to be here as a member of Second 
Wind.
    You heard a little bit about our business. We have been in 
business for 13 years. Our 2006 sales were about $7.7 million. 
We are basically a manufacturer's representative business. Our 
clients are Exxon and Chevron and General Hospital and LSU 
Medical Center. So when we responded to the hurricane, we 
responded to their issues promptly.
    Our property was located in Lakeview, which is a now famous 
community, about a mile from the 17th Street Canal. We 
sustained no damage in the hurricane. Basically we were able to 
call into the building, get our phone messages. So we were like 
``Good. We lived through this.''
    However, when the levee failed, the building was swamped 
with about 12 feet of water for several weeks. So we lost 
everything. We lost our inventory. We lost all parts of our 
business, including all business documentation that we had for 
13 years.
    I am going to summarize our experience for SBA loan number 
906149, which was supposed to help us address our catastrophic 
business losses. This testimony is based on the notes I kept in 
that process.
    As a small business attempting to recovery from disaster, 
several themes emerged in our experience with the SBA. One, 
there is no accountability at SBA, not today, not a month ago, 
not two months ago, not a year ago.
    Two, there is no continuity and virtually no follow-
through. I have been passed off to more than 20 different 
owners, however you label them, of my file.
    Three, the process is grossly redundant and obviously 
excruciatingly slow. We were asked to provide the SBA with the 
same materials again and again at least a dozen times, at least 
a dozen times.
    Number four, while usually outwardly nice enough,--and some 
vary and some not so--SBA representatives were typically 
clueless about our application, I mean like ``Who are you?'' 
clueless, ``What do you want?'' clueless. We were given off-
the-cuff advice by different representatives that contradicted, 
you know, what other people had told us over and over again.
    In addition to taking forever after all, we still have not 
received the loan, for which we were approved. Working with SBA 
after a disaster is like having a second job. It takes a toll 
on your time, your resources, and your well-being.
    Our application was filed the 13th of October, 2005. Early 
January of 2006, there was a site visit at our location. And 
January 25th of 2006, we were approved for a loan for $250,000. 
In that time frame, while it was tense and hard for us, okay. 
So a year ago, more than a year ago, we were approved for a 
loan for $250,000.
    I want to make a point that Mr. Preston said that the loan 
amount was under three percent. That is only for homeowners. 
Small business owners pay four percent, which is, as you know, 
about two percent above market.
    Nina, Amy, Mike, Chad, John, on and on, the representatives 
that we spoke with, all the way through about May. Again, every 
time I speak to someone from SBA, without fail, they don't know 
who I am. They don't understand anything about my claim.
    Did we have outside challenges, as Mr. Preston said? Yes, 
we did. We were responding to our clients' very urgent needs.
    Let's be clear on another point, very clear. The federal 
government, which is extending me a loan for $250,000 and I am 
willing to pay 4 percent on that loan, not asking for help that 
I'm not willing to pay for--okay.
    Let's move to May 17th of 2006. And we received an initial 
disbursement of $10,000. This is a very important point. At 
that point, SBA sort of chucked us off the list. And our loan 
has been serviced. I am continuing to ask for the fulfillment 
of that loan, but that $10,000 moved us from one box to 
another. So somehow I am included in that 98 percent that has 
been serviced. And I have clearly not been serviced.
    And, worse yet, the clock starts to tick on your one-year 
grace period at that point. Okay? So you have one year to 
repay. Well, now our clock is ticking from May of 200. And you 
say, ``Well, surely you want to repay that $10,000.''
    And I would say, ``Absolutely. Absolutely.'' And I will 
start repaying that. But my loan is coming due in full in May 
of 2007.
    I am not alone. Do not think they pulled me out of a pile 
of great experiences from SBA and stuck me up here because I 
have the one bad story. My loan will come due May of 2007 for 
$250,000, and I have received $10,000. I have the bill right 
here telling me when it is going to start to be repaid, just so 
you know.
    Okay. Fall of 2006, the reengineering process that I heard 
so eloquently spoken of has now been kicked into place for 
about three months. Okay? So I get a call. I call in again, 
just to check, as I have routinely, repeatedly. And I speak to 
Mr. Jeff Hardway, who asked me to resend all documentation 
again. This is three months after the team process has been in 
place.
    I resend it. I resend it to him, call again, ask to speak 
to Mr. Jeff Hardway. There is no Jeff Hardway. ``We don't know 
anybody by that name. Can we help you?'' This is our next loan 
officer, which is loan officer number 18. This was in October 
of this year, Appalonia Arayza. He says, ``I'm sorry. I don't 
have any information. Can you tell me what happened? And can 
you resend all the documentation?'' Okay.
    So we worked through that process. Finally in January of 
2007, we send our notarized loan documents into SBA. Okay? A 
full year after we were approved for this loan, we send in the 
loan documents. They are notarized. Everything is as we have 
been told it should be.
