[Senate Hearing 110-547]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-547
 
  OVERSIGHT: GULF COAST DISASTER LOANS AND THE FUTURE OF THE DISASTER 
                           ASSISTANCE PROGRAM

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

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP



                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 25, 2007

                               __________

      Printed for the use of the Committee on Small Business and 
                            Entrepreneurship


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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                 JOHN F. KERRY, Massachusetts, Chairman
CARL LEVIN, Michigan                 OLYMPIA J. SNOWE, Maine,
TOM HARKIN, Iowa                     CHRISTOPHER S. BOND, Missouri
JOSEPH I. LIEBERMAN, Connecticut     NORMAN COLEMAN, Minnesota
MARY LANDRIEU, Louisiana             DAVID VITTER, Louisiana
MARIA CANTWELL, Washington           ELIZABETH DOLE, North Carolina
EVAN BAYH, Indiana                   JOHN THUNE, South Dakota
MARK PRYOR, Arkansas                 BOB CORKER, Tennessee
BENJAMIN L. CARDIN, Maryland         MICHAEL B. ENZI, Wyoming
JON TESTER, Montana                  JOHNNY ISAKSON, Georgia

                 Naomi Baum, Democratic Staff Director
                Wallace Hsueh, Republican Staff Director































                            C O N T E N T S

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                                                                   Page

                           Opening Statements

Kerry, Hon. John F., a United States Senator from Massachusetts..     1
Snowe, Hon. Olympia J., a United States Senator from Maine.......     4

                           Witness Testimony

Thorson, Hon. Eric M, Inspector General, U.S. Small Business 
  Administration, Washington, DC.................................     7
Martin, Gale B., former loan officer, U.S. Small Business 
  Administration, Office of Disaster Assistance..................    22
Shear, William B., Director, Financial Markets and Community 
  Investment, U.S. Government Accountability Office, Washington, 
  DC.............................................................    26
Preston, Hon. Steven C., Administrator, U.S. Small Business 
  Administration, Washington, DC.................................    52

          Alphabetical Listing and Appendix Material Submitted

Kerry, Hon. John F.
    Opening statement............................................     1
    Post-hearing questions posed to Hon. Steven C. Preston and 
      subsequent responses.......................................    83
    Post-hearing questions posed to Eric M. Thorson and 
      subsequent responses.......................................   134
    Post-hearing questions posed to William B. Shear and 
      subsequent responses.......................................   138
Landrieu, Hon. Mary L.
    Prepared statement...........................................    78
    Post-hearing questions posed to Hon. Steven C. Preston and 
      subsequent responses.......................................    94
    Post-hearing questions posed to Eric M. Thorson and 
      subsequent 
      responses..................................................   135
    Post-hearing questions posed to Gale B. Martin and subsequent 

      responses..................................................   140
    Post-hearing question response by Brad Durtschi..............   150
    Post-hearing question response by anonymous loan officer.....   150
Lieberman, Joseph I.
    Post-hearing questions posed to Hon. Steven C. Preston and 
      subsequent responses.......................................    91
Martin, Gale B.
    Testimony....................................................    18
    Prepared statement...........................................    22
    Response to post-hearing questions from Senator Landrieu.....   140
    Additional statement.........................................   165
Preston, Hon. Steven C.
    Testimony....................................................    52
    Prepared statement...........................................    56
    Response to post-hearing questions from:
        Senator Kerry............................................    83
        Senator Snowe............................................    84
        Senator Lieberman........................................    91
        Senator Landrieu.........................................    94
        Senator Vitter...........................................   104
Shear, William B.
    Testimony....................................................    26
    Prepared statement...........................................    28
    Response to post-hearing questions from Senator Kerry........   138
Snowe, Olympia J.
    Opening statement............................................     4
    Post-hearing questions posed to Hon. Steven C. Preston and 
      subsequent responses.......................................    84
Thorson, Hon. Eric M.
    Testimony....................................................     7
    Prepared statement...........................................    10
    Response to post-hearing questions from:
        Senator Kerry............................................   134
        Senator Landrieu.........................................   135
        Senator Vitter...........................................   137
Vitter, David
    Post-hearing questions posed to Hon. Steven C. Preston and 
      subsequent responses.......................................   104
    Post-hearing questions posed to Hon. Eric M. Thorson and 
      subsequent 
      responses..................................................   137
SBA documents included:
    ``Triage Project'' (SBA Loan Closing Project Procedures).....    99
    ``90 in 45 Campaign''........................................   100
    Buffalo letter #1 (SBA loan cancellation letters to 
      borrowers).................................................   101
    Buffalo letter #2............................................   102
    Standard 14-day Letter.......................................   103
    SBA production and performance standards for loan officers...   106
    SBA production and performance standards for team leads w/
      exhibits...................................................   111

                        Comments for the Record

Capital One......................................................   154
Glenn Trainor, SBA loan applicant................................   160
Statements of former SBA loan officers:
Durtschi, Brad...................................................   172
    Response to post-hearing questions from Senator Landrieu.....   150
McClure, Steve...................................................   185
Robison, Melissa.................................................   196
Russell, William.................................................   181
Simien, Wallie...................................................   198
Smith, Jennett S.................................................   186
Young, James A...................................................   188
Anonymous loan officer (current).................................   202
    Response to post-hearing questions from Senator Landrieu.....   150


                  OVERSIGHT: GULF COAST DISASTER LOANS
           AND THE FUTURE OF THE DISASTER ASSISTANCE PROGRAM

                              ----------                              


                        WEDNESDAY, JULY 25, 2005

                      United States Senate,
                        Committee on Small Business
                      and Entrepreneurship, Washington, DC.
    The Committee met, pursuant to notice, at 10:08 a.m., in 
room SR-428A, Russell Senate Office Building, Hon. John Kerry 
(Chairman of the Committee) presiding.
    Present: Senators Kerry, Landrieu, Snowe, Vitter, and 
Thune.

OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, CHAIRMAN, AND 
           A UNITED STATES SENATOR FROM MASSACHUSETTS

    Chairman Kerry. Good morning. We will come to order, 
although I have never seen a more orderly room.
    Anyway, I apologize for being late. I had to go to the 
Finance Committee, which was starting a hearing, and I am 
trying to balance between them. So I thank you for your 
patience.
    We are going to do things a little differently here today, 
both at the request of the Administrator, but also with my 
enthusiasm, because I often think that, at these hearings, 
there is a sort of procedure by which the Administration 
testifies first, and then others come in, and you do not really 
get the kind of give-and-take and exchange that I think could 
be most helpful to the Committee. And since this is about 
getting good information and laying out the facts, I think it 
is helpful to everybody to have the Administrator go last. So I 
welcome the Administrator's willingness to do that, and I look 
forward to it.
    We are here today to take a close look at the SBA's 
Disaster Assistance Program. This program serves as the Federal 
Government's primary source of long-term financial assistance 
to small businesses that have been hit by a disaster of one 
kind or another.
    A couple of years ago, we became all too familiar with what 
is wrong with the program: The lack of adequate planning, the 
lack of adequate staffing, and other kinds of problems that 
accompanied the massive failure of delivery of services across 
the board in the wake of Katrina. And that taught us something.
    I think a lot of people, however, are unaware of how 
frequently the SBA does respond to various disasters around the 
country, some small, some large. And in fact, the SBA's 
Disaster Assistance Program plays an integral role in 
rebuilding homes and towns and businesses in communities all 
across the country.
    In my home State, the city of Uxbridge recently experienced 
a serious mill fire, and some 135 homes and businesses were 
destroyed. A lot of damage was done, and some 300 jobs were 
lost. And this mill had become a major magnet, if you will, for 
business in a community that has been hurt over the last past 
several years by businesses going abroad and the transition of 
our economy.
    So SBA stepped in, and I want to thank the Administrator 
for the fast response of the Agency. Agency personnel were on 
the spot Sunday afternoon for a fire that occurred on Saturday, 
did their evaluation, and by Monday we had a designation and 
were able to move.
    And that is terrific. That is an important message to send 
to people. That is the way it ought to work. Not every disaster 
can receive, or does receive the same kind of response. And 
certainly there are some places where we have not seen such 
swift response.
    Next month marks the 2-year anniversary of the most 
devastating natural disaster that we know of in the history of 
this country. The impact of Hurricane Katrina was nothing less 
than catastrophic on the State of Louisiana and on surrounding 
communities in the Mississippi also. Thousands were killed, 
hundreds of thousands were displaced, and many of them are 
still struggling to recover from the impact.
    At every step during the response and recovery process, the 
Federal Government was shown to be unprepared and unable to 
respond. And I want to emphasize: This was not on Administrator 
Preston's watch. He came in to try to clean up some of this, 
and I think he has done an admirable job of trying to tackle a 
lot of that, but at no agency was the lack of preparedness more 
evident, or incompetent, frankly, than what happened within the 
SBA. Insufficient staffing, slow response, lack of 
coordination, lack of leadership, lack of vision, and an 
inadequate processing system led to the Agency's absolute 
failure to respond to the needs of the Gulf Coast victims.
    Nearly 8 months after the storm hit, Mr. Preston's 
predecessor resigned, leaving an enormous mess to clean up, 
frankly. On that day, more than 31,000 loan applications 
remained unprocessed, and just 10 percent of the money that was 
approved for disaster victims had actually been disbursed.
    By all accounts, Administrator Preston made it his top 
priority to get this program on track. In the fall of 2006, he 
set a goal of reaching each and every one of the roughly 90,000 
loan applicants who had been approved for a loan, but had not 
received their money.
    This aggressive goal did have an immediate impact, and to 
date the Agency has disbursed nearly $6 billion to the victims 
who waited so many months to rebuild their homes and their 
lives.
    Today, during the course of this, and it is inevitable--and 
I want to emphasize--this is not a ``gotcha'' hearing. This is 
an educational accountability hearing. It is what Government 
ought to do; it is what the Committee ought to do; it is what 
all of us ought to be involved in. But notwithstanding the 
success generated by Administrator Preston's efforts, there 
were some serious concerns in some quarters with some of the 
methods that were used to carry out that effort.
    Earlier this year, I received two letters from former SBA 
loan officers which I sent to the Agency's Inspector General, 
Eric Thorson, to consider as part of what was already an 
ongoing investigation into the Agency's Gulf Coast response. 
And I think we should emphasize, it is good that we are having 
that kind of evaluation so we understand what did go wrong and 
do not repeat those mistakes, and we would be criticized if we 
did not, every single one of us.
    Today, we will hear from Mr. Thorson regarding several of 
the allegations made in these letters.
    And we will hear from Gale Martin, a former SBA loan 
officer who wrote one of the letters alleging misconduct on the 
part of superiors.
    As Chairman of the Committee, obviously I am concerned by 
those allegations and by the findings, but I admire the 
qualities in SBA Administrator for his willingness to be 
accountable and to establish accountability, and to submit to 
that accountability. I think it is admirable, and I think it is 
important, and I am confident we are going to see that 
exhibited here today.
    The goal of this hearing, and the goal of each Senator on 
the Committee and for each witness, is to ensure that no victim 
falls through the cracks, that no one who is relying on the 
Government for a loan to rebuild a business or home is left 
wondering why the Government let them down, and that we know 
what happened so that these kinds of things do not happen 
again.
    As we have done since the day Katrina struck, Senator 
Snowe, Senator Landrieu, and Senator Vitter and I have worked, 
and we will continue to work to make sure that he SBA leaves no 
stone unturned in providing relief to small business owners and 
homeowners who are still struggling to make ends meet.
    And I know I do not need to, but I will encourage 
Administrator Preston to continue to work with the Inspector 
General in the months ahead to address the concerns raised in 
those reports.
    More importantly, I believe an effort needs to be made to 
ensure that no loan applicant who was approved for a disaster 
loan was left with an undesired or unrequested cancellation. If 
there are victims of this storm who were approved for 
assistance, but were later turned away against their wishes, 
then I think we have a responsibility to go back and try to 
find out whether things can be made right, within obviously, 
the rules and normal standards by which those decisions are 
made. I am confident that Administrator Preston will make a 
serious effort to do that.
    Just as we have to continue to look at what could be done 
for the people of the Gulf Coast, we have to put in place the 
tools that prevent another Katrina-like response. The SBA 
recently briefed Congressional staff on its Disaster Recovery 
Plan which establishes a framework for how the Agency will 
respond to future events, and we look forward to hearing from 
the Administrator regarding the specifics of the plan.
    We are also going to hear from William Shear of GAO, who 
has made several recommendations through two published reports 
regarding what steps the SBA needs to take to address the 
shortcomings that we will discuss.
    Finally, we are meeting today, 4 months after this 
Committee voted unanimously to report a bill that addresses 
many of the holes in SBA's capacity to execute effective 
disaster response. I emphasize capacity: Capacity depends often 
on the law itself, on staff, and other things.
    This bill creates an expedited disaster response program to 
get money in the hands of victims quickly. It authorizes 
private banks to make disaster loans so that local banks can 
get involved immediately with the response effort--I might 
add--in a place where they know the people, know the players, 
know the facts, and have a stake.
    It also creates a new level of declaration for the 
Administrator, a declaration of catastrophic national disaster, 
to allow for businesses outside of the geographic reach of a 
disaster access to low interest loans if they are adversely 
impacted.
    I want to emphasize--because some have expressed some 
concern about a new level of disaster assistance--it can only 
be done with the Department of Homeland Security and 
Presidential, and other appropriate sign-offs. So it is not as 
if it were some great new permissive discretion, and only in 
the face of, obviously, a legitimate disaster.
    Despite broad bipartisan support in the Senate and a letter 
of support from the Administrator, this bill remains stalled. 
We need to pass this bill now, so that funds are available if 
and when the SBA needs to respond to another large-scale 
Katrina-size disaster.
    So we are here today because we have to get this right. We 
are almost 2 months into another hurricane season which is 
projected to be a busy one. The National Oceanographic 
Atmospheric Administration projects 13 to 17 named storms, with 
as many as 10 becoming hurricanes.
    I think it is irresponsible of Congress to continue to 
count on luck to carry us through having seen what we have 
lived through in the last years. So I hope we are going to 
break that logjam, and I call on my colleagues to help us do 
that.
    I now turn to Senator Snowe.

