[Senate Hearing 110-590]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-590

    HOLDING THE SMALL BUSINESS ADMINISTRATION ACCOUNTABLE: WOMEN'S 
                    CONTRACTING AND LENDER OVERSIGHT

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

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP



                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                            January 30, 2008

                               __________

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


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






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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                       ONE HUNDRED TENTH CONGRESS

                             SECOND 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

                              ----------                              
                                                                   Page

                           Opening Statements

Kerry, The Honorable John F., Chairman, Committee on Small 
  Business and Entrepreneurship, and a United States Senator from 
  Massachusetts..................................................     1
Snowe, The Honorable Olympia J., Ranking Member, a United States 
  Senator from Maine.............................................     7

                           Witness Testimony

Preston, The Honorable Steven C., Administrator, U.S. Small 
  Business Administration, Washington, DC........................    10

          Alphabetical Listing and Appendix Material Submitted

Kerry, The Honorable John F.
    Opening statement............................................     1
    Post-hearing letter to Steven C. Preston, SBA................     4
    Letter to Steven C. Preston, SBA.............................    77
    SBA response to letter.......................................    79
    Questions posed to Steven C. Preston and subsequent responses    79
Landrieu, The Honorable Mary
    Prepared statement...........................................    48
Lieberman, The Honorable Joseph I.
    Post-hearing questions posed to Steven C. Preston and 
      subsequent responses.......................................    63
Preston, The Honorable Steven C.
    Testimony....................................................    10
    Prepared statement...........................................    14
    Responses to questions from:.................................
        Senator Kerry............................................    52
        Senator Lieberman........................................    63
        Senator Pryor............................................    66
        Senator Snowe............................................    68
    GAO reports and recommendations..............................    84
Pryor, The Honorable Mark
    Questions posed to Steven C. Preston and subsequent responses    66
Snowe, The Honorable Olympia J.
    Opening statement............................................     7
    Chart, SBA rule..............................................     8
    Questions posed to Steven C. Preston and subsequent responses    68

 
    HOLDING THE SMALL BUSINESS ADMINISTRATION ACCOUNTABLE: WOMEN'S 
                    CONTRACTING AND LENDER OVERSIGHT

                              ----------                              


                      WEDNESDAY, JANUARY 30, 2008

                      United States Senate,
                    Committee on Small Business and
                                          Entrepreneurship,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:06 a.m., in 
room 428-A, Russell Senate Office Building, the Honorable John 
F. Kerry (chairman of the committee) presiding.
    Present: Senators Kerry, Levin, and Snowe.

  OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, CHAIRMAN, 
              SENATE COMMITTEE ON SMALL BUSINESS 
       AND ENTREPRENEURSHIP, AND A UNITED STATES SENATOR 
                       FROM MASSACHUSETTS

    Chairman Kerry. The hearing will come to order. I 
appreciate your patience. We have another hearing in the 
Finance Committee and then we have a markup this afternoon, and 
both Senator Snowe and I are on that, so we are sort of trying 
to juggle things a little bit here. I appreciate it, and 
Administrator, thanks for being here. We really appreciate it. 
Happy new year to you and to others we haven't had a chance to 
say it to.
    This is the first hearing of the Small Business Committee 
for the Second Session of the 110th Congress. Last year, we had 
a pretty aggressive hearing schedule. We had 14 hearings, 4 
roundtables, 4 markups, and in fact, the Committee--I don't 
know if this is good or bad, but we wound up setting a new mark 
for the number of meetings in 1 year. I am not anxious to have 
meetings for the sake of having meetings, and I don't think 
Senator Snowe is either. But there is a certain amount of 
business that is just pent up and a necessary amount of 
oversight that we need to do.
    I am very appreciative for the continuous, consistent 
support of the Ranking Member in these efforts. There is very 
little that we haven't done that we haven't worked on jointly 
and in a bipartisan way in the whole committee. It is a great 
tradition of this committee and I really appreciate her 
partnership in this effort.
    I am also glad to report that the Committee did make 
significant progress on a number of issues. We reported out six 
bipartisan small business reauthorization bills. We are going 
to continue to work to fully reauthorize those programs and the 
Small Business Innovation Research Program, which expires on 
September 30.
    I am also glad to report that working with other committees 
of jurisdiction, which we have done, I think, fairly 
effectively, we have provided the first real increase in 
funding for small business programs since 2001. We have also 
cut taxes for small firms. We have increased transparency in 
contracting at TSA. We have passed legislation to help small 
firms become more energy efficient. And we have expanded 
research and development opportunities for small firms.
    But as we know, there is still a lot yet to do, and right 
now, our focus is on trying to help some of these small firms 
through very tough economic times.
    Just last week, Senator Snowe and I each introduced small 
business stimulus bills. I guess it is an advantage that we 
both also happen to be on the Finance Committee and we are able 
to work both sides of that, tax and small business. We are 
supporting proposals to expand small business expensing and net 
operating loss carry-back provisions and also to provide 
significant tax incentives for small business. The Finance 
Committee is going to be marking that up this afternoon and I 
am pleased that we will see the inclusion of small business tax 
provisions in the stimulus that are going to help spur business 
investment and free up capital to create jobs and expand the 
economy. The legislation I put forward, cosponsored by 
Committee Members Levin and Landrieu, will also encourage 
government-backed lending.
    Today, this is an accountability hearing to follow up on 
the issues from various hearings which we agreed we would come 
back and revisit, and in which the Administrator and/or 
representatives of the agency said this would be the time by 
which certain things would be in place and we would be able to 
sort of take stock. So I appreciate the opportunity to do that, 
particularly on matters as diverse as energy guidelines, 
disaster reform, lender oversight, and contracting. I 
appreciate the Administrator being here to help us in that 
process.
    One of the central focuses of today's hearing will be the 
Women's Procurement Program. I think it is fair to say, Mr. 
Administrator, that we are deeply concerned. I haven't actually 
had a chance to talk at great length with Senator Snowe about 
it, but I know through the staff discussions that there is a 
lot of concern on the Committee about this rule. It really 
presents some very serious concerns to the Committee, to be 
honest with you. In fact, some people see it as just a rank 
affront to the engagement of women in the business world today.
    We as a Congress determined some time ago that it was 
important to make certain that women have an equal opportunity 
to be able to provide their goods and services to the Federal 
Government. It is an enormous procurement opportunity, and it 
has taken 7 years of pushing in a bipartisan manner from this 
committee, completely bipartisan--this was put in place in the 
year 2000--asking for a rule to implement the means by which 
administrators can set aside a specific amount of contracting 
for women businesses.
    Out of the 140 industries, more than 2,300 contracting 
categories, the SBA is now suggesting that there are only 4--
only 4--that are underrepresented by women. Now, women-owned 
businesses account for over 30 percent of all firms, yet they 
get only 3.4 percent of Federal contracting dollars, far short 
of the 5 percent goal that we set. I think we feel very 
strongly that that goal is not an unachievable goal and it is 
not a phony goal. It is something that really ought to be 
achieved. It ought to be exceeded, if not met.
    So we really believe here that this ought to go back to the 
drawing board and we ought to come up with a workable rule that 
people can get behind. I have written a letter to the 
administration outlining my objections to the proposed rule in 
a more formal way. I will make that letter available to the 
entire committee.
    [The letter of Chairman Kerry follows:]
    