    I called back in another three weeks, two and a half weeks. 
No Appalonia Arayza. I have a new loan manager. Does he know 
anything? His words to me were--and I am quoting--``Who are 
you? And what do you want?''
    I'm thinking, ``Okay.'' Your gut reaction is to cry or 
yell, but no. I think maybe this is the one. Okay? Maybe this 
is the person at SBA that will listen, that will hear, and that 
will do something for us.
    If there are 23,000 people whose loans have not been 
disbursed, you are looking at someone who is in the area of SBA 
loans that have been disbursed. I have heard so many MBA terms 
here. One of the MBA terms that came to my mind was, ``GI, 
GO.'' And that means garbage in, garbage out. My loan has not 
been disbursed. I am not in that number. I want you to 
understand that.
    Another thing I need you to understand is that now I am 
being told by my newest loan officer that I have to provide 
receipts, receipts on amounts up to $250,000 in order for me to 
receive it. So what that is saying is I have to spend my loan 
to receive it. That is not exactly facilitating the process of 
renewal in a community that is hurting.
    So I heard a little bit, too, about demographics. And maybe 
the demographics of the area has a reason for us not 
recovering. But I would say to you that if you have been told 
and if you believe that this SBA has been re-engineered and if 
you have been told and if you believe that all of those loans 
had been processed appropriately because my loan is on the 
checkmark side of being done, you are getting bad information. 
And please don't allow yourself to be given bad information.
    I would not even tell this story at a New Orleans cocktail 
party because I'm telling you it wouldn't raise an eyelash, an 
eyebrow. Everybody has this story.
    I swear to you on my father's grave this is the story. I am 
not an anomaly. I would never have taken the time to do this. 
My husband wouldn't have taken time away from our business to 
do this had we thought we were an anomaly. We are not. I 
promise you we are not.
    [The prepared statement of Ms. Colosino may be found in the 
Appendix, on page 111.]
    Chairwoman Velazquez. Thank you, Ms. Colosino.
    Mr. McDonald?

 STATEMENT OF BRYAN McDONALD, DIRECTOR, MISSISSIPPI OFFICE OF 
                          DEVELOPMENT

    Mr. McDonald. Good morning. I would like to thank the 
members of the Committee for allowing us to share with you 
about the state of small business recovery that is occurring in 
Mississippi. I want to thank you very much, Madam Chairwoman 
and Ranking Member and distinguished members of the Committee 
for giving me the opportunity to visit with you here today. 
Also, as one who rarely gets to see snow, I want to thank you 
for making that happen.
    On August the 29th, 2005, Hurricane Katrina struck 
Mississippi with a terrible blow. Although the eye of the storm 
landed at the Mississippi-Louisiana line, that eye was more 
than 30 miles wide. And Katrina completely devastated our 
entire coastline of some 80 miles. The miles upon miles of 
utter destruction are somewhat unimaginable except to those of 
you who may have had a chance to witness it with their own 
eyes.
    This hurricane wasn't just a calamity for the Mississippi 
Gulf Coast. Its impact reached far inland, all the way into our 
state. We recorded hurricane-force winds more than 200 miles 
from the Mississippi coast.
    Damage along our Gulf Coast was widespread. And damage 
estimates totaled more than $125 billion. FEMA has reported 
that over 65,000 homes in south Mississippi were damaged or 
destroyed. Electricity was lost for some 80 percent of the 
state's 3 million residents. More than 45 million cubic yards 
of debris were left in the hurricane's wake in south 
Mississippi. So Hurricane Katrina's effects on Mississippi 
alone would rank her as the largest natural disaster ever to 
strike the United States.
    Small business women and men across our state found 
themselves having to scramble. They had to adjust and innovate 
just to make do. And it was the spirit of those people, people 
of our small business community, that helped pull us through. 
Our people are strong and resilient and self-reliant. And from 
day one after the storm, they got to work and did what had to 
be done. They helped themselves, and they helped their 
neighbors, often when they didn't have. Their spirit has been 
an inspiration to all of us. And the spirit remains the key to 
our recovery and rebuilding and renewal effort.
    SBA has been a strong partner with Mississippi. And SBA's 
business and economic injury loan programs have aided thousands 
of Mississippi businesses. With more than $500 million in 
loans, the SBA has also offered, as you know, physical disaster 
business loans of up to $1.5 million to repair or replace 
businesses that are located in the declared disaster.
    Additionally, SBA's economic injury loans for small 
businesses provide financial assistance to small businesses 
that suffered substantial economic injury. Our small businesses 
in some 67 Mississippi counties affected by Hurricane Katrina 
have also taken advantage of the SBA-backed loans of up to 
$150,000. Those loans, known as go loans, have been delivered 
through local banks and have been handled under an expedited 
process that in some cases have delivered a response on a loan 
in 24 hours or less.