 OPENING STATEMENT OF THE HONORABLE OLYMPIA J. SNOWE, A UNITED 
                   STATES SENATOR FROM MAINE

    Senator Snowe. Thank you, Mr. Chairman, and thank you for 
holding today's vital hearing on disaster loan oversight, and 
for your continued leadership on this crucial matter which has 
required tremendous effort by this Committee to follow up on a 
number of initiatives that developed in the aftermath of 
Hurricane Katrina.
    I certainly want to welcome SBA Administrator Preston. I 
want to thank him for both his countless hours and efforts on 
this issue. I understand he has just passed the 1-year 
anniversary of his tenure at SBA, and I wish to congratulate 
him.
    And we are especially anxious to hear the progress that he 
is making. I know, during his confirmation hearings just a year 
ago, he indicated his commitment to focus on disaster-related 
issues that we unfortunately and tragically discovered. When it 
was time for the SBA to respond to the disasters that occurred 
in the region, they were not on the front lines as they should 
have been. I know the SBA has responded with numerous 
initiatives such as the 90-in-45 Campaign to address those 
issues. And obviously, we need to learn about what has worked 
and what has not worked, and we are going to continue to 
persevere and to make sure that we resolve any outstanding 
issues in which these programs are administered.
    I also want to welcome Inspector General Thorson, Mr. 
Shear, and Ms. Martin today. Thank you for your participation 
and your perspectives on what the SBA can do better, what needs 
to be done now, and what is not working. Clearly, as the 
Chairman indicated, we have to get this program right.
    As we learned all too well in the aftermath of the 
devastating 2005 Gulf Coast hurricanes, it is absolutely 
imperative that Government programs on the front lines are 
fully prepared when called upon to aid disaster victims.
    Admittedly, the SBA's Disaster Loan Program faced herculean 
challenges in the wake of Hurricane Katrina, but to the 
detriment of all concerned, the Agency made too many costly 
mistakes, leaving disaster victims waiting months for loans to 
be processed, or their money to be disbursed.
    As we all well know, in the numerous hearings that were 
held by this Committee between 2005 and 2006, as well as this 
year, we found the collective record was devastating in terms 
of the failure of the SBA to respond appropriately and swiftly 
to the disaster that has occurred in the region, particularly 
in New Orleans.
    The SBA's recently released Disaster Recovery Plan is a 
step in the right direction toward correcting these problems, 
yet I am deeply alarmed by reports the Inspector General will 
share with us today.
    I am specifically concerned with allegations that suggest 
$1.5 billion in SBA loans were awarded to applicants who lacked 
repayment ability, that loans may have been improperly 
canceled, and that SBA staff altered quality assurance reports 
in order to avoid penalties.
    Hopefully, this new recovery plan equips the SBA with the 
tools required to avoid making the same egregious errors in the 
future. We have to do everything that we can to redouble our 
efforts to make sure that SBA successfully disburses loans 
after a catastrophic disaster.
    As for this Congress and this Committee, I can tell you 
that during the last 22 months, we have worked hand-in-glove to 
craft bipartisan disaster legislation which would assist the 
SBA to respond effectively and swiftly to future disasters.
    In fact, the reauthorization we passed in the last Congress 
included disaster-related legislation--and passed unanimously 
by this Committee. Unfortunately, we never were able to get 
similar action by the House of Representatives.
    We then had a product of consensus and compromise among 
Chairman Kerry, Senator Landrieu, Senator Vitter, and myself, 
as well as other Members of this Committee. The Small Business 
Disaster Response and Loan Improvements Act of 2007, again, 
passed unanimously by this Committee, providing the SBA with 
more resources to aid the victims of future catastrophes, 
taking into account our review of what has worked in the past 
and how Congress could help SBA's preparedness for future 
disasters.
    I have long championed one such provision, the private 
disaster loans which would allow private banks the ability to 
partner with the SBA to offer disaster loans. We cannot 
overstate the necessity of both making additional resources 
available and increasing access to capital for business owners 
and homeowners immediately following a disaster.
    Also addressed in this bill is an issues that emerged in 
our hearings, bridge loans are an absolute necessity until the 
SBA can be on the front lines in administering the loan 
program. It is important that small businesses get immediate 
assistance so they can begin to recover from the disaster.
    What has disheartened and disappointed many in this 
Committee is that Congress has yet to pass our disaster-related 
legislation. How long do we have to wait? How devastating does 
the storm have to be for our Nation's small business owners to 
receive support from this Congress. This disaster package is 
very much essential to not only dealing with the past, but also 
the future. And as the Chairman said in his statement--with 
every indication that we will have above normal hurricane 
activities this season--we must be prepared.
    I know in my State of Maine alone, during the month of 
April, heavy rains took their toll on the southern part of the 
State, and we had disasters as a result of catastrophic 
flooding for the second time in less than a year.
    So Mr. Chairman, as you will agree, the failure to pass 
this legislation makes no sense. It is certainly not 
controversial. It is everything that we have worked on, 
explored, and examined in every dimension. There is broad 
support for this bill including the Administration, the SBA 
Administrator, and Members of this Committee on a bipartisan 
basis. This is not something that should have been held up in 
the United States Senate.
    It is a consequential matter. It makes a difference, and it 
will continue to make a difference in the Gulf region and any 
other areas that might be affected by a devastating hurricane. 
This is certainly an issue around which we all should be able 
to coalesce and show support.
    We hope that we will be able to move this bill forward so 
that this legislation can be signed into law. This hearing 
represents a forward-looking effort to collaborate with the SBA 
for a more comprehensive and aggressive response to future 
disasters.
    It is paramount that we bolster the Agency's capacity for 
assisting this country's small business community with the same 
dedication to excellence exemplified by the entrepreneurs it 
strives to serve.
    So I thank you, Mr. Chairman. I thank the distinguished 
panel of witnesses who are going to be here today to help and 
guide us in finding solutions to improve the disaster response 
by this vital agency.
    Thank you, Mr. Chairman.
    Chairman Kerry. Thank you very much, Senator Snowe.
    Our first witness is Eric Thorson, the Inspector General of 
the Small Business Administration. He has served in this role 
since April of 2006 and previously served as the Chief 
Investigator for both the Senate Permanent Subcommittee on 
Investigations and the Senate Committee on Finance.
    Also Gale Martin, former loan officer, Small Business 
Administration. Ms. Martin has 25 years of experience in 
accounting, tax preparation, and small business management. She 
became a public servant with the U.S. Small Business 
Administration's Office of Disaster Assistance in Fort Worth, 
Texas in December 2005, and remained with the SBA through late 
November 2006.
    In addition, William Shear, Director of Financial Markets 
and Community Investment at the Government Accountability 
Office. Mr. Shear has directed substantial bodies of work 
addressing SBA, Federal Housing Administration, and Rural 
Housing Service Community Economic Development Program.
    So we are grateful to have the experience and commitment 
that is represented in the panel, and look forward to your 
testimonies.
    Mr. Inspector General.

STATEMENT OF THE HONORABLE ERIC M. THORSON, INSPECTOR GENERAL, 
       U.S. SMALL BUSINESS ADMINISTRATION, WASHINGTON, DC

    Mr. Thorson. Thank you, Chairman Kerry and Ranking Member 
Snowe.
    I appreciate the invitation to appear before you to discuss 
our work on the effectiveness of the efforts made by the Small 
Business Administration (SBA) to cope with the aftermath of 
Hurricanes Rita and Katrina.
    Debra Ritt, the Assistant Inspector General for Auditing, 
Mr. Hickok and Mr. Houle both of the audit staff conducted a 
series of audits of disaster relief procedures that are the 
subject of my testimony today.
    I will try to give you a very short summary of these 
reports, but I would request that my full statement be entered 
into the record.
    Chairman Kerry. And without objection, it will be.
    Mr. Thorson. Shortly after assuming the position of 
Inspector General, I personally visited the New Orleans area 
and walked on the deserted streets of the worst-hit areas, 
surrounded by total devastation. It was dramatically apparent 
that our oversight work would need to begin immediately and 
cover nearly every aspect of the SBA disaster loan process.
    Within 90 days of my visit, the Office of Inspector General 
had established a new office in New Orleans, putting both 
investigators and auditors at the scene.
    In the fall of 2006, faced with a backlog of loans that had 
been approved, but not yet disbursed, SBA initiated a 90-in-45 
Campaign designed to contact approximately 90,000 borrowers 
within 45 days to resolve any issues that may prevent closure. 
The audits that I will discuss today were initiated in response 
to complaints by SBA employees about problems allegedly 
resulting from this campaign and other efforts to expedite the 
loan disbursement process.
    While certainly problems arose, this does not diminish the 
Agency's great effort which increased disbursements from only 
$2 billion in August 2006 to $5.5 billion by the end of the 
year.
    And as you said, Mr. Chairman, no one in our office 
approached this from a ``gotcha'' mentality. This was really 
done in an effort to contribute to lessons learned.
    As a referral from this Committee, we received disturbing 
written allegations that indicated thousands of already 
approved disaster loans were canceled in what appeared to be an 
effort to improve statistics that focused negative attention on 
the huge backlog of approved, but undisbursed loans.
    We have just issued a draft report to SBA on this topic. 
Our audit focused on the first 2 weeks of September 2006, 
during which time over 12,000 loans were canceled. We 
determined that close to 8,000 of them were canceled without 
any prior notification to the borrowers. These were loans 
primarily for homeowners and renters who planned to use the 
loans to rebuild homes and replace personal property destroyed 
by the hurricanes.
    At the time, SBA procedures required that borrowers be sent 
a 14-day letter before a loan could be canceled, outlining 
steps needed to prevent the cancellation; however, no 14-day 
letter was sent. The direction was given to make three attempts 
to call each borrower within 24 hours. If they could not reach 
the borrower, they were to cancel the loan.
    The director of the Fort Worth Center stated to our audit 
staff that these instructions were intended to get the loans 
off of SBA's books.
    Our audit disclosed that, in many cases, SBA made only one 
attempt to reach the borrower before canceling the loan. A 
letter of cancellation was sent informing the borrower, and 
sometimes that the cancellation was at the borrower's request, 
even though no such request had been made. The normal disaster 
loan commitment expires in 60 days. In this case, the loans 
were past 120 days.
    While we recognize the effort made by the Agency in 
allowing an extension to 120 days, given the drastic situation 
in this area, cancellation within a 24-hour timeframe, even if 
beyond this 120-day deadline, does not appear to be a fair or 
prudent course of action. In fact, as we near the 2-year 
anniversary, I have no doubt that there are many cases where it 
is still difficult to assemble the documents that might be 
required to close a disaster loan.
    In October, the Buffalo Center attempted to re-contact the 
nearly 8,000 borrowers they were previously unable to reach. Of 
the 4,500 that they eventually did contact, about 1,200 
requested that their loans be reinstated.
    The urgency of this audit is that we recognize, unlike many 
audits where the numbers portray a level of efficiency or 
productivity, these numbers represent individuals and families 
who have faced a tragedy most of us cannot imagine.
    A second audit responded to an employee complaint that SBA 
was not taking proper steps to protect its interest in 
collateral on secured loans. We found nearly 5,000 uncashed 
checks received from borrowers for recording and filing fees. 
This indicated that SBA had not recorded the liens on any of 
the loans related to these checks. Almost 3,000 checks were 
over 90 days old, and SBA had to request new checks before the 
liens could be recorded. We estimated that SBA disbursed $368 
million in loan proceeds on over 3,000 loans without timely 
perfecting liens on property or completing UCC filings.
    A third audit was prompted by employees who alleged that a 
supervisor altered the results of a quality assurance review 
over the loss verification process. Loss verifications provide 
initial damage estimates for repair or replacement of property 
used to determine the amount of a disaster loan. Our audit 
found that an SBA official did materially alter the results of 
quality assurance reviews in 72 of 246 cases, apparently to 
meet required performance parameters.
    The final audit looked at a pilot program that SBA started 
in November 2005 to expedite loan decisions. By making a loan 
based primarily on a borrower's credit score rather than the 
normal analysis of ability to repay, SBA expedited nearly 
70,000 Gulf Coast disaster loans, totaling $3.7 billion.
    We estimate over 21,000 loans totaling $1.5 billion, or 
about 32 percent of the sampled loans, were made to applicants 
who lacked repayment ability. While many of these loans 
processed under the program may default, we also believe that 
many of these individuals should have been referred to FEMA for 
consideration of a grant instead of a loan.
    After we briefed SBA on our findings, the Agency terminated 
the program on April 9, 2007. We commend SBA for quickly acting 
on these findings.
    Our audit staff has accomplished a great deal of work on 
the disaster loan process in a very short period of time. I 
would be remiss, however, if I did not mention the outstanding 
efforts that our criminal investigators have made as well. With 
no presence at all in the region 1 year ago, as of today, we 
have obtained nine indictments, one conviction, and prevented 
losses to the Government of millions of dollars. I am very 
proud of the work our criminal investigators do each day to 
help ensure that the money allocated for victims is not lost to 
theft or to fraud.
    We hope these comments have been both helpful and 
constructive. It is our most sincere desire to use these audits 
to work further with the Agency to help fix the problems that I 
have outlined above.
    Thank you.
    [The prepared statement of Mr. Thorson follows:]

                              STATEMENT OF

                          HON. ERIC M. THORSON

         Inspector General, U.S. Small Business Administration

                               Before the

            Committee on Small Business and Entrepreneurship

                          United States Senate

                             July 25, 2007

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    Chairman Kerry. Thank you very much, Inspector General. We 
appreciate it.
    Ms. Martin. 