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Kerry. I hope the Committee will join me in 
sending a message regarding this rule, and we will come back to 
that, obviously, in the question period.
    We are also going to follow up on the lender oversight 
issue. The BLX $76 million loan scheme showed that SBA needs 
oversight--we need to understand where we are in making the 
oversight process more effective.
    The subprime mortgage problem is affecting all aspects of 
our economy. It is one of the things we are trying to address 
in the stimulus package today, if we can, with a mortgage 
revenue bond proposal that Senator Gordon Smith and myself and 
others have put forward. In my travels around my State, I am 
talking to mayors who are seeing their property tax base shrink 
as they go through hundreds of foreclosures. In Brockton, 
Massachusetts, about 1,200 foreclosures are staring them in the 
face, and that just rips the community apart. It affects the 
schools, it affects public safety, and it affects the tax base 
for all of their efforts.
    We need to deal with that. It is an example of why catching 
lender fraud at the early end is such an important effort, more 
important even than it was when we met on this issue several 
months ago. The SBA is responsible for some $50 billion in 7(a) 
and 504 loan guarantees and we need to make certain that the 
basic changes that make a difference in protecting the taxpayer 
are in place.
    Also, we want to make a few inquiries about the overall 
redaction issue that we discussed last time regarding the 
Inspector General's report on the SBA oversight of BLX based on 
the basic belief that the public deserves as much transparency 
as possible to facilitate a legitimate understanding of what is 
happening. Unnecessary secrecy just thwarts most of the goals 
of the Congress and the Committee and the country in that 
regard.
    There are several other issues, including the Gulf Coast 
disaster reform, making sure the SBA is helping small firms to 
become more energy efficient, and we look forward to talking 
about the Women's Business Centers Renewal Grants Program. I 
might add that, Mr. Administrator, everything that I have heard 
is very positive in that vein and we really want to 
congratulate you and your Deputy Administrator. We have had 
tremendous positive feedback from the centers around the 
country who really feel there has been a terrific take-up on 
that, so we really congratulate you on that and thank you for 
that. That sort of represents the good upside that everybody 
looks for in this kind of effort, but we thank you for that.
    I know that the funding issue from Congress last year 
created some of your own issues, and obviously we hope that 
that can be improved. The Senate passed a higher amount. The 
House did not. We wound up with a lower amount from the House. 
So I think the Senate acted in good faith on it and we hope we 
can try to upgrade that this year.
    This is a particularly important time. In all the years I 
have been on this committee, I guess about 23 years now, we 
have had ups, we have had downs. We have been able to weather 
them. But always, the SBA has been an important leverager in 
that effort and can be very, very important to whatever 
recovery efforts we initiate, so we look forward to working 
with you on that, and again I thank you.
    Senator Snowe.

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

    Senator Snowe. Thank you, Mr. Chairman. Thank you for a 
very productive year, as you indicated, on issues that are so 
critical to small business. I also thank you for starting off 
this year with vigorous oversight on some of the key small 
business programs that we discussed in our oversight hearings 
last year. This obviously reflects a strong mutual commitment 
to ensure accountability on many of these programs.
    I welcome the SBA Administrator, Mr. Preston, for being 
here today before the Committee to answer all the questions and 
for his commitment to honor those programs that we discussed 
last year, particularly in the contracting programs, lender 
oversight, and the issues that the Chairman also cited. Our 
economy couldn't be more fragile, couldn't be more front and 
center on our agenda, and that is why I am pleased, Mr. 
Chairman, that we were able to include the small business 
expensing provision and extending the net carry-back of 
operating losses from 2 to 5 years that is in the Chairman's 
mark that is pending before the Finance Committee today. That 
is an important way to ignite job creation in this country, by 
allowing small businesses to have access to more capital for 
investments and stimulating the economy.
    I am concerned about the Small Business Women's Contracting 
Program, and the implementation of it, through the rulemaking 
process that is pending. I've had discussions with you, Mr. 
Administrator, when I addressed that the SBA has an opportunity 
to hit a home run with respect to this rulemaking process and 
implementing the contracting program and the set-asides for 
women's contracts by women-owned businesses.
    Frankly, I am concerned that the rule would have little, if 
any, measurable benefit given the way it has been structured. 
It is a law that was enacted back in 2000, long before your 
tenure. We have had numerous hearings. We had two proposed 
rules, three reports, and it appears that we are no closer 
today than we were then with respect to developing an equitable 
approach to contracting for women-owned businesses and helping 
them to access Federal agencies, contracts and the hundreds of 
billions of dollars that are available to them.
    So I feel that the rule is deficient and unlikely to have 
any practical impact in helping the government satisfy its 5 
percent goal, which is ultimately our purpose. And as you can 
see here with the chart, it indicates that the gross disparity 
means that only 1,238 businesses really will be affected by the 
rule that is now pending, and during this comment period, 
hopefully we can put forward some of our own suggestions. 
Hopefully, we can get this modified. Only 2 percent out of the 
55,000 businesses, only 1,238 businesses that are women-owned 
would benefit under this rule, and, in fact, only 2 in my home 
State, of the hundreds of businesses that are women-owned 
businesses. I know you discuss some of the issues, and 
hopefully you can get into the methodology that was utilized, 
because I think it is important.
    [See chart attached:]

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
        
    But secondly, when this proposed rule goes into effect, 
Federal agencies must admit to a history of gender 
discrimination, and I find it difficult if not impossible to 
envision a scenario where a Federal agency would make such an 
admission. It certainly isn't required anywhere in the Small 
Business Act, and again, it could be one other barrier to the 
full implementation of an equitable rule.
    This Women's Contracting Program isn't new. We have 
repeatedly insisted that it be implemented. It has been seven 
long years, and unfortunately, through our countless efforts, 
it isn't until now, and I thank you for at least honoring your 
commitment as you told this committee that you would propose a 
rule. But I hope that ultimately we can find some ways to 
modify that rule and promulgate a final rule that would be far 
more equitable for women-owned businesses.
    It is too limited, as is indicated by this chart, and also 
I think it just doesn't get the job done in maximizing the 
effectiveness for women business owners and an entrepreneurial 
climate that is more conducive to grow. If there is any time to 
secure new avenues to generate revenue for the economy, that 
time is certainly now.
    And so I hope that we can begin to modify the rule. I am 
certainly going to submit comments, and hopefully in 
conjunction with the Chairman, as he indicated, or introduce 
legislation--that is one step in the process that is a much 
lengthier process to get that done--so that we make a real 
difference, not just a 2-percent difference. I think that there 
were many ways in examining the methodology that was used, 
there were many more options for measurement that would have 
delineated the number of industries that are women-owned that 
are underrepresented in the contracting process.
    Frankly, we should modify the test. I am talking about this 
past discrimination as a prerequisite for participation. And we 
also should substantially broaden the range of applicable 
business industries for women across this nation and eliminate 
the unnecessary barriers that have been recently proposed under 
this contracting rule.
    It is important and incumbent upon the Small Business 
Administration to satisfy this commitment that was made to our 
committee through the five oversight hearings with respect to 
this rule and to the other lender oversight issues that have 
been raised. One was the implementation of the Women's Business 
Centers Renewable Grant Programs that the Chairman and I along 
with Senator Sununu made permanent last year as part of the 
emergency supplemental.
    We also heard testimony from the SBA's Inspector General 
and former SBA staff regarding the problems surrounding the SBA 
Office of Disaster Assistance, and so we are anxious to hear 
what progress has been made on those questions.
    And also, the Energy Policy Act of 2005 directed the SBA, 
working with the EPA and other agencies, to develop the Small 
Business Energy Clearinghouse to assist small businesses in 
becoming more energy efficient, and it has been more than 3 
years since this requirement went into effect, and yet 
additional energy legislation had to be passed last month to 
compel SBA to fulfill its obligation under law.
    So I think that these are some of the issues that we need 
to address here this morning and to follow through in 
implementation and to make sure that it is consistent with the 
spirit of the law and the intent of the law. Some of these 
issues are long overdue, and as I said, it certainly predated 
your tenure. But hopefully we can work together as partners to 
mitigate some of these issues and to resolve the litany of 
issues that we are going to discuss here today, which are 
hindering our nation's small businesses at a difficult and 
challenging economic time.
    And so I hope that we can be more collaborative in that 
process and trying to make sure that small businesses are able 
to thrive and increase access to capital through the loan 
programs, which have also seen a decline in that respect, and 
the number of lenders have declined, as well. So there are an 
array of issues that I think that we have to address here this 
morning and hopefully that we can forge a partnership for this 
year in addressing these issues, and most especially, first and 
foremost, is to modify this rule during this comment period, 
which is scheduled to close, I gather, on February 25.
    So I thank you, Mr. Chairman, and I sincerely hope this 
will be a turning point for working out these issues and 
becoming a partnership and making substantive differences on 
these and other issues that are important to small businesses. 
Thank you.
    Chairman Kerry. Thank you very much, Senator Snowe. I 
appreciate your comments enormously.
    Well, Mr. Administrator, I think you have got it sort of 
outlined, some of the concerns, and we welcome your testimony.