    SBA has also served as a very good partner for Mississippi 
through our homeowner assistant grant program. Prior to 
disbursing HUD-funded homeowner assistant grants, the state 
must share the information with the SBA to ensure no 
duplication of benefits exists.
    We would like to thank the SBA publicly here for their 
efforts to ensure that timely payments to homeowners are made. 
That information, the search for duplication of benefit, is 
currently being provided on a 48-hour turnaround basis. We 
certainly appreciate that.
    SBA's assistance along with the hard work of our state and 
our citizens has helped spur a tremendous economic recovery in 
our state. With employment levels now above pre-Katrina levels, 
Mississippi's economy recovery is in full swing. Ongoing 
recovery efforts will require continued investment, innovative 
partnerships, economic incentives, and workforce training.
    While much has been achieved in the months since Hurricane 
Katrina, our work to recover, rebuild, and renew is a marathon 
effort that we know will take years. Much opportunity lies 
ahead. Hurricane Katrina with all its destruction gave birth to 
a renaissance in Mississippi that will result in rebuilding our 
state bigger and better than before. Small businesses will be 
at the heart of that renaissance.
    Small business women and men of our state have been a model 
of the spirit and character of our people. They remain strong 
and resilient and self-reliant, though they have endured 
terrible hardships. They bore the worst of Katrina. And many 
are still living in conditions that amount to deprivation, but 
they persevere.
    Our state's small business community is rebuilding one day 
at a time. And we ask for your continued assistance in helping 
them move forward. Through your efforts and the efforts of the 
people of our great state, we will rebuild. And it will be a 
Mississippi that exceeds anything we have ever known before.
    Thank you, Madam Chairwoman.
    [The prepared statement of Mr. McDonald may be found in the 
Appendix, on page 105.]
    Chairwoman Velazquez. Thank you. I want to thank all of you 
for your presentations and especially Mrs. Colosino, your 
powerful presentation on your experience with the SBA disaster 
loan program.
    Mr. McDonald, I just can't help myself but ask why is it 
that experience in Mississippi with the SBA has been so 
dramatically different than the one in Louisiana?
    Mr. McDonald. Madam Chairwoman, I will share a couple of 
observations on that point. It is very difficult to use the 
term ``blessed'' when you speak of what happened at Katrina. So 
I will use the term ``fortunate.''
    We experienced a hurricane. We did not experience a flood. 
Therefore, arguably, we had a 90-day head start in that respect 
with the SBA because we didn't have to wait for water to 
recede. I also want to share with you that we have been very 
focused and very deliberate about taking steps to remove any 
barriers to communication.
    Administrator Preston has facilitated that process and met 
with us on many times. And, much in the spirit that is offered 
here, we know it is not a perfect world. We recognize, this 
Committee clearly recognizes that more needs to be done sooner. 
We have been fortunate in our communications with SBA to engage 
them on a level in which they respond in the same manner. They 
have been eager to work with us and remove those barriers.
    Chairwoman Velazquez. Did you have any experience with 
victims, especially small businesses, in your area regarding 
the relationship in assessing the service from the Small 
Business Administration disaster loans? Were there any 
backlogs? Were there any loss documentation, runaround, any of 
the things that we have been hearing from the other part of the 
region?
    Mr. McDonald. Yes, Madam Chairwoman. And I certainly didn't 
want to paint a picture of a perfect world. We experienced some 
of the same, many of the same, instances, again, I believe on a 
somewhat smaller scale because of the size of our affected 
community. And what we found is as we elevated those issues and 
sought expedited attention from the SBA, that we were in most 
cases able to receive that.
    Madam Chairwoman, much like in parts of our brother or 
sister state, you know, in Mississippi, in the 80 miles of 
coast that were affected, small businesses are more than just 
the economy that provided the paycheck for my father that 
allowed me to go to college. Small businesses are the fabric. 
They are the corner store where life happens.
    Chairwoman Velazquez. Thank you.
    Mr. McDonald. And so we really saw a pointed response from 
the community.
    Chairwoman Velazquez. Thank you.
    Ms. Colosino, I understand that your loan file has moved 
among different loan processing teams and case managers since 
the agency implemented its new case manager system. Have you 
seen this as an improvement over their earlier system?
    Ms. Colosino. No, clearly not. We have not seen an 
improvement. In fact, I didn't even know there was a new system 
implemented. That was news to me. So it has been the same 
experience. My testimony has the language in it, I guess, that 
reflects that change. I just didn't know. But we have 
continually been passed off again and again and again. So in 
any organization, that would never work, doesn't work here.
    Chairwoman Velazquez. You mentioned a dozen times where you 
have to resend your documentation. Do you know if this happened 
after the new case management system was implemented?