 STATEMENT OF GALE B. MARTIN, FORMER LOAN OFFICER, U.S. SMALL 
             BUSINESS ADMINISTRATION, ARLINGTON, TX

    Ms. Martin. Good morning, Senator Kerry and Ranking Member 
Snowe. Thank you for inviting me to testify in front of the 
Senate Committee on Small Business and Entrepreneurship.
    My name is Gale Martin. I am a former loan officer of the 
Small Business Administration's Office of Disaster Assistance 
in Fort Worth, Texas. I loan processed for the SBA from 
December 5, 2005 to the end of November 2006, which was 
directly after the Katrina and Rita disasters.
    I am currently employed with the Communications Department 
of the Federal Emergency Management Agency in Denton, Texas.
    I am here today to hope for about a million people. These 
are the people who were unjustly sent away without anything at 
all, after applying for disaster loans in the wake of 
Hurricanes Katrina and Rita.
    We--this group of nine concerned loan officers, and former 
loan officers--are especially concerned with the home 
applicants. They were the tragedy of the badly done processing 
within the SBA in 2005 and 2006. These are the people whom we 
would like to see given a second look, which is to say, another 
chance for a loan.
    Everyone knows that the system didn't work: The loans 
weren't written, applicants left empty-handed, we have an 
excess of, at the time, $6 billion on the worst natural 
catastrophe the United States has ever had to mend, and that 
did not seem to make sense.
    I brought with me the testimonies of eight other loan 
officers. We join together and we all agree that we were being 
forced by management to cancel, decline, and withdraw 
applications unnecessarily and unjustly in order to make the 
numbers look good for the public, the press, and Congress.
    We could not process each of these loans to a correct 
decision in the amount of time that we were given. We were 
being forced to rush files through at a ridiculously 
unreasonable rate, or be faced with losing our jobs 
immediately. The bar of daily production quotas was raised 
often, and directly correlated with the amount of bad press the 
Agency was receiving. Senior loan officers and loan officers 
alike were scrambling daily, looking for any way to increase 
their numbers of completed loans just to hold onto their jobs.
    It takes almost no time to withdraw, decline, or cancel a 
file. There are many, many reasons to be doing this. It also 
takes less time for a senior loan officer to concur or agree 
with a file that has been declined or withdrawn. This moves the 
entire staff's focus and motivation to finding quick declines 
and withdrawals to meet their daily production quotas, and had 
very little to do with helping the approved files for the 
disaster applicants.
    Here is an example of an extraordinary measure used by the 
management to push things through. We were told we could 
withdraw a file after three attempts to get in touch with the 
applicant in a 24-hour period. That meant one call in the 
morning, one call in the afternoon, and a third call in the 
afternoon of the second day, and by the close of business on 
that second day, that file could be withdrawn. If we did manage 
to get in touch with the applicant, the applicant would then be 
given 48 hours to fax in all requested documents, or again, 
they could be withdrawn or declined.
    Remember, these people had been waiting in line for 4 to 7 
months just to talk to a loan officer. This was a standard 
practice. This is how we were told to treat the applicants.
    There were call-out projects that called thousands of 
people who were given a few hours to make a final decision on 
their loans or their loans would be canceled. A lot of these 
people were still undecided as to whether they could or they 
should even rebuild. If they accepted the loan, they would have 
to start making their agreed-upon payments on the loan at the 
full amount, even if the loan could not be disbursed.
    If the applicant asked for an extension of time, it was 
refused. They had only the choice of accepting the loan or 
having it canceled. They were told they could come back in if 
they reapplied within a 6-month period, but what they were not 
told is that they would have to go through a complete income 
reverification and requalification, and the full approval 
process again, using their most current information.
    Any time a file was withdrawn, canceled, declined or, in 
some cases modified, the applicant was faced with a complete 
reverification. This meant all their documents had to be 
updated, their income had to be reverified, new tax transcripts 
secured, and insurance proceeds double-checked for any 
additional duplication of benefits. The approval guidelines 
used directly after Katrina and Rita were very relaxed in 
comparison to what they are using now. Many of these applicants 
would probably not be able to qualify for a loan again.
    The applicants were never given any information: They were 
rarely sent their decline letters, cancellation letters, or 
withdrawal letters. I used to receive phone calls from 
applicants 3 or 4 months after I had called them with my 
decision on their file. They were still waiting for a copy of 
their letters.
    Applicants only have 6 months to come back in. They were 
told to wait for their letters before they reapplied. The clock 
started ticking from the day the loan officers made their 
decisions on a file. The applicant usually did not know this. 
If they waited a while before calling for a copy of their 
letter, they probably would not have enough time to remedy the 
deficiencies on the file and secure any additional paperwork 
necessary before the clock would run out. This was another way 
to get rid of files.
    An excellent example of an applicant not being informed of 
anything on their case, being put through sheer agony to secure 
a loan, and then being forced into a cancellation of their loan 
is the case of Alice.
    I wrote a relocation loan for Alice in July of 2006, and I 
have been following her progress since then. Alice had been 
waiting in line for relocation processing for over 4 months. Of 
course, she had called in to talk to customer service but, as 
usual, they refused to give her any information about what 
would be needed in processing.
    When I first spoke to Alice, she was horrified to find that 
she needed to have a purchase contract in hand or I would have 
to withdraw the file. This is the policy with relocation loans. 
She thought she would have some time to make the purchase after 
I informed her of the amount that she would be eligible to 
borrow. This situation was a common occurrence within the 
relocation department. The borrower was never informed of what 
was needed prior to talking to a loan officer. They would wait 
in line for months just to be kicked out immediately again for 
not having a purchase contract.
    In this case, I agreed to hold on to her file because of 
her hardship circumstances with her 94-year-old mother who was 
wheelchair-bound. Alice hopped on the project of looking for a 
house, driving from Florida to Georgia with her 94-year-old 
mother in tow.
    Every day she would call in, or every other day, and inform 
me of the progress on her file. Unfortunately, Alice's file had 
been in process for 271 days, and this was the time when the 
Agency was being very embarrassed for aged files. I was told to 
withdraw her file twice--fairly politely--and then threatened 
by the department head about it.
    Fortunately, Alice found a home in that week and we were 
able to write her loan. However, the purchase did not work, and 
Alice found herself on the phone with a loan officer recently 
who refused to give her an extension and insisted on canceling 
her loan. He said she could come back in if she reapplied 
within 6 months, but he did not explain that she would have to 
go through a complete requalifying for that loan.
    This all happened in early April, and by the end of June, 
she still had not received a cancellation letter. He also 
neglected to tell her that the clock started ticking from 
April. When she called in to inquire, she was then sent a 
letter stating that the loan was canceled at her request.
    This is an example of every error that I have just been 
trying to communicate to you. Very little was done well on the 
file, and Alice is still fighting to get her loan back.
    As I explained above, we were also simply ordered to 
withdraw files. During the main thrust of each of the four 
production campaigns, we were not allowed to hold files beyond 
a week's time. Please bear in mind that the public had lost 
absolutely everything in the world. They could not give us the 
documents necessary to process their files within that time 
period.
    An example was during the business loan processing campaign 
which ended in March. We were very behind in securing tax 
transcripts for applicants from the IRS. Up to this period, the 
applicant was not considered responsible for securing their own 
tax transcripts. We were suddenly ordered to inform our 
applicants that they would have to secure their own transcripts 
within 5 days or their files would be withdrawn. Applicants 
were frantically calling in, crying and begging for the files 
not to be withdrawn. We simply gave them a direct line number 
to the IRS and suggested that they call and recall the IRS 
until they found a sympathetic ear who was willing to process 
their request before the deadline. For the most part, the 
applicants were told by the IRS that it would take up to 6 
weeks to process their transcript request. As a result, these 
files were unreasonably withdrawn.
    The applicants were rarely notified of decisions made on 
their files. The written testimony of two of the 
reconsideration loan officers spells it out. Loan officers 
would simply lie in the chronological comments in order to 
close off the file and include it on their daily production 
reports. Over and over again, reconsideration letters from the 
applicants would come back having stated that they had not been 
informed of the changes made on their cases.
    I also witnessed this myself while working in the legal 
escrow department. If I saw that a file had been withdrawn, I 
always made it a point to call the applicant and ask if they 
were aware that the file had been withdrawn. The answer was 
always no.
    I remember one poor lady was on vacation in California. She 
ended up having her daughter in Mississippi break into her 
house to get me the documents I needed to reinstate her file 
since I could only hold the file for 24 hours.
    Another poor woman who had been withdrawn and not notified 
had to exit her apartment within 2 weeks of my call. Her 
landlord had already given her a one-time extension and refused 
to give her a second. She thought everything was in place for 
SBA to complete her closing in 2 weeks. Instead, her file had 
been withdrawn with no apparent reason.
    By the way, my orders in Escrow were simply to fix a legal 
stipulation on the withdrawal, not to reinstate the file. We 
did manage to save her home purchase and get her home closed in 
time, but we had to scramble to do it.
    The statement below was made by a former reconsideration 
loan officer. I thought it was worth including in my oral 
testimony.

    ``What follows are a few examples of why fundamental change is 
needed at the Agency: I was told to change the dates on the DCMS system 
to reduce the aging time of the files. The Reconsideration Department 
withheld hundreds of files for 2 weeks that had been recommended for 
approval, to make the total number of the files not processed a smaller 
number, thereby making the numbers process look better. The head of the 
same department asked a new employee, `Why do you care?' when a loan 
officer showed some concern for his applicants. Another supervisor said 
he would use a 3-minute egg timer, and when it went off, that was the 
maximum time that his group of employees were allowed to be on the 
telephone with their applicants. A 15-year SBA vet, SLO, talked to his 
group of employees, and the topic of conversation was: `How to get rid 
of files.' ''

    I could go on and on for hours here, but the truth is that 
only the wealthy moved through the system easily. People with 
credit issues who owed the Government even a little bit of 
money, who had lost their documents, or just moved around would 
probably not be given a loan, and if they had, they would 
probably have to fight to keep it.
    In closing, it was the decision of the Agency to force 
files through the system at a rate that did not allow for 
proper processing. Their concentration was on making the 
numbers look good to the public and Congress at the expense of 
possibly over 100,000 applicants.
    Thank you again for allowing me to testify, and I look 
forward to answering any of your questions.
    [The prepared statement of Ms. Martin follows:]

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    Chairman Kerry. Thank you very much, Ms. Martin.
    Mr. Shear.

STATEMENT OF WILLIAM B. SHEAR, DIRECTOR, FINANCIAL MARKETS AND 
 COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE, 
                         WASHINGTON, DC

    Mr. Shear. Mr. Chairman, Senator Snowe, and 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 released in July 2006, 
discussed SBA's planning for and implementation of the Disaster 
Credit Management System, called DCMS, which the Agency uses to 
process disaster loan applications.
    The second report, which was released in February 2007, 
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. SBA faced unprecedented demand for its 
disaster loan services as a result of the hurricanes.
    In summary, we identified several system and logistical 
challenges that SBA experienced in responding to the Gulf Coast 
hurricanes that undermined 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, about 9 
months after Hurricane Katrina struck the Gulf Coast, SBA 
processed disaster loan applications, on average in about 74 
days, compared with its goal of within 21 days at that time.
    While the large volume of disaster loan applications that 
SBA received 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 use the 
information available from disaster simulations developed by 
Federal agencies, or catastrophe models used by insurance 
companies to estimate disaster losses. The SBA also did not 
adequately monitor the performance of the 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.
    We made recommendations to SBA in both our July 2006 and 
February 2007 reports.
    For example, we recommended that SBA first reassess DCMS's 
maximum user capacity, in light of lessons learned from the 
Gulf Coast hurricanes, information available from catastrophe 
risk modeling firms disaster simulations, and related cost 
considerations.
    Second, strengthen its DCMS contractor oversight and 
further stress test the system.
    Third, 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 fourth, develop timeframes for completing key elements 
of the Disaster Management Plan.
    The SBA has taken steps to enhance its capacity to respond 
to potential disasters and we are encouraged by SBA's agreement 
with our recommendations. However, the process is ongoing, and 
continued commitment and actions by Agency managers are 
necessary.
    As of July 2006, SBA officials said that the Agency had 
completed an expansion of DCMS's user capacity to support a 
minimum of 8,000 concurrent users, as compared with 1,500 
concurrent users supported for the Gulf Coast hurricanes.
    Further, in June 2007, SBA released a disaster plan. While 
we have not evaluated the process SBA followed in developing 
its plan--consistent with recommendations in our reports--the 
plan states that SBA is incorporating catastrophe models into 
its planning process, an effort that appears to be at an early 
stage. SBA's plan also anticipates using 400 staff who are not 
normally involved in disaster assistance programs to provide 
backup support in an emergency. We will monitor SBA's efforts 
to implement our recommendations.
    It is a pleasure to present our work before this Committee. 
I would be happy to answer any questions.
    [The prepared statement of Mr. Shear follows:]