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

    Mr. Preston. Thank you very much. Thank you for inviting 
me. I have reiterated it many times, but Senator Snowe, I 
appreciate your request for a partnership. Any time we can come 
up and brief you, work through these issues, we are happy to do 
it, and I know recently we had our team up here briefing the 
Committee staff on lender oversight.
    The proposed rule that will implement the Women-Owned Small 
Business Federal Contracting Procedures has been published in 
the Federal Register. It is currently in the 60-day comment 
period. SBA has been and remains committed to implementing the 
statutorily authorized set-aside for the program.
    I would also like to take this opportunity to discuss SBA's 
ongoing efforts to improve lender oversight in our loan 
processing centers in Herndon as well as Sacramento.
    Let me start by discussing the Women's Procurement Program. 
Based on nonpartisan guidance that we received from the 
National Academy of Sciences, the RAND Corporation conducted a 
statistical review to determine underrepresentation for women-
owned small businesses in Federal contracting. RAND 
recommended--or, excuse me, NAS recommended considering a 
variety of data sources and methodologies in order to gain a 
broad perspective, but in addition, they provided much more 
specific guidance based on solid reasoning that weighed heavily 
in our thinking.
    First, NAS indicated that greater weight should be given to 
measures based on contracting dollars going to women-owned 
small businesses rather than the numbers of contracts. In 
addition, NAS emphasized the importance of considering more 
detailed industry information, which is represented by four-
digit North American Industry Classification System codes, 
NAICS codes, rather than the very broad industry 
classifications. They also highlighted the need to demonstrate 
that businesses were ready, willing, and able to perform in 
Federal contracting.
    To determine underrepresentation and substantial 
underrepresentation, RAND identified 28 possible approaches 
that considered data in the Central Contractor Registry, the 
Federal Procurement Data System, as well as the Survey of 
Business Owners from the 2002 Census. After careful 
consideration of the remaining approaches and in keeping with 
the direction of NAS and RAND, SBA adopted the approach that we 
believe best captured the most appropriate measures based 
heavily on the guidance we received from those institutions.
    First, based on the NAS comments and the need to align our 
findings with Federal policy, we did use measures that 
considered contract dollars going to businesses rather than 
numbers of contracts. Clearly, the goal of the statute is to 
achieve 5 percent for women-owned businesses in terms of 
contract dollars. Getting revenue from contracts is what 
creates business value. The entire appropriations budgeting 
contract and the accounting process in the Federal Government 
is also based on dollars.
    Second, NAS guidance is clear that SBA should use NAICS 
code levels that more clearly disaggregate between industries 
performing similar activities. SBA determined that the four-
digit NAICS code level best met these criteria. Only the CCR 
data provided the detail at the four-digit level. SBO data was 
only available at the two-digit level. In addition, only the 
CCR data base gave us women-owned small businesses. SBO data 
compiled them with businesses that didn't meet the small 
business standard. NAS also questioned whether SBO data would 
be characterized as ready, willing, and able since it 
represented all companies in the economy rather than those 
signed up to do contracting through the CCR.
    Frankly, I and many people on my team were surprised by the 
results of the study. We learned that those women-owned small 
businesses registered in the CCR actually generally receive a 
higher percentage of revenue from Federal contracting dollars 
than other businesses and that the data only showed 
underrepresentation in four NAICS codes, and that is four out 
of the 140 that they studied, and I want to avoid any confusion 
with 2,000 industries. This is four out of 140. The 2,000 
relates to some different issue.
    According to the study, once women in small businesses 
register to do business with the Federal Government, they 
received a higher percentage of their gross receipts from the 
Federal Government compared with others in their industry 
sector. The study indicates that the real issue, we believe, is 
an increase in the number of women-owned small businesses who 
compete for government contracts. Our goal at the SBA is not 
only to develop regulations implementing these procedures, but 
also to help women-owned small businesses so that they can 
compete both in the private marketplace as well as for Federal 
contracts.
    In 2007, SBA began an initiative to more effectively assist 
small businesses interested in doing business with the Federal 
Government. We have realigned our field staff. We provided them 
with additional training so that they are better equipped to 
help advise, train, and counsel small businesses so that they 
are then, in turn, equipped to do the marketing necessary to 
find procurement opportunities. I think we have made a 
tremendous amount of progress.
    In 2006, contract dollars going to women-owned small 
business reached a record level, $11.6 billion. In addition, 
women-owned small businesses experienced the largest growth in 
history in any single year since the goal was established at 
$1.5 billion. The amount of contracting dollars going to women-
owned small businesses is more than 2.5 times what it was in 
2005 and has grown almost 17 percent per annum since that 
period of time. Subcontracting dollars were over $10 billion 
and represented about 6 percent of subcontracting dollars.
    We are taking a forward-looking approach. First, our 
programs are all tasked with growing the universe of women-
owned businesses and encouraging these businesses to register 
in the CCR, which makes these businesses eligible to contract 
with the Federal Government. In addition, the role of the SBA 
is to help those businesses become ready, willing, and able to 
undertake and build a successful track record, and we have done 
a number of things. We have provided our entire field 
organization this past summer with a full week of training to 
help them become more effective in outreach and training. We 
have rolled out a new technology to help other agencies easily 
find women-owned small businesses to help them meet their 
contracting needs. We have established outreach goals for all 
of our offices throughout the country and we are holding 
Federal agencies accountable through the scorecard.
    We also have a number of exciting initiatives planned for 
the next year. We expect to participate in over 500 
procurement-related activities, additional training and 
matchmaking events in the field, additional online courses on 
Federal procurement, realigning our field staff to focus on 
business development and identifying contracting opportunities, 
as well as continue to increase accountability for Federal 
agencies.
    You know, I think our view here is that there is no one 
single approach that is going to expand participation of women-
owned small businesses but rather a combination of initiatives 
that take into account the individual needs of the businesses 
and the best approach to provide those opportunities to women-
owned small businesses.
    Let me briefly now discuss SBA's progress on improving 
lender oversight. Obviously, effective lender oversight is 
foundational to the quality of our programs and our 
responsibility to the taxpayer. When I appeared before this 
committee on November 13 last year, I discussed SBA's efforts 
in managing credit risk, in monitoring lender performance, and 
in enforcing lender program requirements. We are engaging in an 
ongoing dialog with the IG on the implementation of their 
recommendations. Where it makes sense, we implement their 
recommendations or we take actions to address the issue giving 
rise to them. Where we don't concur with the recommendation, we 
explain those conclusions to the IG.
    There are a number of steps we have taken and are currently 
taking to improve oversight that deserve particular attention. 
We dramatically improved the quality and expanded the scope of 
our onsite and offsite reviews. We provided greater 
transparency on our processes to our lenders and giving them 
access to data on their portfolios and on the portfolio in 
general. We have issued proposed regulations that would clarify 
the lender oversight process and lend a level of clarity to our 
oversight activities. We have implemented training, expanded 
staffing, and are driving reengineering initiatives at our 
Herndon processing center that will improve its capacity, 
responsiveness, and quality in rolling those out to all of our 
other centers.
    We are revamping the SBA Express and Community Express 
procedures, and we have implemented a process for replacing our 
loan account system. The new system will contain more 
information that lenders can see and that we can leverage for 
future oversight.
    I think the agency is well, well ahead of where it was just 
a couple of short years ago. We clearly have more room to go 
and I would be happy to report out on that, as well.
    But thank you for the opportunity to testify today and I 
look forward to any questions you might have.
    [The prepared statement of Mr. Preston follows:]