    Ms. Colosino. Well, I have sent it--I don't know--probably 
half a dozen times since then, since the new case management 
system.
    Chairwoman Velazquez. The new case management system was 
implemented in the summer. Have you had to resubmit 
documentation ever since?
    Ms. Colosino. Yes, ma'am. I have had to resubmit at least 
half a dozen times and as late as November.
    Chairwoman Velazquez. We have heard many small businesses 
to say that time is of the essence following a disaster 
situation. In your experience, what is the appropriate time 
frame for receiving financial assistance?
    Ms. Colosino. Well, the 74 days that apparently is the 
average probably is too long. You know, for us we liquidated 
our own savings. We had to sell our house eventually. Had we 
been able to receive our loan in a more timely manner, we 
wouldn't have had to do that.
    You know, 74 days to me sounds great. I am at 380-something 
days. So I would say, you know, wouldn't it be great if you 
could do it in 60, awesome if you could do it in 45? A regular 
loan takes, you know, five weeks. Anything is better than 380.
    Chairwoman Velazquez. Would you like to comment, Mr. 
Francis?
    Mr. Francis. Yes, ma'am. Thank you.
    Having serviced hundred of thousands of small business, we 
saw the need arise immediately. We saw businesses that wanted 
to take advantage of the cleanup that needed to buy new 
equipment. A big pressing need was the worry about where their 
employees were, the fact that they needed to make payroll to 
keep those employees so that when they returned, they could 
return to work.
    Those needs are immediate. They are the day after the 
storm. It is not 60 days. It is not 90 days. It is immediately. 
And I can't stress that enough, that it is waiting on the SBA. 
Even if it is 74 days, it is too long. We need to be a in a 
position that we can react to those businesses and help them 
immediately.
    Chairwoman Velazquez. The system that they need to get 
their feet back on track and keep their businesses open or just 
close the businesses out altogether.
    Mr. Francis. I am sorry? Repeat that.
    Chairwoman Velazquez. What I am saying is that time is of 
the essence. And if they don't get in a timely manner the cash 
assistance that was promised to them and they keep waiting and 
waiting, they will lose their businesses altogether or, like in 
some many instances, people will decide not to move back into 
the area.
    Mr. Francis. Exactly. That is exactly what has happened. We 
have many businesses that were not borrowing money that had 
checking accounts with us that didn't go apply for loans, that 
just basically closed shop and left.
    Chairwoman Velazquez. In your testimony, you describe how 
an increased deferment period will significantly benefit small 
business borrowers. What length of deferment do you believe is 
appropriate?
    Mr. Francis. Well, a lot of that depends on the type of 
business. If you have to rebuild your whole building to set up 
your manufacturing shop, that is a lot longer. If it a 
restaurant that needs to buy new equipment and new tables and 
chairs to put in place, it is a shorter process. And so it all 
depends on the business.
    I think that is where the bankers really come into play is 
because we know these people. We know the businesses. We know 
how those cash flows work. We know the character of those 
individuals. And so we can deal much quicker, much more 
directly with those folks. And we understand those different 
types of businesses because of the experience that we have.
    Chairwoman Velazquez. You heard Mr. Baker, Congressman 
Baker, talking about including private lenders in the disaster 
lending process. Would it be necessary for the SBA to make a 
100 percent guarantee or would an 85 percent guarantee be 
sufficient to ensure the private sector coming in?
    Mr. Francis. No, ma'am. We would not like to have 100 
percent guarantee. Eighty-five percent guarantee is sufficient. 
That is, we share in the risk of that. It is not the 
government's money going out. It is private capital money going 
out through the banks.
    Eighty-five percent guarantee in a situation that is a 
little less, I guess, rigid in documentation because of the 
immediate need would be more than enough to get monies in the 
hands of small businesses.
     Chairwoman Velazquez. So under the proposal that you were 
making, how would banks ensure that interest rates are kept low 
for disaster loans?
    Mr. Francis. Well, that is a very good question. And that 
is the one thing that really drives the demand for small 
business disaster loans, is the interest rate. If those 
interest rates were the same as a mortgage loan or a regular 
business loan, nobody would go through that rigmarole to get a 
loan except the ones that are the least creditworthy.
    So I think that the government has to think about a way to 
subsidize the interest rates, not for the banks' benefit but 
for the benefit of the borrowers, so that we could pass on 
those savings to the customers. That would be a very effective 
tool to get low cost of capital in the hands of individuals and 
the borrowers and small businesses.
    Chairwoman Velazquez. Thank you, Mr. Francis.
    And now I recognize Mr. Chabot.
    Mr. Chabot. Thank you, Madam Chairwoman.