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    Chairman Kerry. Thank you very much, Mr. Shear. Let me try 
to come right back to you, and then I will go back to the 
others, because your's is a testimony focused more on process, 
and I want to get at it for a minute.
    You have had a fair amount of experience in assessing SBA's 
internal capacity over a period of time. What is your judgment 
here? Is it that SBA doesn't have the people, the personnel, 
the structure? Give us the net bottom line in a hard fashion, 
if you will.
    Mr. Shear. The point that we observe that I think is most 
relevant to the question you just asked is, over the years, we 
have looked at what is called SBA's transformation efforts, and 
we are very glad to be initiating our work at your request to 
look at transformation.
    And we get into questions as far as how siloed the Agency 
is. So in terms of the ability of the Office of Disaster 
Assistance to interact with other parts of SBA to get the right 
expertise to the table is something that certainly is a concern 
of ours going forward, generally with the Agency, and 
specifically with respect to disaster assistance.
    Chairman Kerry. What do you think that they have to do that 
has not been done, in your judgment?
    Mr. Shear. Well, first there has to be greater, I would 
say, communication and transparency within the Agency to make 
sure that when they submit a plan--for example, for disaster 
assistance, there is buy-in from the Agency, and you are 
looking across the Agency.
    And then I think the agency is rather siloed in terms of 
looking at, what do we have to do to really provide quality 
disaster assistance, in terms of reaching out to other 
entities, such as FEMA, such as the geological survey, such as 
other partners in disaster assistance. So these are among the 
things that we are more globally looking for from the Agency.
    Chairman Kerry. Are you satisfied that SBA is working to 
incorporate your recommendations?
    Mr. Shear. We are hopeful that they are. We are glad that 
they agree with our recommendations. We have initiated some 
discussions, and we are basically waiting for them to come to 
us to document what is behind their plan which they just 
released recently to the Congress to make sure that there is 
substance behind it.
    This is our role as an audit agency. So we are hopeful. We 
think they are working constructively with us, but we really 
have not looked at the details behind the actions that they 
have taken because we have not been yet provided with what we 
call the details that would make us really confident, as far as 
SBA's capacity going forward.
    Chairman Kerry. Well, it has been a year since the report 
was published. So I take it that when you say you're being 
hopeful at this point, you are saying to me that you think 
things could have been embraced faster.
    Mr. Shear. We would hope they would be faster, and to some 
degree, what we have been dealing with--sometimes we ask, is it 
a communication problem between SBA and us, or between or 
different parts of SBA? And that would, in a sense, be the best 
scenario that basically, the Agency is further along than we 
think they are.
    But to some degree, it causes us some pause that we really 
have not been provided that much information on what has 
happened.
    Chairman Kerry. Do you think that they have the personnel, 
either type of personnel, or numbers necessary?
    Mr. Shear. The personnel--one of the things that I think is 
hopeful, and again, getting behind this--is that during the 
course of our work, we pointed out that disaster assistance--
especially in response to catastrophes--requires some 
redundancy; it requires infrastructure in place for when the 
catastrophe occurs.
    There seems to be now some recognition of what should 
happen in terms of reserve corps, in terms of office space, 
that you have to be prepared and have infrastructure in place. 
There is a recognition of that. As of yet, we do not know to 
what degree that will be carried out over time. And that is 
something that I think, for this Committee and for our work, 
will be ongoing over time.
    For example, you could see that the reserve corps right 
after 
9/11, had a lot of people in their reserve corps, but then that 
dissipated over time. So what causes me to think that we will 
be constantly monitoring this component, even if the reserve 
corps are adequate today, if they are adequate next year, what 
will happen if we go through a few years without major 
disasters, as far as readiness? That is part of our concern.
    Chairman Kerry. Ms. Martin, you described a fairly--I guess 
the word to describe it is chaotic, haphazard process.
    You're shaking your head.
    Ms. Martin. No. No, it was not chaotic or haphazard. They 
knew what they were doing. They knew where they were taking it 
to.
    There are some extremely skilled people there. Everyone, 
everyone was burdened with production; that was the goal.
    Chairman Kerry. Say that again. They knew what they were 
doing?
    Ms. Martin. They knew what they were after.
    Chairman Kerry. They were after what?
    Ms. Martin. They were after files to be pushed through 
quickly.
    Chairman Kerry. So you are saying to the Committee that 
they just wanted the files cleared and out of the way, that 90-
in-45 drove the process.
    Ms. Martin. Absolutely. And I worked with 90-in-45. I was 
in the Legal Escrow Department looking at the files. They were 
an absolute mess. A lot of them should not have been passed.
    We did not have time to clean them up. I did try for the 
first 3 weeks or a month, and I was ordered by my SLO to just 
push them through. If they say fix the stip, fix the stip, and 
that is what I did. They needed correction.
    People had been pushing these through way too quickly. 
There was not enough documentation. Insurance needed to be 
revisited one more time.
    Chairman Kerry. Well, is there a balance here--let me ask 
you in fairness, is there a balance here in good faith, if they 
are trying to give the benefit of the doubt to the folks in 
that dire situation, that there may have been a situation--
since we do not have a grant program--that they were 
effectively going to use the loans as a bridge to help people 
get on their feet?
    Is that a legitimate way to look at it or not?
    Ms. Martin. Well, obviously, they wanted the money out in 
the field. People, in fact--I can cite another situation--had 
up to September of 2006 only received $10,000. They were under 
a lot of gunfire for that, and the decision was made--right or 
wrong--to get it out there. They figured they could do the 
cleanup later, which is what is going on in the Collateral 
Department at the moment. I think that was, perhaps, a wise 
choice, and yes, I think they were trying to help.
    Chairman Kerry. Why could you only hold a file for 48 
hours?
    Ms. Martin. Because they wanted the file to be pushed 
through quickly.
    Chairman Kerry. So they specifically--wait, you----
    Ms. Martin. Now, in Legal Escrow, during the 90-in-45 
Campaign, it was actually 24 hours, not 48. I pushed the point 
to hold it for 48. We were given 24 hours to move a file out of 
our queue.
    And basically, as I said, I am looking at a file with 
several problems on it----
    Chairman Kerry. Were you also not--was that 24 hours 
notwithstanding whether you had been able to contact the 
person.
    Ms. Martin. Oh, absolutely. If I could not contact the 
borrower, the file was withdrawn.
    Chairman Kerry. It was automatic.
    Ms. Martin. Absolutely. Absolutely. As soon as----
    Chairman Kerry. No matter what the rationale for not being 
able to reach the borrower.
    Ms. Martin. It did not matter. I mean, simply, the whole 
purpose was to prepare this file for disbursement. If the 
borrower could not be contacted, it was withdrawn.
    Chairman Kerry. Senator Snowe.
    Senator Snowe. Ms. Martin, did anybody lose their job, or 
were they threatened with the loss of their position if they 
failed to meet this standard and this goal?
    Ms. Martin. Absolutely. If you will read--which, excuse me, 
I would like to enter into the formal record the testimonies of 
the nine loan officers including myself.
    If you will read through the testimonies, that a couple of 
them, yes, actually were.
    [The testimonies of the former officers appear in Comments 
for the Record on page ??.]
    Senator Snowe. Yes. I did not have the benefit of that.
    Ms. Martin. Yes, they did.
    There were many of us trying to pressure back, fighting to 
hold onto files. We were simply called into the office and 
threatened.
    Senator Snowe. And what was your understanding, and the 
others who have submitted their statements with respect to 
where these instructions were coming from?
    I mean----
    Chairman Kerry. Can I just interrupt for 1 second?
    Senator Snowe. Yes. I am sorry.
    Chairman Kerry. I need to go to Finance to ask some 
questions of one of the nominees there, important to our State.
    So Chairman Landrieu will Chair in my absence, and we will 
just continue. I will be back.
    Thank you.
    Senator Snowe. Ms. Martin, was there an understanding, or 
did any of your superiors or fellow colleagues have an 
understanding in terms of where these instructions were 
derived?
    I mean, who was issuing these instructions beyond your 
direct superiors?
    Ms. Martin. I have to complement the immediate staff in 
SBA. I worked for some very lovely people, some very nice 
people. They were being given orders from outside the Agency, 
above Fort Worth.
    They were in danger of losing their jobs if they did not 
obey. But who--but shall we say Washington, I have no idea. But 
I understood, just from working with them and how truthfully 
they were eager and they were hopeful to help these applicants 
themselves, that they were being bound by what was being 
requested of them.
    Senator Snowe. Right. And I assume that you and others 
expressed to your superiors the devastating impact that this 
was having.
    Ms. Martin. Absolutely.
    Senator Snowe. I appreciate what you are saying here today, 
because I can only imagine the horrendous circumstances that 
these disaster victims were confronting: loss of their business 
and their homes. And we had many of those witnesses before our 
Committee, so we certainly understand the dimensions of their 
tragedy. For them to amass the necessary information for 
verification would be overwhelming, under the best of 
circumstances, but under these unimaginable circumstances it 
would be nearly impossible.
    So obviously you expressed that to your superiors. And what 
did they say in response?
    Ms. Martin. They were a little worried about my attitude 
from the simple reason that, at the end there, especially in 
the Escrow Department, I became somewhat of a little bit of a 
threat, because I seemed to be taking notes as to what was 
going on, and that was that I had already made the decision to 
turn this over to you, the difference being that--this could 
not be allowed. This was not acceptable. The money was 
appropriated. These people have a right to the loans. After 
listening to 6 months of crying borrowers, either screaming or 
crying, begging for help, living in FEMA trailers, what were we 
going to do, leave them there?
    Something had to be done. Their hands were tied. They could 
not do anything more than just say, Gail, just fix the stips. 
Just fix it. I said, but there are 18 things on this file that 
are wrong. Just fix the stipulations.
    I was hollered at quite a--several times by department 
heads who were trying to move me into more of agreement with 
what they were actually trying to do.
    Senator Snowe. I see. And you were a temporary employee, as 
I understand.
    Ms. Martin. I was a long-term temporary.
    Senator Snowe. You were a long-term temporary.
    Ms. Martin. Yes.
    Senator Snowe. And did that include the others who were 
working in your department?
    Ms. Martin. All of us. All of us are long--there are people 
who have been there for 17 years and they are still considered 
long-term temporaries.
    Senator Snowe. Long-term--really? OK.
    Ms. Martin. There are very few core employees.
    Senator Snowe. Well, I certainly appreciate the facts that 
you have presented, and your willingness to present that 
information to this Committee, because we certainly want to 
take any corrective actions. And on behalf of those who 
submitted testimony, as well, because obviously that is not the 
way that we would want to handle those circumstances.
    It is one thing to meet goals, but there is a way in which 
to accomplish it, and we will just have to get to the bottom of 
it.
    Mr. Thorson, are you looking into this issue as the subject 
of one your reports?
    Mr. Thorson. We had not looked into some of the things that 
came out in today's testimony which did definitely get my 
attention.
    There were some very serious statements made here today.
    Senator Snowe. Yes.
    Mr. Thorson. And I think, given what we did find, on the 
basis of what we have looked into, I think we are going to have 
to take another look at some of these things.
    Senator Snowe. I see. So you have begun a process in any 
event, but you have not had the opportunity to talk to Ms. 
Martin and others?
    Mr. Thorson. We got the letter that the Committee sent us, 
and there have been some communications, but not to the extent 
that we heard today. And we certainly are looking at things, 
for instance, the withdrawals. That is ongoing.
    But Ms. Martin touched on a number of very serious issues 
today.
    Senator Snowe. So you are surprised by what you are hearing 
today.
    Mr. Thorson. Absolutely.
    Senator Snowe. Then clearly it is going to be critical for 
this Committee to be appraised of your findings on this 
question, because we obviously want to get to the source of the 
problem and take any corrective measures. So I appreciate that.
    Mr. Thorson. Absolutely.
    Senator Snowe. To what extent do you think the SBA, Mr. 
Thorson, has taken the steps to address and to remediate some 
of the issues that you have raised here today, because that is 
critical. I am trying to determine if they are making the 
progress that is necessary, especially in direct response to 
some of the specific issues, like the loan cancellations, the 
lack of security collateral.
    Mr. Thorson. I think you have two different things that you 
have heard.
    One is the more technical aspects, which are the 
cancellations and how many days were allowed. How many calls 
are made in 24 hours? Should they be canceled? And that sort of 
thing.
    And then you have some very serious management issues that 
Ms. Martin just raised that are really separate from that. And 
it comes down to a leadership aspect and management of how 
people are treated that are doing this work. What focuses--
certainly, a lot of attention on this is, of course, the 
seriousness of the work they were doing and the people they 
were trying to help.
    And of course, from a management point of view, how 
disillusioning this is to the people trying to do this work. 
And that is--as I sat here and listened to that, I have a great 
concern.
    So we have two different things here that we are going to 
have to sit down and address.
    Senator Snowe. Yes. The specifics and the overall approach 
and how this culture developed.
    Mr. Thorson. I think you really hit on it when you call it 
a culture. And I have seen that before in various bureaucracies 
that we have looked.
    The culture really has to be one of really wanting to 
assist and help the individuals. And certainly, when I went to 
Louisiana--and I have also been in Mississippi--but you see the 
people working out on the scene, on the ground, the volunteers, 
et cetera. They are great people. They are really doing 
tremendous work, and you owe them excellent management and 
leadership.
    Senator Snowe. I agree.
    Mr. Thorson. That is what we are going to have to be 
talking about.
    Senator Snowe. Unfortunately, the result was sort of cold, 
calculating and dismissive. And knowing what we know, and 
certainly the two Senators here, Senator Landrieu and Senator 
Vitter, who were on the front lines of the State that was so 
devastated, to hear what Ms. Martin is saying today is tragic, 
because people are facing enormous problems.
    I mean, the whole idea of just assembling all that 
information. It would be virtually next to impossible, not to 
mention the timeframes that were demanded as well.
    So I appreciate your efforts in looking into this, as well 
as getting back to us.
    I know my time is up. I will be back to you, Mr. Shear, but 
I know the Madame Chair is here, and we will go on to the next 
round.
    Thank you.
    Senator Landrieu [presiding]. Senator Vitter.
    Senator Vitter. I just want to thank all of the witnesses 
for their work and their testimony, and I am really eager to 
get to the Administrator and talk with him. So I will wait for 
that.
    Thank you.
    Senator Landrieu. I do have a couple of questions. And I 
want to thank the Chair and Ranking Member for calling this 
hearing. Gulf Coast recovery has been something that they have 
really stayed focused on from literally the first weeks of 
Katrina and Rita in a very bipartisan way. Together my 
colleagues have worked to try to find a better to serve the 
constituents that we represent who are in such--were and still 
are in such desperate situations.
    To have an agency that has the title of ``Small Business 
Administration,'' and then to see that it was not 
administrating anything very well--at a time of great need for 
our constituents--was very disappointing. Not only do we want 
to fix it for the people we still can help at home along the 
Gulf Coast, but we want to make sure that, when this happens 
again--and rest assured it will--that SBA is better prepared. 
For example, either a tsunami will hit Seattle, or a Hurricane 
will slam into Long Island, or an earthquake will occur in 
California or Memphis, and thousands upon thousands of 
businesses will be disrupted.
    When those business owners, large and small, turn to their 
Government that they have paid taxes for, put the uniform on--
served--we owe it to them that this Government will respond 
better than it did the last time.
    Before I ask my question, I must say how terribly 