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
        
    Chairman Kerry. Thank you very much, Mr. Administrator. I 
appreciate it.
    I think for somebody just tuning in, all this code stuff is 
probably pretty confusing and doesn't have a clue what you have 
just said, but I want to try to follow up on a little bit if we 
can here. First of all, it is accurate, is it not--let me ask 
Senator Levin, who just came in, if he has any opening comment 
that he wants to make.
    Senator Levin. No, I will hold off. Thank you.
    Chairman Kerry. All right. Thanks.
    It is accurate, is it not, that there was an original study 
done by SBA with respect to underrepresentation of women 
businesses, correct?
    Mr. Preston. Yes.
    Chairman Kerry. And that original study that was done by 
SBA was then reviewed by NAS, the National Academy of Sciences?
    Mr. Preston. That is correct.
    Chairman Kerry. And the National Academy of Sciences in its 
review essentially found that the study by the SBA was 
inadequate.
    Mr. Preston. Yes, two things. They found that our study was 
inadequate, and then they laid out a methodology under which a 
study would be adequate.
    Chairman Kerry. And RAND came along in order to fill the 
void and provide the study that hopefully would be adequate, 
correct?
    Mr. Preston. They took the NAS methodology and then they 
did the study, pulled the data and all the analysis.
    Chairman Kerry. And in that methodology, what they did, 
what the RAND folks did was find that anywhere from 87 percent 
of industries to a range of zero percent, depending on what 
statistical model you used, would be underrepresented. If you 
used one statistical model, you could have 87 percent 
underrepresentation, is that correct?
    Mr. Preston. They looked at a variety of methodologies. 
That is the correct range. They did not in any way imply that 
those methodologies would all be appropriate for 
consideration----
    Chairman Kerry. I understand that. They did provide a range 
of statistical models----
    Mr. Preston. Yes.
    Chairman Kerry [continuing]. Which you could then adopt to 
say, wow, this is very reasonable. Let us use this----
    Mr. Preston. Correct.
    Chairman Kerry [continuing]. Correct?
    Mr. Preston. Yes.
    Chairman Kerry. And in May of last year, I wrote you urging 
you to choose the statistical model that would create the 
broadest possible program, correct?
    Mr. Preston. Yes.
    Chairman Kerry. And on October 17 of last year, Senator 
Snowe joined me and we wrote a letter to you urging you to 
implement the broadest possible program. You chose the 
narrowest possible. Help us understand that. Why would you not 
want to at least fall mid-way or as close as you could to 
meeting what we feel was the intent of Congress, which is try 
to broaden this?
    Five percent is not a ceiling, it is a floor. It could be 
much higher. And when you start looking through the range of 
these codes, which I will go into in a minute, it is 
incomprehensible to me that you can find areas--that you can't 
find underrepresentation in those areas, that you wouldn't want 
to say, wow, let us get some women-owned firms into more 
procurement in food manufacturing or in--you know, I can run 
through the list. Why would you not?
    Mr. Preston. Well, I think because the approach we took was 
to look at the methodology that we thought was most appropriate 
given the issues we were considering, to advance the policy to 
fulfill the legislation as well as fulfill constitutional 
issues that we thought may be an issue----
    Chairman Kerry. Well, before we get to constitutional 
issues, you will acknowledge it was your discretion as to which 
statistical model you choose, correct?
    Mr. Preston. I would acknowledge that it was our discretion 
to determine the statistical method, understanding, however, 
that we wanted to choose the most defensible method, given what 
we were trying to achieve.
    Chairman Kerry. Well, you are here to defend it. We want to 
understand why a broader, or if not the broadest statistical 
model which RAND offered you would not meet the goal of the 
intent of Congress to try to broaden the participation of 
women-owned businesses Federal procurement, the $6 billion at 
minimum that could be spread out among women-owned businesses.
    Mr. Preston. Yes. Let me make a couple of points. First of 
all, let me highlight that we are in a rulemaking process right 
now and we are in the public comment period, so obviously we 
are looking at all the comments and--to ensure that we 
understand that people concur--dispute with these methodologies 
and the basis upon which that occurs.
    I think there are two fundamental concepts to understand, 
because to get away from codes and all the confusion, there are 
two fundamental concepts to understand. Number one, do you do 
an analysis based on the dollars going to women-owned small 
businesses or based on the numbers of contracts?
    Chairman Kerry. Let me just stop you right there for a 
minute.
    Mr. Preston. Okay.
    Chairman Kerry. If you do dollars, you can take a pack of 
dollars and give it to one person, leaving out a whole bunch of 
other people who could also be procuring, and then you measure 
dollars and you say, wow, aren't we doing great because we just 
gave a $3 million contract here? But you could be giving maybe 
10 or 15 or 20 additional smaller contracts. Do you follow us?
    Mr. Preston. I think when you look at the numbers of firms 
in Federal contracting, you are less likely to find that, but--
--
    Chairman Kerry. Sixty-three-thousand.
    Mr. Preston. Well, let me draw the other analogy----
    Chairman Kerry. There are 63,000, Mr. Administrator.
    Mr. Preston. Okay. Let me----
    Chairman Kerry. Senator Snowe has pointed out there are 
only about 1,200 that are getting helped here.
    Mr. Preston. Okay, but if you use numbers of contracts, I 
can make a couple of analogies, I think, that would be 
appropriate here. First of all, if you are looking at a $1 
million firm and a $10 billion firm, they are considered equal, 
so if the $1 million firm gets a $500,000 contract from the 
Federal Government and the large firm gets a $500,000 contract 
from the Federal Government, they are considered at parity now. 
If the very large firm gets two $500,000 contracts with the 
Federal Government, which is a minuscule percentage of their 
base, it doesn't take into consideration capacity to perform, 
Okay, the small firm is considered underrepresented even though 
50 percent of their revenues are coming from the Federal 
Government.
    Using numbers doesn't right size the business that they are 
getting to the size of the company. You can have a $5 million 
company that has five $1 million contracts, gets 100 percent of 
their revenue from the Federal Government. You could have GE 
getting ten $1 million contracts. It is inconsequential to 
them.
    Chairman Kerry. I agree with you. I mean, I am not arguing 
about that. You are the one who suggested that the dollar 
amount----
    Mr. Preston. What I am telling you, those ten contracts 
going to GE and the five contracts going to the small business 
would result in that small business being considered 
underrepresented, even though 100 percent of their business is 
coming from the government. So what this methodology does is it 
says what percentage of the revenues are these firms getting 
from the Federal Government relative to the private sector, and 
the analysis shows that women-owned businesses in most of these 
categories get a higher percentage of their revenue from the 
Federal Government than non-women-owned small businesses.
    Chairman Kerry. Well, that may be, but that is not a 
measurement of whether or not they are capable of getting the 
procurement level that we set as a target or of even growing 
into their ability to get a larger percentage of the private 
sector----
    Mr. Preston. I agree 100 percent.
    Chairman Kerry. This is the whole point.
    Mr. Preston. It is a measure of underrepresentation, and 
the legislation, the statute and then bolstered by 
constitutional precedent, which I unfortunately am not going to 
be able to wax eloquent on, and I would be happy to follow up 
with questions for the record or bringing other colleagues 
before you, requires us to show underrepresentation as a basis 
for setting up a preference program, and that is the reason 
that we had to do it that way.
    Now, the dollar value--so the dollar value allows us to 
look at companies based on their capacity to perform. It gives 