    Mr. Francis, since most disaster loans are those for 
physical damage suffered by homeowners, would it make sense to 
have banks process homeowner disaster loans and allow the SBA 
to focus on disaster loans for businesses?
    Mr. Francis. Well, I tell you what. I think that the SBA in 
my opinion does a better job of processing the individual loans 
than they do the business loans. And the reason why is because 
they are less complex. The business loans are the ones where we 
have the relationship.
    We understand these businesses. We have worked with them 
for many years. That is where the SBA has trouble. When you 
have got documentation destroyed, lease agreements destroyed, 
and you can't reproduce them, that is where things get stuck.
    Mr. Chabot. Well, let me reverse my question, then. Would 
it be better to have them concentrate on the other and have the 
private sector?
    Mr. Francis. I think it would be best to have the banks and 
other financial institutions concentrate on disaster loans. 
These are our customers. They are our mortgage customers. We 
create mortgages for them. We create small business loans for 
them. We know these folks. We can talk to them the day after 
the storm or try to talk to them the day after the storm. We 
don't have to mobilize people. We are already there in 
existence. We have got branch networks in existence. We don't 
have to go find space for them to work. We don't have to go 
find workers. We have them in place. So I would recommend that 
we look at having the banks work in conjunction with the SBA on 
individual loans and small business loans.
    Mr. Chabot. Okay. Have your bank customers expressed any 
difference to your employees about the speed with which the SBA 
is currently processing disaster loans today than in the first 
year after Hurricane Katrina?
    Mr. Francis. To be honest with you, we have not heard a 
whole lot of it lately. In the beginning, there was a lot of 
frustration, but most of the businesses have just said, 
``Forget it. We will come to you for the loans.''
    Our loan demand is way, way up. And they are just coming 
straight to do bank loans. Now, the disadvantage is that they 
don't get to borrow at a low interest rate that the direct SBA 
loans offer. But the businesses need the case more than they 
need the low cost of capital to survive.
    Mr. Chabot. Thank you very much. Let's see. Ms. Colosino, 
first of all, thank you for coming here and telling us how this 
affected you. Obviously it has been an awful experience all the 
way around.
    And, you know, your testimony is very disturbing because we 
heard testimony earlier obviously that things are improving. 
And, according to you, things haven't gotten any better. And a 
thing that is particularly disturbing is you indicated you are 
pretty reflective of a lot of other folks in your community.
    Do you want to expound upon that at all as to how you are 
aware that other people are going through the same thing that 
you are?
    Ms. Colosino. Well, just from being part of Second Wind, 
first of all. Second Wind started with ten businesses, small 
businesses. And now it's 1,200 small businesses. So that is one 
way.
    And then, you know, we are a member of our community. I am 
a native New Orleanian. My husband and I both went to college 
there. You know, that is our home. So we know many, many people 
that have done precisely what you said, which is say, ``Oh'' 
and go to a regular bank.
    We also have secured three different loans from banks to 
buy property and things that we need for our business in the 
interim. Okay? So three times I have gone commercially.
    And it is just part of the fabric of New Orleans that SBA 
doesn't work for us. It is so--
    Mr. Chabot. Let me make sure I understood something that 
you said earlier, too. Just to clarify, you had mentioned when 
you got the initial $10,000, you said that within a year--you 
sort of left the impression that the entire loan was due at 
that time. My understanding is that for a year, that is when 
the payments actually start on the additional up to $250,000. 
Is that correct?
    Ms. Colosino. Well, to clarify, we received a disbursement 
in May of 2006 of $10,000. And I have received pre-bills, I 
guess you could call them, for the entire loan amount, which 
says, ``Starting in May 2007, you will have payments due on 
$250,000,'' not on the 10.
    Mr. Chabot. Right. But not on the entire amount, just 
payments every month. I assume they are monthly payments that 
are due?
    Ms. Colosino. Yes, sir. They are monthly payments 
calculated not on 10,000, which I received, but on 250, which I 
have not.
    Mr. Chabot. Right. Thank you.
    And the other thing that was particularly disturbing is 
when I know how much trouble you have to go through to get all 
of the forms filled out and get all of the copies and 
everything and get them in and then to have to do it all over 
again. We have had that periodically over time but not a dozen 
times like that. That has to be extremely frustrating. And we 
absolutely have to do a better job than that.
    Mr. McDonald, let me turn to you in my final questions here 
if I can locate them. In your professional opinion, what 
lessons should be learned by the state and the federal 
government from Katrina? And given your state's experience with 
Katrina, what suggestions do you have to give the federal 
government in improving its responses to such catastrophic 
disasters?
    Mr. McDonald. Well, Congressman, I would respond to that by 
saying that I think some of the information the Committee has 
received here today--and I have to choose my words carefully in 
saying ``information'' but the plans, as I appreciate them, 
that are underway. They focus on identifying the lessons that 
have been learned through Katrina but, more importantly, 
planning to make sure that those are not repeated in other 
disasters are central to what I believe is in the best interest 
of the process, more specifically communication.