disappointed I am that a bill to fix many of the issues that 
are being raised again today is being held up on the floor of 
the Senate.
    And I am going to, with the Chair and the Ranking Member, 
pursue the focus of this hold to try to see what we can do to 
move a bill forward that can correct some of these issues, and 
then, of course, to continue hearings like this to find and 
draft additional legislation that is necessary, as well as 
asking for changes to be done at the administrative level that 
do not require legislation.
    I have one question, but I want to comment to Mr. Thorson. 
Thank you for going down to New Orleans at my request. And the 
tour that you did, I got tremendous positive feedback about 
your really going down, kicking the tires, talking to both 
people who had received loans and those that had not, the Loan 
Office, et cetera. And I think that experience will certainly 
help you and help us to reform the situation that we are 
finding.
    My question may be, I am not sure--may be, Ms. Martin, to 
you.
    It was apparent within several months of the storm that 
applicants were sent fairly quickly a $10,000 check.
    Ms. Martin. Yes.
    Senator Landrieu. But at the same time, they were required 
to begin paying on the full amount of their loan, or at least 
that is what was told to me, that they would be paying on the 
full amount of the loan approved.
    So if they had $150,000 loan approved, they had only 
received $10,000. They were being immediately billed for the 
amortization schedule, I guess, of the full amount; is that 
true?
    Ms. Martin. Absolutely.
    Senator Landrieu. Why did that happen, and has it been 
changed?
    Ms. Martin. It hasn't been changed, which is why, in the 
cancellations, the applicants would have canceled their loan.
    What was happening is, they have received $10,000; they are 
still not able to rebuild; they are still waiting for 
relocation processing. They were given a 12-month deferment 
only. The clock started ticking from the day they signed the 
final loan papers. That is day one of their 12 months. At the 
end of that, they have to make full payment. They have received 
100--maybe they have receive their personal property, the 
$40,000, but they have not been funded over for the rebuild 
yet. They will be making their $1,200 payments.
    When I talked to a senior loan officer, she said, well, 
they have been qualified at $1,200. They will simply be re-
amortized at the end of the note. So that has not changed.
    And this is why a lot of these people would have decided 
to--I don't even know if I can rebuild--decided to let go of 
the note.
    Senator Landrieu. I need to get this clear.
    You are testifying that, when the final loan document was 
approved, the clock started ticking----
    Ms. Martin. It started ticking from the day they signed 
their final loan document.
    Senator Landrieu. So they sign the final loan document and 
the clock starts ticking, and they have 12 months, and then, at 
the end of that 12 months, they have to start paying a full 
monthly----
    Ms. Martin. Full payment.
    Senator Landrieu. Full payment on the whole amount, whether 
they have receive it or not?
    Ms. Martin. Absolutely.
    Senator Landrieu. Now, when they signed their final loan 
document, did they, on that day, receive their $10,000 check, 
or did the check come later?
    Ms. Martin. No. The $10,000 was sent out, usually, within 2 
to 3 months of their initial application.
    The theology was they could give them a $10,000 unsecured 
loan, so----
    Senator Landrieu. So they received their $10,000 loan--
excuse me--before they actually signed the final document?
    Ms. Martin. Yes.
    Senator Landrieu. When they applied, they could receive at 
least $10,000.
    Ms. Martin. There was an initial disbursement of $10,000, 
because the rules of the game for a $10,000 loan meant they 
could actually justify, under law, a $10,000 loan that was 
unsecured.
    So if the applicant later turned around and said, no, I 
have decided I don't want to collateralize my new home and the 
old home, they could pull it back down to what they had already 
disbursed to the applicant.
    Senator Landrieu. And two more questions.
    Is it still the law of the SBA, or the rule, that when a 
person in Louisiana--and maybe Mississippi, but I know this to 
be true, I think, in Louisiana--receives their Road Home grant, 
that they must repay, in full, their SBA loan, Ms. Martin?
    Ms. Martin. Not repay in full, however, I had outlined a 
specific case where--they are counting it as a duplication of 
benefits, meaning that it is raking it straight off the top of 
their eligibility.
    If they have $200,000 worth of eligibility and receive 
$100,000, their new eligibility is $100,000. Instead of giving 
them this ability to refinance their loans--and many of them 
have one or two loans that are still out at 8 percent on the 
damaged property--instead of giving them this ability to 
refinance and then taking the grant and putting it against the 
entire eligibility and the entire loan, basically they are 
removing their ability to refinance and just taking it dollar 
for dollar against the loan--if I managed to get that point 
across.
    The problem is----
    Senator Landrieu. Could you explain it one more time? That 
was a little complicated.
    Ms. Martin. Yes, I understand that.
    The applicant's eligibility to refinance their note is 
directly proportional to their eligibility. So they may be 
eligible for a $200,000 note. That makes them eligible for 
$200,000 of refinancing of the note on their damaged property 
which is usually at a much higher percent interest rate--10 
percent, let's say.
    What they are doing with the grants is they are removing 
their eligibility by $100,000, or in many cases, $130-$140,000, 
which also removes their eligibility to refinance that note by 
the same amount.
    What happens is the poor applicant is stuck with their old 
notes at 8 and 9 percent. They do have the grant, but their 
eligibility has been pulled down directly proportional with the 
amount of the grant. It is actually crippling the applicant in 
some cases.
    Senator Landrieu. And I am going to state for the record--
and I may ask for a letter from the Coordinator of Gulf Coast 
Recovery to express the position of his office on this, because 
this has been a singular bone of contention with me.
    When this Congress passed the block grant funding, it was 
in recognition that what we had available for these disaster 
victims may be not enough, given the catastrophic nature of 
this situation.
    It was the expressed intent of the appropriators, of which 
I am one, to provide residents with the funds they need to 
fully rebuild their homes. Our great attempts are being 
thwarted by administrative rules that, despite our restated 
position of the Congress and the Administration to rovide badly 
needed help to victims, they are still being held to the 
standard of grants being a duplication of benefits with loans. 
It is intended to be a duplication--for people to be able to 
get a low interest loan, and on top of that, if they are deemed 
eligible by the State and have additional needs to receive 
whatever they are entitled to by the way these grants are being 
fashioned by the Governor and the staff of Mississippi, and the 
Governor and the staff of Louisiana. And I intend to make that 
the way this operates--to provide necessary resources for 
housing recovery.
    Mr. Shear, do you want to add anything?
    Mr. Shear. I cannot--based on our work, I cannot respond 
specifically to that situation. So much of our work was geared 
toward, how do you handle loan applicants rather than looking 
at some of the issues involving the CDBG funds.
    Senator Landrieu. One more question, and then I see Senator 
Thune may have questions and statements.
    When we have a disaster or catastrophic situation, as we 
have just had, is it not possible for the SBA to get copies of 
tax returns from the Federal Government, as opposed to asking 
disaster victims to go search in a home that is crumpled and 
destroyed for their old copies?
    Ms. Martin. May I answer that, as a processor?
    Senator Landrieu. Yes, go ahead.
    Ms. Martin. We, up to the end of the business loan 
campaign, would not have--we would accept what they were 
saying, but we had to have it verified by the IRS in absolutely 
every case.
    It was an extraordinary measure to ask the applicant to go 
to the IRS directly. Normally, that is never done. And the only 
reason we----
    Senator Landrieu. Excuse me. What is normally done?
    Ms. Martin. Normally, we send in a tax transcript request 
to the IRS, and we would only accept something coming directly 
back from the IRS.
    Senator Landrieu. But in this case?
    Ms. Martin. There was a flood. It was tax season. There 
were a flood of requests from us, and we could not process them 
in time.
    Senator Landrieu. So normally, when you have to process 
your loan applicants, you--since you are a Federal agency, it 
would make sense--you normally go to another Federal agency and 
say, would you send me Mrs. Jones back 3 years of taxes so we 
can process her SBA loan?
    But in this case, that was not done for a Mrs. Jones. She 
had to go find her own tax returns?
    Ms. Martin. She had to find her tax transcripts; it is a 
reverification.
    She could have given us her original copies if she had 
them, but we would not have accepted that. They had to be 
verified. It has to be a third-party verification coming 
directly from the IRS in every case, in every case.
    The difference was we were asking her to go to the IRS for 
us and to get the tax transcripts directly sent to us.
    Senator Landrieu. So a person that had lost their home, 
lost their school, and did not have a church to pray in on 
Sunday, did not have a trailer to leave, you--our Government--
requested that they contact the IRS and get copies of their 
taxes and then have them verified by a third party?
    Ms. Martin. No. That is the third party.
    The IRS--we would accept--if it were fine for the 
transcripts to be even faxed in to the applicant, they are in a 
format that we accept. She would then fax them in to us.
    They are the third party, but we had to have the IRS 
verifying the information. They were not quick enough for us, 
so we went to the applicant and made them do it. And if they 
couldn't get it in in time--all of those--all of those were 
withdrawn.
    In that second or third week of March--I believe it was--
anyone who did not have their tax transcripts in had their 
files withdrawn.
    Senator Landrieu. Mr. Shear, do you have a comment about 
this nonsense?
    Mr. Shear. Oh, yes.
    When our team visited the Gulf Coast, we heard nightmarish 
stories such as these and based on the focus of our work, 
especially the focus on the use of DCMS and the loan process, 
these were among some of the reasons that we said that SBA 
should look for the feasibility of using an internet--you know, 
a secure way of making loan applications, because people are 
going through nightmares with submitting home records, tax 
records, other types of records, those being misplaced during 
this long chaotic process.
    And so those were among the reasons why, based on our focus 
at the time we were visiting the Gulf Coast, we said, there has 
to be a better way to do this.
    Senator Landrieu. OK.
    Any other final comments, because we have a second panel, 
and then Senator Thune may have a----
    Mr. Thorson. I think, as a victim, one of the last things I 
would want to be told is to contact the IRS. This is probably 
not something that I think most people were prepared to do, 
wanted to, or really--it actually goes against, as was pointed 
out, the procedures, which was to receive those directly from 
the IRS to the SBA, so they knew that there were no changes 
made.
    But like I said, as a victim, that would not be something 
that I would want to hear.
    Senator Landrieu. Senator Thune.
    Senator Thune. Thank you, Madam Chair. I thank you for 
calling this hearing. I think it is important that Congress, on 
an ongoing basis, take a look at things that we can learn and 
things that we can do better, and hearings like this one are an 
effective forum, I think, for Members of Congress to reflect on 
and remember the Gulf Coast disaster, and more importantly, 
give us an opportunity to better understand the mistakes that 
were made, and what steps have and still need to be taken to be 
better prepared for future disasters of all sizes.
    I do want to take a moment to thank Administrator Preston 
and the SBA for the work that they have recently done in my 
home State of South Dakota. I know that the severe storms and 
the tornadoes and the flooding that occurred this past year 
near Aberdeen, South Dakota do not compare in size or scope to 
the hurricanes that ravaged the Gulf Coast in 2005, but they 
nonetheless impacted families and businesses.
    And after visiting South Dakota following the flooding, 
there was no question in my mind that the assistance that came 
from FEMA and the SBA was crucial to the cleanup, to the 
repair, and the recovery for that area. So I am pleased to say 
that SBA has made available low interest disaster loans to 
homeowners, renters, businesses of all sizes, and private non-
profit organizations to help them rebuild.
    And while the last day to apply for disaster assistance 
does not close until next Monday, thus far, SBA has approved 
more than $16 million in low interest loans to South Dakota's 
residents and businesses in need. So I know that there are many 
South Dakotans that are very grateful for the assistance that 
they have received, both from FEMA and the SBA, and I would 
again thank the SBA and the Administrator for their help in 
that regard.
    I know that, with regard to the issue before us today, 
there has been a lot of work that has gone in to trying to 
determine the answers to some of the questions that were raised 
as a result of what we went through with Hurricane Katrina.
    And I guess what I would like to ask Mr. Thorson if his 
office did any audits on the handling of duplication of 
benefits, and if so, what were the findings on that?
    Mr. Thorson. That is something that we have ongoing as far 
as the duplications. And we have worked with the HUD IG as well 
on that issue. So it is something that is ongoing now.
    Senator Thune. So you do not have any findings currently 
that you can report about that?
    Mr. Thorson. Not at this time, no.
    Senator Thune. OK. The second question I have is, at the 
end of your testimony, you discuss briefly some of the 
indictments and the conviction that the criminal investigators 
made last year.
    Can you provide the Committee any more details about that?
    Mr. Thorson. On some, where the cases are closed, we can 
certainly provide the details. I do not have them with me 
today, but there are a number of cases that have been 
completely processed. We obviously do not talk about any 
ongoing criminal cases.
    We do work with the Justice Department and their Katrina 
Fraud Taskforce. We are a full partner in that effort, and the 
work that is being done down there is, in my opinion, 
outstanding. These are good people. The U.S. attorneys are 
exceptionally cooperative in that effort in trying to stick to 
a zero-tolerance policy, and we are making great strides down 
there to keep the money where it belongs.
    Senator Thune. Let me just, if I, Madame Chair, conclude. 
Again, I appreciate your holding the hearing. I thank the 
witnesses for their testimony, and I look forward to working 
with my colleagues on this Committee on this important issue 
and making sure that we are meeting the needs of future 
disaster victims, and obviously, hoping we can take a page out 
of the lessons that were learned with regard to this disaster.
    So thank you, Madam Chair.
    Senator Landrieu. Senator Snowe, do you have any additional 
questions before we move to the second panel?
    Senator Snowe. I think, given the time, I will submit my 
questions, thank you.
    Thank you all very much. We really appreciate it.
    Senator Landrieu. And I just have one.
    Mr. Thorson, how many criminal investigations have been 
prosecuted successfully? Can you at least mention the number?
    Mr. Thorson. Is it----
    Senator Landrieu. I am following up with Senator Thune.
    Mr. Thorson. The number?
    Senator Landrieu. The number. Can you at least testify----
    Mr. Thorson. I believe we had one conviction and, I think, 
nine indictments, is what I mentioned in the statement.
    Senator Landrieu. Nine indictments and one conviction-----
    Mr. Thorson. One conviction, and then----
    Senator Landrieu [continuing]. Two years later.
    And how many total applications did we have?
    Mr. Thorson. I----
    Senator Landrieu. Approximately.
    Mr. Thorson. I want to make sure I give you that number 
properly. It will not take long.
    Senator Landrieu. Ms. Martin, do you know approximately how 
many applications?
    Mr. Shear, approximately?
    I think it was between 400-500,000.
    Ms. Martin. Four Hundred twenty-two thousand was the number 
of applications associated with the three hurricanes.
    Senator Landrieu. Four Hundred twenty-three thousand 
applicants. We have one conviction and nine cases.
    I most certainly want to prosecute fraud, and I assure my 
colleagues we will. The greatest fraud was perpetrated by the 
Agency itself.
    Ms. Martin. Thank you. Yes, it was.
    Senator Landrieu. And I would just like to go on record at 
this Committee, I will go on the floor, the greatest fraud 
perpetrated was by the Agency itself.
    So please continue. I am sure you have to prosecute people 
who took money they should not have, but the real fraud is the 
failing of the Agency.
    Thank you and we will hear from Mr. Preston.
    Mr. Preston, we are happy to have this morning, and let me 
begin by saying that my experience so far has been that you are 
committed to change and reform.
    I want to say, for the record, that you have been very 
responsive to my office, and I thank you for that, but I will 
also say--based on the testimony this morning and the continued 
work that we are doing on this--that we have a long way to go.
    But if you would just begin with your opening statement, 
and then we will go through a round of questions.