us a measure that is based on something that confers value to 
them. You could have ten $100 contracts or ten $1 million 
contracts. Those would be considered equal if you had a 
numerical measure. So there are a lot of flaws with the 
numerical measure and that is----
    Chairman Kerry. I agree. There are sometimes some flaws, 
which is why the instinct ought to be not to be arbitrary. The 
instinct ought to be to exercise discretion in a way that tries 
to meet a public policy standard, if you will. I mean, speaking 
as a lawyer, and I know Senator Levin is a lawyer, on the 
constitutional issue, and so the bar you have to get over with 
respect to the measurement of an underrepresentation to qualify 
you legitimately for a preference is pretty hard when you have 
a range of 87 percent to zero, and when you look at just the 
raw statistics of 1,200 versus 63,000 to, under any reasonable 
test standard believe you are arriving at a place that is 
comfortable. I mean, does your gut tell you you are comfortable 
with that?
    Mr. Preston. My gut----
    Chairman Kerry. You designed the study. Does your gut say 
this is the right level----
    Mr. Preston. My gut tells me we should be working to bring 
more women-owned businesses into the contracting registry 
because once----
    Chairman Kerry. Why wouldn't you create a rule that helps 
to do that when you have a statistical basis given you by RAND 
on which you could do that?
    Mr. Preston. Because, Senator, the rule--the statute 
requires us to go out and base our decision on 
underrepresentation in Federal contracting.
    Chairman Kerry. Well, I understand that, but let me--I 
mean, you are running through the list here. I mean, you have 
got tobacco manufacturing; fiber, yarn, and thread mills; 
fabric mills. I mean, you have got subcategories in every 
single one of these--textile furnishing, cut and sewing apparel 
manufacturing. I can take you down in New Bedford and Fall 
River and show you some folks who are underrepresented in that, 
not to mention, I am sure, in Portland and in some other 
places. You have men's and boys' cut and sew trousers, men's 
and boys' cut and sew work clothing manufacturers, men's and 
girls' dress manufacturing. These are all areas where you say 
they are not underrepresented. I just find that stunning on its 
face.
    Mr. Preston. Well----
    Chairman Kerry. I can run through a lot of others. I mean--
--
    Mr. Preston. Certainly, we would be happy to have--ask the 
RAND people----
    Chairman Kerry. Printing, commercial lithographic 
printing----
    Mr. Preston [continuing]. Who did the analysis to come and 
talk with you----
    Chairman Kerry [continuing]. Digital printing. I mean, you 
can run down--pharmaceutical, small electrical appliance. I 
mean, wood kitchen cabinets. This is the one area, kitchen 
cabinetry, you found them unrepresented. I----
    Mr. Preston. Well, let me just make----
    Chairman Kerry. How about mattress manufacturing? You got a 
sense of that?
    Mr. Preston. I don't think that one is in there, but----
    [Laughter.]
    Chairman Kerry. Well, it is in here.
    Mr. Preston. If you would like to follow up on it----
    Chairman Kerry. It is a category.
    Mr. Preston. If it is a category, then----
    Chairman Kerry. It is a category which you found.
    Mr. Preston. If it is a category, it has an 
underrepresentation figure based on the mathematical analysis. 
But I think it is important for us to understand that, you 
know, and I said in the opening we were surprised when we saw 
the results, too. But I will also say we didn't go in there 
saying, What is the number we want at the end of the day? We 
went in there and said, What is the methodology we need to 
choose to align it with what the statute is asking us to do and 
to make it consistent with the fact that we are trying to help 
women-owned businesses get contracting dollars? And so it was 
based on trying to get that alignment in place and try to have 
a defensible methodology that will result in a sustainable 
program.
    Chairman Kerry. Well, here is the problem. We have an awful 
lot of women-owned businesses that we are in touch with who 
come across the transom here who claim underrepresentation and 
they are not getting their fair share. So on its face, you have 
got a problem here in terms of this rulemaking period for 
public comment. Here is some public comment right here on this 
committee, part of the record, and we will submit it as part of 
the record, that we don't think that this statistical method 
chosen adequately addresses the intent of Congress or provides 
the ability to meet the goal.
    And you do have a number that you were supposed to go in 
there with. It is 5 percent. That is the number. It is 
statutory. It is the law of the land, at 5 percent----
    Mr. Preston. Five percent is----
    Chairman Kerry [continuing]. And you are at 3.41, so you 
have got to go in there and find the statistical analysis, and 
you were given an 87 percent underrepresented capacity----
    Mr. Preston. Well, you know----
    Chairman Kerry [continuing]. Which meant you could have met 
the 5 percent.
    Mr. Preston. I just have to say, and I think you all 
probably understand this better than I do, when you are dealing 
with issues like this, having the right foundation to have a 
rule that is sustainable, that aligns with what you are trying 
to achieve----
    Chairman Kerry. Let me go back for a minute. Did RAND or 
did RAND not give you a range of 87 percent underrepresentation 
down to zero?
    Mr. Preston. RAND gave us a variety of methodologies that--
--
    Chairman Kerry. Did they not give you----
    Mr. Preston. They did not imply, or they did not support--
--
    Chairman Kerry [continuing]. Which to take, but they gave 
you the range.
    Mr. Preston. They also said specifically--but let me just 
mention something. They said specifically in the study that 
they did not opine on whether or not all these methodologies 
were appropriate for any type of policy.
    The other thing is, the NAS study, which was really the 
foundation we needed to use because the NAS is the one that 
threw out the original study that the SBA did, said two things. 
They strongly supported using dollar numbers because that is 
how value is conveyed and that is what is aligned with the 
goal, and they strongly supported using industry information 
that was detailed enough to look into smaller industry 
segments.
    Chairman Kerry. The dollar numbers were----
    Mr. Preston. And those are the two things we----
    Chairman Kerry [continuing]. You don't know how many people 
are available, how many people are in a particular sector, how 
many available companies are there. If there are 63,000 
registered, have you done a break-down of those 63,000? Do you 
know how many fit into which category in those 63,000? If you 
can't take----
    Mr. Preston. Yes.
    Chairman Kerry. You do?
    Mr. Preston. We do. It is all part of the study, yes.
    Chairman Kerry. Well, you ought to be able to tell, it 
seems to me, whether or not they are getting, on that basis, a 
share of a combination of sort of numbers of contracts and 
amounts of money. Anyway, let me cede to Senator Snowe. She is 
going to probably follow up on the same thing, I assume.
    Senator Snowe. Correct assumption. Mr. Administrator, so 
the RAND report made no policy recommendation with respect to 
the methodology. They looked at 28 measurements, 14 in contract 
dollars, 14 in the number of contracts, correct?
    Mr. Preston. Yes. RAND basically took all this stuff, 
plugged it into their models, and didn't make any value 
judgments on what was right or wrong.
    Senator Snowe. Okay, but out of the 14 contract dollars 
that the SBA chose to focus on, it eliminated four 
measurements, as I understand it, that found the highest level 
of underrepresentation.
    Mr. Preston. Yes. Let me----
    Senator Snowe. And those four found that women contracting 
was underrepresented between 27 to 55 percent. So why would you 
have eliminated those four measurements in that category?
    Mr. Preston. Okay, so that is the other piece of the 
puzzle. We talked about dollars versus numbers, and we can go 
back some more if you want, but the other piece--there are 
basically two concepts--the other piece is do you look at all 
companies in America or do you look at companies that are 
signed up to do contracting with the Federal Government, okay? 
So that is the other piece.
    When you look at the data on companies across the industry, 
we cannot get women-owned small businesses to any degree of 