    Those communication lines, which allow us to facilitate 
interaction to identify expediters, to respond in a meaningful 
way the tenor of testimony, which I think is very accurate, 
which indicates the frustration felt working not only with 
various caseworkers but through various agencies and 
departments of government, in this event are somewhat unique 
because of the regional nature of the disaster.
    The great news is after the disaster, Congress responded 
with a lot of help. And that is great. Each of those individual 
programs have appropriate checks and balances. And there was 
struggle. And there continues to be struggle and disconnect in 
making sure, as was discussed with the homeowner program, that 
there is not a duplication of benefit, that at the end of the 
day, it makes a bad situation worse in requiring an individual 
to return money or be asked to repay money.
    So I would suggest to you that the efforts that have been 
undertaken here, certainly that of review and ensuring that 
communication, those lessons are really learned, the changes 
are made and that the changes are not just discussed but are 
real, that would be a top priority to us.
    Mr. Chabot. Thank you very much. I yield back.
    Chairwoman Velazquez. Mr. Jefferson?
    Mr. Jefferson. Thank you, Madam Chair Lady.
    Mr. Francis, let me ask you this. Other banks offer their 
services to the SBA. Louisiana Bankers, the American Bankers 
have all made them aware that they are there to be helpful. 
What has been the reason for the resistance that has been 
explained to you as to why the SBA hasn't taken you up of the 
offer to be of assistance to them?
    Mr. Francis. That is a good question, Mr. Jefferson. We 
worked with the LBA right after the storm, many banks meeting 
with the SBA, head of the SBA, to try to get them to understand 
and let the banks be more directly involved.
    That is when the SBA came out with the go loan program, 
which was okay, but $150,000 from any business is not enough 
money. And it was a drop in the bucket. And it got some 
momentum, but I really think that the SBA didn't understand and 
didn't trust that the banks could do as good a job as they 
could do.
    I really think it was as control thing from the SBA's 
standpoint that can the banks do disaster lending as good as 
the government can do it? And I think at the end of the day, 
that's why it did not get enacted.
    I think we had momentum at that time to get some changes 
done legislatively and they just did not take the opportunity 
to do that.
    Mr. Jefferson. How do you think the experience of a small 
business owner like the lady sitting next to you and others she 
has described would have been different if banks had been 
permitted to get involved in this process?
    Mr. Francis. She would have had her money weeks after the 
storm. And I will tell you my parents own a small business. And 
their experience is exactly like hers. The only thing they did 
differently is they said, ``Forget it. We are not doing it. It 
is too much.'' After the third time resubmitting paperwork, it 
is just they said, ``No way. We are not going to go through 
this.''
    And the banks would have gotten money in the hands of 
businesses. And I think the recovery would have happened 
quicker. And it would be a lot further along today if we had 
been more directly--
    Mr. Jefferson. One of the witnesses from the SBA said they 
were concerned about monitoring and accountability from banks. 
Does that make any sense to you?
    Mr. Francis. It absolutely makes sense. And as a certified 
lender, we have to adhere to the rules and regulations of the 
SBA. And we understand those. The banks understand rules and 
regulations. Let me tell you, the FDIC, the Comptroller of the 
Currency, we understand what rules and regulations are.
    Mr. Jefferson. That is not a legitimate concern on the part 
of the SBA that banks couldn't be able to live up to that 
requirement?
    Mr. Francis. Banks make mistakes, but for the most part, I 
will bet you we are 99.9 percent accurate.
    Mr. Jefferson. Thank you.
    Mr. Francis. We have to be.
    Mr. Jefferson. Ms. Colosino, welcome to the Committee. I am 
glad you made it through the weather all the way to get here. I 
am sorry Ms. Olivier and others from Louisiana couldn't make 
it, but I am glad to see you here.
    Ms. Colosino. Thank you.
    Mr. Jefferson. I heard one of the predicates of your 
testimony, predicate statements, was that the storm came and 
everything seemed to be in good shape. You called folks and 
said, ``Hey, we are still here, and we are ready to go back to 
work.'' And then the levee breached.
    Now, the Corps of Engineers has said that it is responsible 
for that. It has admitted that its negligence in the 
construction, the design of the levee was the reason why the 
levees broke.
    And here you are now a year later or whatever, years later 
now, almost a year, 18 months, whatever it is, still trying to 
get something fixed, taking on new loan responsibility and all 
the rest, because of something that a federal agency failed to 
do.
    In the early questioning I asked whether the SBA should not 
be involved more, as our Chair Lady said, in grant programs in 
these instances, not so much to give people money for the heck 
of it, but here the government actually caused this problem, 
number one.