 STATEMENT OF THE HONORABLE STEVEN C. PRESTON, ADMINISTRATOR, 
       U.S. SMALL BUSINESS ADMINISTRATION, WASHINGTON, DC

    Administrator Preston. Great, sure. All right. First of 
all, is the mike on? OK.
    Good morning. Thank you, Chairman Kerry, Senator Landrieu, 
Senator Snowe, Senator Thune.
    Thank you also for your kind words starting out. I would 
also like to thank Eric Thorson. He has been a good partner of 
ours at the Agency.
    Bill Shear has done some terrific work through the GAO 
report.
    And of course, Ms. Martin, it is never easy for a front 
line employee to come forward and testify in a situation like 
this.
    I would like to say, and I think this is very important, as 
I listened to the testimony and the answers today, there is a 
long timeline that has been discussed here. A lot of the issues 
that were brought forward in these discussions preceded the re-
engineering work that has taken place at the SBA. And so it is 
very important, when you think about what you heard today, I 
think, to put in it the proper context, because it is a 
different agency today.
    I came to the agency just over a year ago in July 2006. 
Prior to coming into the position, I took a trip to New 
Orleans, on my own time, to see and listen to the issues first 
hand; to see--like everybody, I think, who has been down there 
firsthand--what an incredibly devastating, overwhelming 
situation it was.
    So after coming into the job, my second week on the job, I 
went down to New Orleans. I went immediately to the processing 
centers where we process disaster loans. It was clear to me, at 
that time, that we had very significant operational and service 
issues, many of which you heard about today.
    Our staff was overwhelmed. I think our staff was losing 
heart. We had severe backlogs in a number of critical areas. 
Over 100,000 disaster victims were still in our process. And in 
order to tackle the greatest backlogs right away; we 
immediately reassigned staff to focus on those key areas.
    Then we undertook an extensive re-engineering effort to 
accelerate responsiveness to people in the Gulf, and to ensure 
a dramatically better response in the future.
    In order to get to the root of the issues, we interviewed 
our customers; we interviewed our employees, we talked to 
people in many of your offices. We gathered performance metrics 
that had not been gathered before. We hired a small team of 
experts in rapid results process improvement to support us.
    In August, armed with our findings and analytical support, 
I convened a meeting of 20 top Agency officials from our 
processing centers, from our disaster operations, and from 
headquarters. We started this session by listening to a video 
that I had our people make of our customers telling us about 
their stories.
    Some stories were good. They elaborated on how much money 
they had received, and how it not only helped them get their 
lives back, but it also helped others in the Gulf get services 
like daycare and taxi services.
    Others told us of the ongoing confusion and difficulties 
that they had experienced in dealing with the SBA, becoming one 
more source of despair, unfortunately, for many of them.
    At the conclusion of that meeting, we resoundingly resolved 
that the effort we were undertaking would be in the interest of 
the people we served: The disaster victims of America. That was 
our primary focus.
    Following this meeting, the team launched into a detailed 
redesign process that would involve totally redefining how we 
went about the business of making a disaster loan: To make it 
faster, to make it more efficient, and to become much more 
helpful to the customer, while also providing greater 
consistency from a perspective of standards and oversight.
    In September, a number of things happened: We physically 
moved 1,300 people and redesigned our workflow from a 
production line with backlogs, inadequate communication between 
functions and higher error rates, to case teams where loan 
officers, attorneys, and case managers worked collaboratively.
    Customers were reassigned to those teams based on the 
characteristics of their loans to ensure that they received 
high-quality service. Every borrower, for the first time ever, 
received a case manager--a single point of contact, a human 
being on their side who could help them.
    There were 33,000 customers at that point who had not sent 
in their closing documents. Most of them were past their 
expiration date. We did not have records from the borrowers 
indicating that they wanted to proceed. Previously, those 
people would have simply gotten a letter in the mail telling 
them that they were canceled and that they could reapply within 
6 months.
    Under our new process, these customers were assigned to a 
triage team in our Buffalo call center with the mission of 
getting people the help they needed, whether that assigning the 
customer to a case manager to assist in closing and 
disbursement, extending the closing date if the customer still 
was interested, but was not sure of his or her plan, or 
canceling the loan if the customer was no longer interested or 
responsive. The plan specifically stated that it was to ensure 
customer satisfaction at every point.
    Most people were contacted, and we proceeded based on the 
customers' wishes. In 9,000 cases, people were not ready to 
close, so we gave them a case manager to help them close. Over 
3,000 were ready--I'm sorry, 9,000 were not ready to close. We 
put them in a closing team. Over 3,000 were ready to close, so 
they got a case manager tailored to their circumstances. About 
4,000 requested cancellation and about another 4,000 requested 
an extension. That extension was granted. About 7,700 borrowers 
who were past their expiration date and who, according to our 
records had not requested an extension, received a cancellation 
letter which indicated that they could reinstate the loan for 6 
months.
    Because of our commitment to speak with those borrowers 
under the new system, a week after the campaign ended, we began 
calling all 7,700 borrowers again. We reached almost 5,000 of 
those borrowers. One thousand two hundred had their loans 
reinstated. As a result, they were given a case manager for the 
first time, and they were put on a path to disbursement of 
those loans on a much more accelerated basis.
    By Thanksgiving, the backlogs were largely eliminated, and 
our response time had dramatically improved. Along the way, as 
with any major change of a large operation experiencing 
tremendous challenges, we encountered unexpected challenges, 
but we have been able to address many of them quickly because 
of better metrics, better early warning indicators, much better 
communication across the Agency, coordination across functions 
and problem resolution teams.
    One of my biggest responsibilities as a leader is to try to 
keep an open line of communication with managers, front line 
employees, and most of all, our customers, not only to lay out 
the vision, but also to listen. I have done this by listening 
both to employees and customers. I go down to that facility in 
Fort Worth; I kick the managers out of the room, and I bring in 
people on the front line and listen to them. Every one of them 
has my e-mail address; a lot of them use it. I hear a 
tremendous amount of front line feedback, and that is an 
important way that we make changes at the SBA.
    Specifically, the issues in the Inspector General's report 
on collateral had persisted for some time. Those rose in 
prominence because of our re-engineering efforts. We had 
identified those. And as it noted in the report, today we have 
a new process in place to ensure better controls before 
closing, and we had made a lot of process by the time we got in 
there.
    Additionally, during a meeting with employees at the 
processing center, I learned that we did not have consistent 
standards that were being applied before disbursing loans. We 
are addressing those types of issues now through a renewed 
policy team, and better focus there.
    From talking to customers, we learned that many people in 
the Gulf Coast had loans that were not enough to cover the 
costs of repairing damages because of rising construction 
costs. We made adjustments to our estimates at the end of last 
year, and we put in place a process to expedite review of loans 
where people did not have enough money to increase the amount 
of the authorization.
    As both Louisiana and Mississippi became to roll out their 
CDBG grant programs, we needed to get information from the SBA 
to help them out. We knew we needed to be responsive to those 
important programs. We put in place a process which resulted in 
information requests being turned around in a matter of hours 
for both of those programs.
    Today, we not only have a redesigned closing and 
disbursement process, which we needed to complete our work in 
the Gulf, we have also redeveloped the way SBA responds to 
future disasters.
    On June 1 of this year, we presented you, the Committee, 
with a copy of our Disaster Recovery Plan. After months of 
deliberation, countless hours of work, we have documented the 
critical steps taken by the Agency to respond and recover from 
natural disasters of all levels. It includes a surge plan, 
which we have implemented. It clarifies personnel actions, 
space management plans, information technology matters, as well 
as an in-depth communication plan and coordination plan with 
external groups.
    It gauges the SBA network of district officers as never 
before, and it puts in place a model for much greater 
coordination with, and support from other governmental agencies 
and non-governmental support organizations.
    Our disaster operation has undergone dramatic 
transformation over the last year. It leaves the Agency in a 
significantly improved position to serve Americans in the 
future.
    I also have a couple of members of our staff here, if you 
have questions for them: Perry Pedini, from our Buffalo call 
center, which is a subject of one of the IG reports; Celia 
Horner, from our Fort Worth facility; and we also have Herb 
Mitchell here, who runs Disaster Assistance.
    I would also like to ask permission to have some letters 
regarding our efforts included in the record, one from the 
advisor to the president of the city council in New Orleans 
talking about our efforts, and one from Parish Clerk offices, 
talking about specific efforts that we have put in place to 
assist them with their work flow.
    Administrator Preston. Thank you.
    [The prepared statement of Administrator Preston follows 
with attached letters referenced above:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman Kerry. [presiding.] Thank you very much, 
Administrator Preston. We appreciate it.
    So help us understand--you have described an enormous 
amount of change, which we respect and certainly acknowledge. 
There have been a lot of changes. But the 90-in-45 campaign has 
obviously run into its rough spots; would you agree with that?
    Administrator Preston. I think a lot of what you heard 
today preceded that program. And I think what we did when we 
came in--first of all, it is a broader initiative. We call it 
the Accelerated Disaster Response Initiative.
    We had a 45-day initiative to call 94,000 borrowers who are 
somewhere in our system to find out what they needed and how to 
get them to the right place.
    Chairman Kerry. Why put a 24-hour curfew on that?
    Administrator Preston. Well, the 24-hour issue is something 
that came out in Eric Thorson's report.
    And the issue there was, we had 33,000 people that had 
expired loans. We had not canceled them, and we wanted to get 
to them to understand what to do. So a call effort was put in 
place to reach all of them, and instructions were to try and 
get to people in 24 hours.
    In retrospect, frankly, I would have preferred for it to be 
a week or several days. But you have to understand, if they 
didn't get called and they were past their expiration date, 
they got a letter that said, ``Your loan has been canceled. 
Contact us in 6 months if you would like to be reinstated.'' 
And then we recalled all 7,700 people and reached 5,000 of 
them.
    So when you look at that whole body of activity, there were 
very few people who ultimately were not reached. Now, the 
inconvenience is that there were about 1,200 people that we 
sent a cancellation letter to; then a week later we called them 
and they said, I didn't want to cancel. So that is where the 
inconvenience was.
    But what happened once we did contact them is they had 
never had a case manager before and they got an expedited 
closing and disbursement process. So they got put into the 
flow.
    Chairman Kerry. You contacted, I think, some 7,700-plus 
folks, right?
    Administrator Preston. We contacted in the campaign 94,000. 
Seven thousand seven hundred were the ones who were past due--
who were expired, that we couldn't get on the phone, and they 
got a cancellation letter.
    The instructions that we had given people----
    Chairman Kerry. Right, but of the 7,700 who were contacted, 
some 1,200 said, whoa, wait a minute. I still want my loan.
    Administrator Preston. Yes. Initially, we couldn't get 
them----
    Chairman Kerry. So what does that tell you about the rest 
of the universe that has not been----
    Administrator Preston. Well, out of the 7,700----
    Chairman Kerry. One thousand two hundred out of the 7,700 
said, I wanted to stay there. I assume there are a lot of 
people out there who have been canceled who do not want to be 
canceled.
    Administrator. Preston. Well the universe of people 
canceled that we did not reach during that call campaign was 
about 3,000 people.
    They got a letter. They got messages left for them 1 week. 
They got a letter saying, we are going to cancel you, but call 
us in 6 months if you want to reinstate. Then they got another 
call and, in most cases, had phone messages left for them.
    So that group of 3,000 people or so had several outreaches 
made to them, and we have not heard back from them, or if we 
have, we have reinstated them.
    Chairman Kerry. Is it accurate what the Inspector General 
asserts, that the standard letter notifying a borrower 14 days 
prior to cancellation was not sent?
    Administrator Preston. Yes. It was not sent because, in 
those cases, we allowed their expiration to elapse. We did not 
cancel them.
    Typically, what happens is, if your elapses in 2 weeks, you 
get a 14-day letter ahead of time. We were not canceling 
anybody's loans. We knew this situation was horrible, and the 
instructions that we gave our people were, do not cancel any 