detail in the industry codes. Women-owned small and large 
businesses are combined. The data is old. And we used that data 
in our first study that was thrown out and the NAS said that it 
was difficult to substantiate that those businesses were ready, 
willing, and able since they weren't even signed up to do 
contracting.
    The other piece of data we had is the Federal Contracting 
Registry, so they clearly qualify as willing and able and we 
are assuming readiness. We were able to get detailed industry 
information. Let me pause on that for a second. If you look at 
the national data, it would say all retailers, okay. If you 
look at the detailed data, you could break out auto 
dealerships, apparel, jewelry stores, grocery stores. If you 
don't get to that level of specificity in your analysis, you 
are comparing auto dealerships with grocery stores. So you had 
to look at representation in those more detailed categories. 
Those detailed categories were not available in any of the 
other measures that you are citing.
    Senator Snowe. So we are down to four categories, really 
only three if I understand it, because the national security-
international affairs has no women-owned business. So really, 
you are down to three categories.
    Mr. Preston. Right.
    Senator Snowe. Is that correct?
    Mr. Preston. Yes.
    Senator Snowe. Okay. So we are down to coating and 
engraving, heat treating and allied activities; household 
institutional furniture; kitchen cabinet manufacturing; and 
other motor vehicle dealers, and that is it.
    Mr. Preston. That is right.
    Senator Snowe. I think you have just gone to the lowest 
common denominator and it is one thing to choose contract 
dollars, it is quite another to break it down into these very 
narrow subsectors of an industry rather than using broader 
categories.
    Mr. Preston. That was----
    Senator Snowe. And you talk about the National Academy of 
Sciences, they cited their sources, the same information. So 
what we are talking about is a de minimis level here----
    Mr. Preston. Right.
    Senator Snowe [continuing]. When it comes to helping women 
out. Ninety-nine percent of all women-owned businesses are 
small.
    Mr. Preston. Yes.
    Senator Snowe. So that is where we are at. So really, when 
you are talking about four categories, we are now down to three 
because one doesn't have any private firms--and can't have any, 
if I understand it, according to the law----
    Mr. Preston. Yes, I----
    Senator Snowe. National security and international can't be 
a private sector organization.
    Mr. Preston. Right. No, I understand what you are saying, 
and I think when we look at the two pieces, the two factors 
that we considered with getting detailed information, looking 
at dollar information, I just want to remind you, these were 
strong recommendations that came to us from the National 
Academy of Sciences. I will also concede----
    Senator Snowe. They didn't dictate it, though.
    Mr. Preston. They didn't dictate it.
    Senator Snowe. The SBA chose--you chose these----
    Mr. Preston. We chose the approach based on the strong 
recommendations.
    Senator Snowe. And of the 14 options, you eliminated 4 
measurements, is that correct, that had the highest 
underrepresentation of women. It ranged from 27 to 55 percent. 
So you even eliminated measurements under the options of 
contract dollars of 14 measurements.
    Mr. Preston. The contract dollar measurements that you talk 
about are ones that included very, very broad industries, and 
it gets to this issue that I mentioned before where you would 
be mixing IT contractors with lawyers. It just--it didn't 
provide the level of specificity for us to understand where 
representation truly occurs, and it is at that level of 
specificity that Federal contracts take place.
    Senator Snowe. Well, you dissected it to the lowest common 
denominator in order to reach the goal. You just cut up the 
sectors in order to achieve that goal. This is what has 
happened. We have been driving this for 7 years. It is 
ludicrous. I don't even think the public could believe that it 
would be 7 years trying to have something implemented, and it 
is especially frustrating to reach this point and you get a de 
minimis, the lowest common denominator standard, by choosing 
the lowest possible result that ultimately is going to affect 
women. Women-owned businesses is the fastest-growing segment of 
our economy.
    Mr. Preston. It is----
    Senator Snowe. Yes.
    Mr. Preston. But Senator, I also want to highlight it is 
the fastest-growing sector of Federal contracting and women-
owned small businesses are growing faster than any of the set-
aside categories.
    Senator Snowe. Well, given the rate in which we are 
achieving the 5 percent goal, it will take until 2019 to get 5 
percent, according to our calculations, at the rate at which we 
are going. In Fiscal Year 2006, the SBA is one of only a few 
agencies that achieved the 5 percent goal. Even the Department 
of Defense with hundreds of billions of dollars, over $20 
billion did not achieve the goal. We have been in the low 
single digits, only recently achieved 3.4 percent of women-
owned businesses accessing Federal contracts. So we have a long 
ways to go and I don't see this rule galvanizing this process 
to achieve the ultimate 5 percent goal. It should have been 
long ago achieved----
    Mr. Preston. I can't argue with that.
    Senator Snowe. It is going to take 11 years to get to 5 
percent at this rate.
    Mr. Preston. I think we can get there faster than that----
    Senator Snowe. I hope so.
    Mr. Preston. I would love to work with you----
    Senator Snowe. We should have been there yesterday, though. 
That was the point. This is 7 years since this law was passed--
--
    Mr. Preston. I understand----
    Senator Snowe [continuing]. Anybody--you wouldn't be that 
patient in the private sector, would you, for results? Nor 
should we in the public sector.
    Mr. Preston. I hope you know I wouldn't be that patient in 
the public sector, either, given what we are doing, but----
    Senator Snowe. We wouldn't wait 7 years to achieve a 
result. We have to achieve a bottom line. It is no different in 
the public sector. We all should be aggressively pursuing the 
bottom line here, because ultimately it means fairness and 
equity, which is the essence of the Small Business Act of 1953, 
it was to make sure that there was a fair proportion----
    Mr. Preston. Yes----
    Senator Snowe [continuing]. And now it is access to Federal 
contracts and doing business with the Federal Government. This 
is not equitable and it certainly isn't fair.
    Mr. Preston. Well, we are--I think our outreach efforts, I 
think our education efforts are effective. I think we are 
driving this number forward without the set-aside. I do totally 
agree with you that this is not going to be a significant 
measurement of the needle. It is not affecting enough 
industries or businesses. But I think we are showing good 
progress and I think the SBA is leading by example. This year, 
we are going to show 25 percent of our revenue from----
    Senator Snowe. We have all the Federal agencies, and that 
is where the SBA plays a vital role, as you well know. And I 
realize these weren't all of your problems. You inherited many. 
But the question is now, you are in a position to be able to do 
something about it here and now.
    Mr. Preston. Let me----
    Senator Snowe. Well, certainly we can start with this rule 
that is 7 years old. There is no reason to pursue the path that 
you are recommending in the rulemaking process. So I just hope 
that we can find a different path in this process and 
submitting our comments and recommendations to change it so 
that we can significantly modify this approach to more broadly 
represent women-owned businesses. It ultimately means jobs and 
it means fairness. Women-owned businesses ought to access 
Federal contracts. That is what it is all about, because we are 
now down to three categories. That is just astonishing.
    Mr. Preston. Right----
    Senator Snowe. That is not fairness.
    Mr. Preston. Although I just want to pause for a second, 
because the language that you are using, I feel compelled to 
make a point, which is I think women-owned small businesses do 
compete effectively today based on the results we saw. This is 
about giving them a preference program, and the reason we have 
to do all this detailed work is when you do have a preference 
program, you have to be able to justify how you determine the 
underrepresentation and look at all sorts of precedents and 