    But, number two, to get back to Mr. Francis, it could be 
used not for the whole amount but to provide equity amounts 
that would permit the lending to take place more easily that 
could give them more latitude in getting money out and getting 
loans out.
    So even if they just did a small part of it, 15-20 percent 
of it, particularly where there would have been no disaster, 
you have an experience had it not been for the levee breech, 
you would have been in business now. You wouldn't be talking to 
us. You wouldn't have had this experience.
    So do you think that it is fair for the government to have 
more responsibility here with respect to making monies 
available to people who are just going about their business 
except the levees broke and due to the admitted fault of the 
government--it is not we have to speculate about this. The 
Corps have stood up there and said, ``We did this. It is our 
fault.'' Then they just kind of did a reverse pivot and walked 
behind the curtains, and they are gone.
    Ms. Colosino. I am not sure how to answer that, but I will 
say that what would I wish for SBA to do? And that would be to 
really advocate for small business insurance issues. I mean, 
certainly banking issues and funding issues, but, you know, can 
we not talk about the other issues that small business people 
fight every day? So we were pitifully under-repaid by 
insurance, criminally so.
     So yes, I wish SBA could actually effect their disaster 
mission if that is what it is. If it is an entity that responds 
to small business in disaster, then I would say do so, but if 
that is the vision statement today, that is not how it walks 
and talks in the community of disaster.
    Mr. Jefferson. One of the problems here is that it seems 
like the SBA is undertaking its normal lending responsibility 
that it is assigned by statute, as opposed to its 
responsibility to help folks in a disaster to recover, treat 
them as if it is exactly the same thing. I hope they are. It 
seems like this is worse than the other one. But they treat 
them similarly, as opposed to treatment of the issue of 
recovery, helping people recover, which is an emergency issue. 
They don't seem to be up to the task.
    Of the 1,200 people you associated with, are you saying 
most of these people had the same experience you had or similar 
experiences or have some of them had more satisfactory 
experience with the SBA?
    Ms. Colosino. What Second Wind did is about three weeks ago 
send out an e-mail to their constituents and said, ``If you 
have an SBA story, tell it.'' And I believe that you all are 
going to be provided with that.
    We have the stories, which they are bound. And I assumed 
when I wrote mine up that mine would just be bound in a 
document and sent on. So it wasn't written to be delivered 
here. It was written to be part of the story. So did that 
answer your question? I'm sorry.
    Mr. Jefferson. The last thing I want to ask you is the 
people whose names you have talked about, I don't remember them 
all, but you had individual names you mentioned. Where were 
these people from? Were these folks the SBA brought in from 
someplace to train them as lending officers and they went away 
and they kept giving you a new person because these folks went 
back to wherever they were from? Is that what happened? Do you 
know?
    Ms. Colosino. I don't know because I could never get any 
information on the last person. You know, the last person 
disappeared off the face of the Earth.
    So okay. Here we start over. And you start all the way 
literally, literally from square one every single time, every 
time. Okay?
    Thank you.
    Chairwoman Velazquez. Now I recognize Mr. Gonzalez.
    Mr. Gonzalez. Thank you very much, Madam Chairwoman.
    Mrs. Colosino, would you give us permission to look into 
your specific case? In other words, it is your information. And 
if we request SBA to make an inquiry and report back to the 
Committee, obviously those are your records. And we need your 
permission, at least in my estimation. I am just asking to make 
sure because I would like as of today to articulate a specific 
request of SBA because we do have representatives from SBA 
present.
    Ms. Colosino. Okay. I would answer that in two ways. Don't 
assume by any chance that I am here to get my $250,000. That is 
good, and that would be wonderful. But there are thousands of 
people standing behind me that just have a different name and 
the same face and the same song. Okay?
    So yes, you have my permission to do that. Yes, you do. You 
have our permission, my husband's and mine.
    Mr. Gonzalez. And I would ask, Madam Chairwoman Velazquez 
and Ranking Member Chabot, to see if they would join me in this 
request. We have SBA personnel here. I think this information 
could be gathered and reported back to us within two weeks. We 
won't be here next week, so two weeks from today, first how 
Mrs. Colosino's loan application is listed. Is it listed as a 
completed transaction in that percentage when, in fact, you 
have received 10,000 of the 250,000? And suddenly we have got 
figures out there that are truly misrepresentative, as you have 
pointed out to us.
    Secondly, you have indicated that in order to receive 
further funding from the $250,000 approved loan, you have only 
received $10,000 as of last summer. You have to produce 
receipts. Is that correct?
    Ms. Colosino. Yes, sir, that is correct. And I made him 
repeat it. And I put the phone on speaker. And I said, ``Are 
you telling me right now that I have to produce for you 
receipts to the total loan amount?''

    And he said, ``Yes, you have to produce receipts to the 
total loan amount.''