loan until you talk to a human being, or you hear from them. 
And by virtue of calling these 94,000 people, that was the 
process we used to talk to them and get them to the right place 
in the organization.
    So when they didn't get reached-- OK, when we were not able 
to reach them, they were already past their expiration date. 
Rather than saying, your expiration date is coming in 14 days, 
we sent them a letter that said, effectively, your expiration 
has passed. Call us in 6 months if you would like us to 
reinstate.
    Chairman Kerry. Mr. Preston, when you first came in here 
for confirmation, we talked about what has happened to SBA over 
the course of the last years, and the Ranking Member, likewise, 
when she was Chair, beat on this significantly.
    I mean, it has been a source of concern to this Committee 
the degree to which the SBA budget has been reduced, and how 
that has affected personnel.
    Is it your judgment at this point, that the ability of the 
Agency to be able to respond to this has been affected by what 
has happened to that budget, to personnel over the course of 
the last few years?
    Administrator Preston. No. I think you all have been 
terrifically accommodating of this Agency through the 
supplementary budgets, as we have needed funds for these larger 
disasters. So most of our funding has not come through the 
typical budgeting process.
    Chairman Kerry. Except that you do not have a permanent 
staff in place to do the planning and put the procedures in 
place and guarantee that you do not have these bumps.
    Administrator Preston. We have staff in place that does 
that. We do not have a position that is called that, but we 
have teams of people that work on that everyday.
    Chairman Kerry. Well, if that is true, then why did Katrina 
get the response it got?
    Administrator Preston. Well, it is hard for me to--I do not 
think at that point the Agency had a surge plan in place that 
we do today that contemplated the type of requirement that we 
had.
    We had systems that could not handle it. We had 
dramatically fewer people on staff. We did not have plans in 
place to be able to ramp that large. We did not have back up 
facilities plans. We did not have a plan in place to engage our 
district network like we do today. We had many, many fewer 
reserve people trained as compared with today.
    So when you look at that--and I know your staffs have 
gotten a briefing on it--what you see in that disaster plan is 
something that is in place today with people, names, facilities 
listed, arrangements in place, work that has been done by our 
district offices. It is an entirely different concept around 
preparedness. And it is an entirely different concept around 
how we process a loan.
    Chairman Kerry. With respect to that Disaster Assistance 
Plan that you mentioned in your testimony also, were outside 
experts consulted in the formation of that plan?
    Administrator Preston. Yes. We worked with an outside 
consulting firm who is very well thought of in this area.
    We consulted with other outside organizations to look at 
their disaster preparedness plan. We showed our plan to a 
number of other Federal agencies to take a look at those.
    Chairman Kerry. Were the reports issued by GAO and SBA 
considered in that process?
    Administrator Preston. Yes. Now, the GAO reports really--
many of the issues addressed in the GAO report have been 
adjusted through the operational improvements.
    The big issue, I think, that the GAO report came forward 
with is to enhance our predictive capability which we have 
expanded through the use of modeling that is used in other 
Federal agencies.
    Chairman Kerry. And final question, or couple questions, 
the issues raised by Ms. Martin in her testimony, unless I 
misheard them, clearly apply to the 90-in-45 period of time.
    And it is pretty strong testimony that there was sort of a, 
``let's get rid of these; let's move these out attitude,'' and 
certainly her testimony at least, is that some superiors were 
clear and intent on that.
    What is your response to that?
    Administrator Preston. Well, I think one of the things she 
focused on a lot had to do with title documents. And this was 
exactly one of the things that Eric Thorson's report focused 
on, which was getting the paperwork together to close it and 
move it on.
    Eric's report showed that, in many cases, there was 
insufficient documentation in place on certain pieces of 
collateral. We think there are many circumstances that would 
support what we did in some cases, and other cases, we did not 
have what we needed.
    What I would tell you is the circumstances that she alluded 
to were highlighted in the 90-in-45 re-engineering initiative. 
And as part of that, the redesign of those processes were 
kicked off. They were not completed as part of the campaign, 
and I think she left in November of last year, so she would 
have left toward the end of the campaign.
    But today, the IG's recommendations in that area have been 
fully implemented, and the backlog of the problems that were in 
place are largely worked out.
    So frankly, I would love to have seen Ms. Martin's 
testimony a year ago when we were kicking this off, because as 
I have learned listening to these stories to see how people 
act, what their motivations are, and how it all fits together, 
is one of the best pieces of insight a leader like I can have 
as we look at fixing it.
    The other thing I want to mention is, before we changed 
this, we had a big production line effectively set up with how 
we did loans. If there were problems, often, they went down the 
production line. Backlogs occurred in many areas of that 
production line. There was insufficient coordination, and as a 
result--and there was no single point of contact for the 
borrower.
    When we totally redesigned this process to put in place 
case teams, it provided an opportunity for all these teams to 
work together to resolve these issues jointly, to improve 
coordination for the borrower, and then to give them a single 
point of contact.
    So many of the issues that she brought up, I can envision 
how they would have occurred under the old process, and even 
during the transformation of the process.
    Chairman Kerry. What about the last point, the important 
point that she made, I thought, about the intimidation and 
actual encouragement of the declining of the loan, or the 
withdrawal of the particular application?
    Do you think some folks just kind of--now, I am not 
directing this, but I know how bureaucracies work sometimes, 
how it can go up and down the chain of command, and some people 
can get overly enthused, or lazy, and/or--just in the course of 
business, want to get it done the simplest, easiest, fastest, 
least inconvenient way.
    Administrator Preston. Well, what I would tell you is, when 
it comes to the approval of a loan, those were prior to these--
I mean, loans had generally been all approved by the time we 
had kicked off this initiative. The issue was, the loans had 
been approved and they were not getting closed and out the 
door.
    I think you can appreciate, the Agency never came under 
attack for not getting the loans through the door. They came 
under attack for not disbursing loans. The only financial 
incentives that were in place in that facility had to do with 
disbursing loans. There was no incentive whatsoever, I think, 
for people to cancel loans.
    Now, the other thing I want to mention is Mr. Thorson's 
report dealt with the call campaign in Buffalo, Ms. Martin 
worked in Fort Worth. So those were different sets of 
activities. I can envision how somebody working on the front 
line with a team lead who wants to get through work can get 
heavy handed.
    She did make one comment that I thought was an important 
one. She said, we were--she used the comment, the number of 
files we processed. Prior to re-engineering this organization, 
a lot of what we looked at were things like files processed. 
Now, what we look at are things like, how long has it taken us 
to turn around a borrower request? How long are our backlogs in 
getting back to customers? We have details on every single 
borrower on why we haven't closed their loan. It is one of the 
reasons we found out people were having such a horrible time 
getting title documents, and we sent 12 people into the Parish 
Clerk's office in New Orleans Parish to help them with their 
backlog.
    So the types of things we measure are much more about 
customer response and customer wait times than they are about 
moving something through a process, because those old metrics, 
I think, focused people on the wrong things.
    Chairman Kerry. Can I say to you, Mr. Administrator, that I 
know from experience, and when you hear this kind of testimony, 
that--I have no question that you are trying to institute that 
change in the culture. I have no question of the bona fides of 
the reforms that you want to put in place, none whatsoever. And 
I think Ranking Member Snowe would agree with me, this is a 
very different hearing from the hearing we would have had with 
your predecessor.
    But I did hear Ms. Martin say that one of the measurements 
was still processing cases, and therefore, it just may be that 
what you are sending down the chain is not getting to every 
part of that chain, and I think it is important----
    Administrator Preston. I think that is great----
    Chairman Kerry [continuing]. To make sure the metrics are 
in fact----
    Administrator Preston. Well, I do see the metrics. And 
frankly Senator, I, in many cases, designed a lot of them 
myself.
    I would highlight that Ms. Martin has not worked at the 
Agency since last year--November. A lot has changed since then. 
There was an overlap during that 90-in-45.
    Chairman Kerry. So this fundamental change, you are saying, 
has been put in place since that period of time.
    Administrator Preston. A lot of the tracking tools were put 
in place through that campaign and are in place today.
    Chairman Kerry. Fair enough. I accept that. And we will 
obviously continue to work with you.
    I do want to express my appreciation for your willingness 
to come in here and be part of this. I think it is helpful, and 
I think we will all benefit. I- think the Agency can ultimately 
be stronger for it, but I certainly appreciate the way in which 
you have addressed the questions that we had before the 
Committee.
    Administrator Preston. Well, thank you. And once again, 
your staffs have been in the centers. Some of them have--we 
welcome, at any point, anytime your staff want to come down and 
talk to our employees, talk to--walk the floors and see for 
themselves.
    I think this is an exciting story about people who really 
care and who are working like crazy to be excellent service 
individuals for America's disaster victims.
    Chairman Kerry. Thank you.
    I will turn it over to Senator Snowe now. I need to go back 
to where I was, but Senator Snowe will close out the hearing at 
her discretion.
    Senator Snowe [presiding]. Administrator Preston, I want to 
thank you. I know it has been a difficult challenge that you 
inherited a little more than a year ago. When you became 
Administrator of the Agency, the disaster program required 
massive restructure. Regrettably, it wasn't working well at a 
very difficult time for the Gulf Region and for this country.
    We have heard testimony on a number of issues today, but I 
want to start with Ms. Martin's testimony.
    Obviously, it is troubling. She testified today on what 
took place in Fort Worth, Texas from December 2005 through 
November 2006, and I found her testimony deeply disturbing.
    Administrator Preston. Absolutely, yes.
    Senator Snowe. Have you ever heard of the types of episodes 
described in Ms. Martin's testimony?
    It does not matter when it happened, the fact is that it 
happened. Given what she has indicated, you need to be 
concerned that a culture might be developing.
    Administrator Preston. Yes.
    Senator Snowe. And I was just wondering, were you aware at 
all, of these kinds of charges?
    Administrator Preston. As I mentioned earlier, every 
employee has my e-mail address, and many of them use it.
    And so, periodically, I have gotten e-mails from 
employees--a number of months ago, I would say, I got a handful 
of e-mails from employees who indicated that decisions were not 
being made consistently in some cases. And usually what I would 
do is I would e-mail the person back and say, can you get me 
details on how that works.
    And what I did was I went down to the Fort Worth Center 
shortly after that, and I cannot give you the month, but it was 
early this year, and spoke to the employee base, and said--
which I have done a number of times before--and said, look, 
this is all about serving people. You are doing God's work 
here. Thank you so much, but let me tell you, if you ever have 
a concern, if there are ever issues, if you ever asked to do 
something that you do not think is appropriate, contact me.
    And then I also held a number of sessions with front line 
employees with no managers in them. And you might think that 
they may be intimidated by those meetings, but what I can tell 
you is they view it as just a great opportunity to vent.
    And what I learned was a couple of things. And probably 
most, I think, poignant of which was, we had consolidated four 
different centers. They did not all do business the same way. 
When they got consolidated there was inconsistency in certain 
practices; there was sometimes friction. And whereas a lot of 
the policies had been unified, they had not necessarily been 
adopted in the organization.
    So we put in place a policy and procedure team, asked them 
to redouble their communication efforts, and began taking what 
I had heard from employees to get that out there and ensure 
that was the case.
    I think the most troubling thing has to do with Ms. 
Martin's testimony was sort of the attitude and the view that 
potentially people were pounding their fist and it was just 
about production. What I can tell you is, in all the documents 
where we talked about the reforms, we consistently communicated 
to people that what was in the past was in the past. Let's look 
forward, and let's think about serving people compassionately 
and effectively.
    And what ended up happening was, when I would meet with 
case managers, they became the customer advocate. It was no 
longer about getting their stuff done. I would hear people 
saying, we have a practice over here that I am concerned is a 
problem. We really need to fix it. So I can envision how an 
organization, especially many people working 7 days a week, we 