make sure that it withstands scrutiny, because the last thing 
you want is for a program like this to be overturned.
    Senator Snowe. I just don't see why you couldn't have 
chosen other options using all the 14 measurements. It was 
highly selective. We have had 50 procuring Federal agencies 
that failed to meet the standards, 50 agencies, including the 
Department of Defense, that has more than $234 billion of 
procurement dollars and we can't meet a goal of 5 percent. That 
is a principle that was enshrined in law, that we wanted a 5-
percent standard for women-owned small businesses, and 
rightfully so, and we have got 50 agencies that have failed to 
meet that challenge. It has been 7 years.
    Mr. Preston. Right.
    Senator Snowe. So you can understand the frustration, and 
there was another path to take that could have withstood 
constitutional scrutiny and public accountability. So I just 
hope that we can find a way to do it differently in the days 
ahead.
    Mr. Preston. Okay.
    Senator Snowe. Thank you, Mr. Chairman.
    Chairman Kerry. Thank you very much, Senator Snowe.
    Senator Levin.
    Senator Levin. I want to get back to the discretion 
question. Is it clear from your testimony, as I understand it, 
that you could have selected categories that showed 
underrepresentation in terms of dollars, which would have led 
to a greater number of categories? Is that correct? You could 
have?
    Mr. Preston. Not if we followed the advice of the research 
group that laid out the pathway to do the study.
    Senator Levin. In other words, the only way that you could 
achieve a larger representation in terms of dollars was to pick 
these narrow categories? The other ways would not have led to a 
greater representation in terms of dollars? Is that what you 
are saying?
    Mr. Preston. What I am saying is if we had looked at data, 
okay, that looked at all women-owned businesses in the economy, 
looked at very broad industry categories, all retailers, all 
service providers, very broad, data that was 5 years old and 
data that commingled women-owned small business with women-
owned large businesses, all of which was against the advice of 
the NAS, we would have found more categories.
    Senator Levin. That is not my question. Could you have 
adopted a larger number of categories which still would have 
shown underrepresentation of women in terms of dollars?
    Mr. Preston. No.
    Senator Levin. This is it? You are saying there are only 
three categories----
    Mr. Preston. Right.
    Senator Levin [continuing]. That show underrepresentation 
of women in terms of the amount of dollars?
    Mr. Preston. That is correct. That is what the study shows.
    Senator Levin. And there is not----
    Mr. Preston. I want to highlight two things----
    Senator Levin. That is not the way I read these. I mean, 
that, to me, is the key issue. You are saying there is no other 
way you legally could have done it. On the other hand, when the 
Chairman asked you the question, you said you had discretion.
    Mr. Preston. We had discretion. We had the discretion to 
choose. If we had chosen differently, we would----
    Senator Levin. No, you had the discretion to choose 
legally. I mean, the question isn't whether you had discretion 
to do something illegal. The question is whether or not you had 
discretion to do something. Discretion means legally to act in 
a way which would have raised the number of categories which 
would have added dollars in terms of contracts for women.
    Mr. Preston. We had the discretion to choose the 
methodology. The methodology we chose was based on factors that 
were laid out by the National Academy of Sciences.
    Senator Levin. I understand. Was that the only one you 
could have chosen?
    Mr. Preston. Theoretically, we could have done anything, 
but its defensibility is something that would have been up for 
grabs, potentially.
    Senator Levin. Is it a matter that the others that you 
could have chosen would not have been defensible, or would have 
in your judgment been less defensible?
    Mr. Preston. I think the latter. They would have been less 
defensible.
    Senator Levin. So it is not the only ones you could have 
chosen----
    Mr. Preston. But----
    Senator Levin [continuing]. It is the one which, in your 
judgment, was the most defensible?
    Mr. Preston. Right, and I think----
    Senator Levin. It is not the only one which was defensible.
    Mr. Preston. Yes, and I think----
    Senator Levin. Wait, wait, wait. One at a time. Is that 
correct?
    Mr. Preston. That is correct, and I think--and I appreciate 
the distinction you are making because what I do not want 
anybody to think is that we looked at the numbers we got at the 
end of the day and then decide the methodology based on the 
number. We were surprised by the number. But as we vetted this 
within our agency and throughout other people who are experts 
in this area, this is where we landed.
    Senator Levin. No, I understand your conclusion. It is now 
a lot clearer in my mind that there are other categories that 
you could have chosen that were----
    Mr. Preston. Other methodologies.
    Senator Levin [continuing]. Other methodologies which would 
have led to defensible--you said less defensible or more 
defensible. They still would have been defensible, but in your 
judgment, less defensible.
    Mr. Preston. Defensibility doesn't imply that at the end of 
the day you win the argument. The defensibility--if we are 
putting in place a law, a program, rather, we want to make sure 
it withstands scrutiny.
    Senator Levin. Of course. Look, you can have ten different 
options, all of which are defensible. Number one is the most 
defensible, but numbers two through ten are also defensible, 
but not as defensible in someone's judgment as number one.
    Mr. Preston. Right.
    Senator Levin. But they are still defensible, but two 
through ten would lead to a much better result in terms of 
policy. That is where it seems to me you have failed----
    Mr. Preston. Right.
    Senator Levin [continuing]. It seems clear to me that those 
other approaches are legally defensible, even though you can 
argue less defensible, they are nonetheless----
    Mr. Preston. Right.
    Senator Levin [continuing]. Defensible legally, but you 
chose one which you thought was the most defensible 
technically, but from a policy perspective doesn't achieve the 
results which we clearly intended. That is what troubles me a 
great deal.
    Mr. Preston. Right. There are two things I would mention 
that I am sure you appreciate the degree to which these types 
of programs have come under attack, legal attack. There has 
been all sorts of--I am sure you all understand this better 
than I do, since you have been in this world much longer than 
I.
    So Number one, I think we view it as being very important 
to look at those factors and make sure that what we have out 
there does not come under--is not weak in the face of attack.
    Number two, once again, we looked at the strong advice on 
two factors that we got by the research academy that laid the 
pathway for how this should happen and we took those two pieces 
of advice and we followed them.
    Senator Levin. Let me just move on to another question. I 
will take two more minutes, because I think I understand what 
you did and I disagree with it. You can have ten different 
approaches that are defensible legally, one of which is the 
most bulletproof, the next one is the second most bulletproof, 
and so forth. If you take the fourth or fifth or sixth most 
bulletproof one--it is not the most, but it is the best in 
terms of policy, and you have a darn good chance of defending 
it legally from a policy perspective, it is worth doing, and 
that is, at least from my one perspective----
    Mr. Preston. I understand.
    Senator Levin [continuing]. The mistake that I think you 
have made. And I have been in that situation many times, by the 
way, as a lawyer, where the goal was we have got to achieve a 
policy and the question was do we do it this way, this way, or 
this way, and the decision would be it is so important that we 
achieve the policy, we will take a 5 percent risk on legality 
to achieve a 50 percent gain on policy. That is where, from my 
understanding, you have made, I think, a mistake. It may be 
different from the understanding of others on the Committee, 
but that is the way I frame it in my mind.
    It is much too narrow. It is needlessly so in the quest of 
gaining the most technically, theoretically bulletproof legal 