    I said, ``I can't, you know, like go down and give you an 
accounting of what we bought or still need to buy.''

    ``No, no. You have to have spent the money.''
    Mr. Gonzalez. The second question to SBA, then, is it 
required that someone who is receiving loan proceeds first has 
to somehow provide written receipts for expenditures before 
further amounts of money are provided to the borrower?
    The next question is,--and this is kind of confusing--it 
appears that you qualify for a quarter of a million dollars. 
You received the $10,000. And the clock starts ticking, as you 
accurately described. From the time you received the $10,000 a 
year and payments are then expected, predicated on an amount of 
250,000--and I want that clarified.
    I definitely want SBA to please explain to me Earth's time 
line. Is she supposed to start paying back $10,000 at the end 
of the year? If she receives another $50,000 today, is it a 
year from today that she starts paying back? She hasn't had use 
of this money. I mean, none of this really makes much sense.
    I am hoping that all of this will be clarified and it sort 
of will make sense. And that is going to be my personal 
request. And, of course, I would ask other members of the 
Committee, the Chairwoman, and the Ranking Member to join in 
that. And I would request that the information be made 
available to us.
    Chairwoman Velazquez. I will be joining the gentleman. Mr. 
Chabot?
    Mr. Chabot. I would be happy to join the gentleman in that 
request.
    Chairwoman Velazquez. Thank you.
    Mr. Gonzalez. And I appreciate it.
    And you are right. It isn't all just about you because this 
could be very, very representative of what is going on out 
there because we want to give people the benefit of the doubt 
and we want to work together. And I am taking more time than I 
anticipated.
    Mr. Francis, has the American Bankers Association made a 
formal proposal, been proactive in taking the initiative to 
approach SBA and say, ``Hey, look, the way you are structuring 
this disaster alone is not going to work?''
    You know, in this go alone or whatever it is, maybe the 
problem with that is that the borrower is paying a higher rate 
of interest and so on. So it is really not the best answer out 
there but how you in the private sector can come in with a 
proposal to streamline this procedure and pointing out all 
about what fees should be charged and it should be different 
from 7(a) and so on in your written statement that I went over. 
Have you all made a formal proposal? And I don't know if that 
is too much to ask of any association or private sector.
    Mr. Francis. ABA has and we have as a bank, other banks. 
The LBA has. Yes, that has happened.
    Mr. Gonzalez. I would ask that you please let us know when 
you made it and what response you have received. I do 
appreciate the effort, believe me, because I think the answers 
are out there.
    And then, lastly, Mr. McDonald, I really don't have a 
question, but it's good that we remember that, of course, 
nothing to the dimension and scope of Katrina but that 
Mississippi was also hit and is in the rebuilding phase. You 
know, we have a reminder of that every day with one of our 
beloved colleagues, Gene Taylor. I also wish to remind other 
people that we had Rita in Texas.
    And that's also been neglected. But thanks to all three of 
you for your presentation today.
    Chairwoman Velazquez. Before I move to recognize Mr. 
Johnson, Mr. Francis, I would like for you to explain to me, 
how do you disburse disaster loans? Would you ask for receipts 
before you provide the money?
    Mr. Francis. No, ma'am, we would not ask for receipts. What 
we would do is we would verify if it was a real estate 
construction loan. What we would do is we would--normally in a 
real estate process, the contractor will go and perform work 
and submit a draw request to us that we would go out and 
inspect. And then we would fund the contractor.
    And in equipment purchase, the purchase order would be 
submitted. We would then submit the payment to the vendor for 
that equipment, but we would not ask the borrower in those 
cases to pay for it and then submit the receipts to us.
    Chairwoman Velazquez. Yes. Let me state for the record, 
that is part of the statute that you have to provide receipts 
before you get your money. But it doesn't make sense to us or 
to me when we are dealing with people, victims who lost 
everything.
    Mr. Francis. That is not the normal procedure in the 
banking industry.
    Chairwoman Velazquez. Thank you.
    And now I recognize Mr. Davis. No questions? Then we'll go 
to Mr. Johnson. No questions? Well, let again thank all of you. 
We will continue to monitor the situation with the disaster 
loan program and the disaster readiness of SBA. And we will 
continue to monitor the situation, the response from SBA. Ms. 
Colosino, maybe before you leave we could have a conversation 
with members of the staff of SBA. And I want to ask unanimous 
consent to enter into the record testimonies that were provided 
by witnesses who were not able to make it.
    [The prepared statements of the Hon. Michael Olivier and 
Ms. Patricia Smith may be found in the Appendix.]
    Chairwoman Velazquez. Without objection, this hearing 
adjourns. The Committee adjourns. And I want to again thank you 
all for being here today.
    [Whereupon, at 1:09 p.m., the foregoing matter was 
concluded.]

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