had double shifts going, some of the facilities that they were 
in were not what you would call A-class facilities. I can 
envision how that could have happened in many cases. I 
absolutely could not comment on whether or not that was 
widespread in the Agency at that time.
    Senator Snowe. Did you issue instructions in conjunction 
with this new effort to accelerate the process and to make 
these 90,000 calls?
    Administrator Preston. Yes, we had----
    Senator Snowe. Did you issue instructions on how to conduct 
themselves and what the guidelines should be?
    Administrator Preston. We had call scripts, in fact, for--I 
was looking through it the other day, and it is interesting. I 
was looking through some of the e-mails from the Buffalo call 
center. And Perry Pedini is here, and Perry may not realize it, 
but I looked at an e-mail from him to his calling staff right 
around the time of the call campaign.
    Quoting from it: ``Thousands of disaster victims are 
relying on these funds to rebuild and complete their recovery. 
The importance of this project cannot be understated.''
    Some of our people were chomping at the bit to get these 
calling campaigns going. The head of our Fort Worth center sent 
Herb Mitchell an e-mail, wanting to get started. This is an 
extremely important task because it is going to define the 
universe of those who want to close and those who want to seek 
disbursement. And what happened is, after we determined that, 
we gave them their case manager and they got along the way. The 
call scripts provided different categories of customers and 
encouraged people to get them to the right place so that they 
could get the right kind of help.
    And then I was looking at the executive briefing document 
with the stated objectives for that particular call campaign: 
``Assign files to a loan team for disbursement. Extend loans if 
the customer is interested. Cancel loans if they are no longer 
interested or responsive. Ensure customer satisfaction at every 
interaction.''
    So the communication that was going out--and certainly the 
culture we have been trying to build in the organization is 
much more about customer-facing. And if you look on many of the 
walls in the SBA, you will see the second point--there will be 
four points, customer-focused.
    Senator Snowe. So has that been translated there? I mean, 
are you sure that no longer exists?
    Based on what you have heard here today, how do you follow-
up?
    Administrator Preston. Oh, certainly how I would follow-up 
is----
    Senator Snowe. I want to make sure, because obviously, 
given the circumstances, you want to make sure that this does 
not continue to exist.
    Administrator Preston. Yes.
    Senator Snowe. I mean, it wasn't just several calls, it was 
many calls.
    Administrator Preston. Yes.
    Senator Snowe. So I think it is important----
    Administrator Preston. Absolutely.
    Senator Snowe. The people, especially given the devastation 
that they faced, it is hard to imagine having their 
circumstances further compounded by a horrible call from SBA 
demanding that they respond immediately with all of their 
information.
    So I am just wondering, how you know that has changed?
    Administrator Preston. I think, certainly what I think I 
will do following this hearing is to make sure to convene the 
leaders in that organization to go through the issues, go 
through the concerns.
    I have--I will tell you, I have talked to many of them one-
on-one to say, what do you think the mind set was at the time? 
What do you think people are going through? I have heard people 
say, where we were a year ago, it is a different place today. 
It is a different feeling. It is a different level of morale.
    I think you also have to understand----
    Senator Snowe. I think that these are specific cases.
    Administrator Preston. These are specific cases.
    Senator Snowe. Yes. So I think that it is important to get 
to the specifics of the issues that Ms. Martin raised with 
those who work there, it seemed to be the norm rather than the 
exception at that moment in time.
    I just think it is important to make sure what happened--
and I know Mr. Thorson will be looking at it, but just to make 
sure it doesn't happen again.
    Administrator Preston. Absolutely.
    Senator Snowe. We need to find out what transpired and all 
the details associated with it, because it really is important. 
You do not want that episode to be repeated. You really should 
find out why.
    Administrator Preston. Yes. Although I would emphasize one 
more time. Many of these circumstance, many of these 
circumstances preceded the re-engineering work we have done.
    But I think your comments are absolutely on target, 
Senator.
    Senator Snowe. Yes, because it was November of 2006 that 
Ms. Martin was referring to. So that is not all that long ago.
    How many outstanding loans do you have now?
    Administrator Preston. In the Gulf, we have got--I might be 
off by 1,000 or so, but about 17,000 that are in the process of 
getting disbursed, and about 1,000 that have not been 
disbursed.
    Those are generally situations where people have taken 
initial disbursement and just do not know yet what they are 
going to do. So we call them regularly.
    I have to tell you, I was in New Orleans a few weeks ago 
doing an on-camera piece, and the cameraman and the producer in 
the studio came up to me and said, you guys are professional. 
You guys are terrific to deal with. I have never seen this from 
a Federal agency before. And as they described the 
circumstances that they had in dealing with us, it was--I 
really felt like I could envision how the changes we have made 
had begun to take. And that is why I think it is so important--
I have a couple of letters from officials in New Orleans that 
are on the ground.
    Senator Snowe. I appreciate that, and I think that is 
critically important in making that turnaround, given as I 
said, the enormous undertaking that it requires--the thousands 
and thousands of loans, and all the other issues related to it.
    And speaking about the SBA's 6 month reinstatement policy. 
Now, I gather that if they do not get their loan reinstated 
within 6 months they are limited in terms of Federal assistance 
they can receive once they reapply?
    Administrator Preston. No. What we have done is we have 
extended that another 6 months. And our practice right now is, 
if people call us, we extend them. So we have continued to be 
very flexible with the Katrina situation.
    We get a handful of people everyday that call us up, and we 
reinstate them.
    Senator Snowe. And what is it that they are required to do 
in order to be reinstated, to have all of their information 
verified?
    Why should they go through that process once again?
    Administrator Preston. Well, what we ask for to reinstate 
them is--we ask for a form that allows us to get information 
from the IRS to see if there is a new tax form.
    And our policy right now--although in other situations we 
have required more documents--is simply to ask people to give 
us their signed promissory note and their loan authorization, 
and if they can just do that we will reinstate them. So it is a 
relaxed standard right now.
    Senator Snowe. OK. And if their loan was improperly 
canceled by the Agency----
    Administrator Preston. Oh, they can call us up today, and 
we will reinstate it.
    Senator Snowe. You will?
    Administrator Preston. Yes.
    Senator Snowe. Without a reverification process?
    Administrator Preston. Well, if their circumstances have 
changed dramatically--what we need to do is get updated tax 
information, but we do that--we get that from the IRS.
    And I, unfortunately, cannot speak to the circumstance that 
Ms. Martin mentioned that--right after the storm. I am just not 
familiar with it.
    We are also working with the IRS to try to increase the 
level of automation between our two agencies to get that more 
seamless.
    Administrator Preston. I will tell you Senator, a lot of 
our letters are drafted by attorneys, who want to make sure the 
letter of the law is followed. And we have, in many cases, 
looked at some of these letters and try to make the language 
softer and more compassionate to the borrower.
    Senator Snowe. I know that Mr. Thorson mentioned something 
about $1.5 billion worth of loans were given to those high-risk 
individuals that should really, essentially, go into FEMA.
    And also we heard in testimony here today that FEMA 
actually referred many disaster loan applications to SBA that 
represented a high risk, as well.
    Administrator Preston. Yes.
    Senator Snowe. Is there a way of working together on this?
    Administrator Preston. There are two things there, and both 
of them have been taken care of.
    One of which is our interaction with FEMA during the storm 
was not what it needed to be. And so we have simplified and 
approved the process of getting people to us from FEMA, and I 
can go into that a little bit more chapter and verse.
    The issue that Mr. Thorson brought up was, shortly after 
the storm. To accelerate the loan approval process, the Agency 
rolled out a pilot where the approvals were based much more 
heavily on credit scores. So they didn't do as much analysis of 
their financial information.
    As a result, the IG audit report showed that a lot of 
people that were approved at that time would have been unlikely 
to have been approved under our more detailed cash-flow 
analysis process.
    That pilot was discontinued, and we now have in place a 
methodology that does more extensive work. His numbers 
extrapolated that to about $1.5 billion in loans.
    Senator Snowe. Now, in his testimony today, in mentioning 
all the loan cancellations, the expedited loan program, the 
lack of collateral, sufficient collateral--all those issues--
have they all been addressed so far?
    Administrator Preston. Yes. The collateral issue has been 
addressed. The expedited loan process has been addressed. I 
think we have talked about the cancellation--the 1,200 people 
that got a cancellation letter and then we reinstated. I do 
want to mention that is fewer than 1 percent of our approvals, 
although anybody who is disrupted is a problem.
    And there was one other, which is a new report on the 
quality review of the loan verifiers--or the loss verifiers, 
rather--that we have just gotten, and we need to look into.
    That is more about having a good process in place for 
internal oversight than financial risk or customer service.
    Senator Snowe. Is SBA prepared to handle a similar 
situation in the future? Hopefully we do not have one.
    Given the lessons learned, are you prepared?
    Administrator Preston. I remember very clearly----
    Senator Snowe. Would you say that SBA is prepared to handle 
another catastrophic disaster?
    Administrator Preston. Yes. I remember very clearly our 
first meeting when you said this was an opportunity for the 
Agency to shine, and they did not.
    I would say, I think the Agency has shined in the last 6 
months. And I want to say the very people who were leading that 
Agency during that period of time and who were overwhelmed are 
the ones, I think, that have rallied and really put this Agency 
on the right track, and I am very proud of them.
    I would also tell you--and I know some of your staff who 
were over in our briefing, when you look at how we are ready 
for whatever may happen, it is a very clear pathway with very 
clear understanding of how we get there in terms of people, 
facilities, technology, and coordination. We already have every 
one of our district offices with contact plans for local and 
State officials filled out and completed and ready to go. We 
are training 400 people in our own field; about half of that 
has been done.
    So a lot of what we have talked about has been getting the 
funds in the hands of people in the Gulf, but at the same time, 
we have taken all those lessons learned and designed an 
entirely different way, not only to process, but to plan and 
implement a surge.
    So you know, I think we are in a very, very good position 
today as a result.
    Senator Snowe. I appreciate it.
    Well, I thank you, Administrator Preston, and I know it has 
been a significant effort on your part and those at SBA, and we 
are pleased to hear that you are making some major reversals 
from where we were from the onset in the aftermath of Hurricane 
Katrina.
    Administrator Preston. Thank you.
    Senator Snowe. We really appreciate it. And we want to work 
in a constructive fashion to resolve any of the additional 
questions, the issues that Ms. Martin raised----
    Administrator Preston. Right. Absolutely.
    Senator Snowe [continuing]. To get this right for now, and 
for those who have been directly affected by any improper 
decisions or behavior.
    And then, second, to make sure it works well in the future.
    Administrator Preston. Yes.
    Senator Snowe. Hopefully we do not have to utilize this 
disaster response, but if we do, the SBA is now in a position 
to shine at a time in which people are facing some very 
troubling situations, as we saw in the Gulf 2 years ago.
    Also, I hope we get to pass a disaster loan package through 
the Senate as quickly as possible.
    Administrator Preston. Thank you, yes.
    Senator Snowe. We appreciate your expressions of support 
for this legislation, and hopefully we can overcome some of the 
objections of our colleagues here in the Senate, because 
clearly, this package has been thoroughly evaluated and 
examined over the last year-and-a-half when we first initiated 
that effort here in the Committee. It was part of the overall 
reauthorization. Not much has changed. It passed unanimously 
then, and it has passed the Committee again under the 
Chairman's leadership, and it is unfortunate we have not moved 
this forward.
    And anything that you can do to assist in that effort, we 
greatly appreciate.
    Administrator Preston. Thank you, yes.
    You should also know that we have already begun to work on 
some of the provisions in the bill in contemplation that it 
will pass. And I also want to say your staff, Senator Kerry's, 
Senators Vitter's and Landrieu's staffs have been terrific 
partners of ours in understanding the issues in the Gulf, 
getting us to the right people, and giving us great insights 
along the way. So I cannot tell you how much I appreciate that.
    Senator Snowe. Well, thank you.
    This hearing is adjourned, but the Committee will leave the 
record open for 2 weeks for any additional comments and 
questions.
    [Whereupon, at 12:17 p.m., the hearing was adjourned.]












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