approach, but you have lost so much in terms of the policy gain 
that you have taken an approach which seems to me to be the 
wrong one in terms of the policy of the law.
    Real quickly on Women's Business Centers----
    Mr. Preston. Yes.
    Senator Levin. You have now resolved some of the 
uncertainty about the future funding of these business centers. 
You have replaced a sustainability pilot program with a 3-year 
renewal grant program which is more permanent. I applaud you 
for that and I just would urge that you implement this program 
as soon as possible and I am wondering if you can tell us what 
the time table is for that.
    Mr. Preston. It would be--the submissions for the Women's 
Business Centers came in, I believe, last week. That was 
completed. By the end of the month, they will know whether or 
not they are getting grants, and shortly after that, they will 
begin getting their grant money.
    The other issue which I should report, which you didn't 
bring up but it is related, is historically these Women's 
Business Centers have gone through a very difficult and arduous 
process to get their grant money, resulting in delays, and you 
know these centers, they need their money when they need their 
money. So we have rolled out a new program where they will be 
getting their money very quickly upon submitting the grant 
request and we will be doing--it is much more responsive, much 
more sensitive to their needs and certainly has been received 
very happily by the community.
    Senator Levin. Thank you. I do very much support that 
program and I applaud you for the steps that you have taken in 
that area.
    Mr. Preston. Thank you.
    Senator Levin. Thank you, Mr. Chairman.
    Chairman Kerry. Thank you very much, Senator Levin. Thank 
you for helping to clarify that, as usual, capably, and we 
appreciate it.
    Following up on that just a little bit, Mr. Administrator, 
and we do have some other questions in a couple of areas, but I 
am reading from the RAND study. Here is what it says. We found 
that the measurement of whether women-owned small businesses 
are underrepresented in Federal contracting is sensitive to 
whether contract awards are measured in dollars or in number of 
awards, and to whether the population of ready, willing, and 
able firms comprises essentially all employer firms or just 
those firms that have registered as potentially bidders on 
Federal contracts. So right up front, they acknowledge the sort 
of universe issues here, which if you wanted to, I mean, you 
could say, okay, let us look at this in a way that is going to 
accomplish the public policy goal. But let me go further.
    Depending on the measure used, underrepresentation of 
women-owned small business in government contracting occurs 
either in no industries or in up to 87 percent of industries. 
Then most importantly, it said, this variation is especially 
large in the measures that use contract dollars rather than 
number of contracts. The most important sentence, this report 
does not advocate a particular measure.
    Mr. Preston. No, that report didn't----
    Chairman Kerry. Rather, it highlights industries where the 
disparities occur.
    Mr. Preston. Right. That is exactly right.
    Chairman Kerry. So, you know, again----
    Mr. Preston. The NAS laid out the recommendations----
    Chairman Kerry. No, NAS--but this study was done because 
NAS made a judgment of the original study, but it wasn't the 
gospel with respect to how we proceed forward on this. The RAND 
study was the study that was supposed to say, what does the 
underrepresentation look like?
    Mr. Preston. The RAND study made no judgments on 
methodology. They simply----
    Chairman Kerry. Correct.
    Mr. Preston [continuing]. NAS recommendations.
    Chairman Kerry. That is exactly where I started at the 
beginning of this hearing----
    Mr. Preston. Right.
    Chairman Kerry [continuing]. And that is the main point 
here----
    Mr. Preston. What I----
    Chairman Kerry. They did make no recommendation. They left 
to your judgment, to your discretion how you would implement 
the policy that the U.S. Congress had put into law. Now, that 
is what is at stake here. Let me read you--this is fairly 
simple stuff when you really get at it, I think. Other 
categories--these are other categories--this is under the RAND 
study. Other categories where women are considered 
underrepresented had SBA used the broader numbers in the RAND 
study, which was your discretion.
    Let me just give you a sense of it: water, sewage and other 
systems; residential building construction; utility system 
construction; foundation, structure, building exterior; 
building equipment contractors; building finishing contractors; 
other specialty trade contractors; other textile product mills; 
cotton sew apparel manufacturing, which I went through earlier; 
converted paper product manufacturing; printing and related 
support activities; other chemical products; forging and 
stamping; architectural and structural metals; oil tanker 
shipping containers; coding, engraving, and heat treating; 
other fabricated metal products; commercial and service 
industry machining; communications equipment manufacturing; 
navigational measurement; electro-medical; manufacturing and 
reproducing magnetic media; electrical equipment manufacturing.
    I mean, I can go on and on. There are 105 different 
business areas: business support services; facility support 
services; administrative services; waste treatment and 
disposal; technical and trade schools; educational; beer, wine, 
distilled alcoholic beverages; warehousing and storage; 
software publishers; data processing. Run the list----
    Mr. Preston. Right.
    Chairman Kerry [continuing]. Where there are, according to 
the study, available discrepancies of underrepresentation of 
women in procurement. You could have embraced these.
    Mr. Preston. Okay. I guess the way I think of it, Senator, 
is the NAS was sort of the engineer. They laid out the plan. 
RAND was sort of the assembly line, okay. The NAS, in looking 
at this, specifically says--I am quoting here--that the two-
digit codes appear to be too broad to be used as a basis of 
disparity ratios to inform an understanding of the role of 
women-owned small business in Federal contracting and what kind 
of preferential treatment may be indicated. Specifically, this 
was the group that basically threw out our old study and said, 
this is what you need to look at and this is why we have relied 
heavily on their guidance.
    Chairman Kerry. Well, again, I think you are getting a 
sense here, as I wrote to you in the letter, as I have 
written--you haven't gotten it yet, but----
    Mr. Preston. No, and I think Senator Levin's point is very 
important, which is what is sort of the balance between the 
policy goals----
    Chairman Kerry. Right, but let me build on that because 
there is a legal standard here and you are trying to assert 
that you thought it was the most legally justifiable and both 
of us disagree, or all three of us disagree.
    Mr. Preston. I think also closest to the heart of the 
matter, closest to understanding what we are actually----
    Chairman Kerry. What you seem to be applying is what in the 
law is called a strict scrutiny level of view to a gender-based 
program, and the Supreme Court has held in 1976 that gender-
based programs are subject to intermediate scrutiny standards, 
meaning that to justify the program, the government only needs 
to prove an important governmental interest and that a program 
is substantially related to the achievement of that purpose. 
That is the standard. And under that standard, Mr. Preston, you 
know, it just is incomprehensible that you would go to the sort 
of most defensible standard to the lowest common denominator 
here, as Senator Snowe has called it.
    Mr. Preston. Well----
    Chairman Kerry. So I think we have made our point. I think 
that if you want to respond, I am happy to have your response--
--
    Mr. Preston. My understanding is that the standard that was 
applied was intermediate scrutiny. I know strict scrutiny is 
referred to in the RAND study, but I believe they are 
referencing a racially based program, which is a different 
standard, and I think--so our understand--my understanding----
    Chairman Kerry. It does not require the standard of race-
based programs which is laid out in city of Richmond----
    Mr. Preston. That is right----
    Chairman Kerry. Boren, that is a different standard, and 
the Adarand decisions----
    Mr. Preston. Exactly----
    Chairman Kerry [continuing]. It does not apply here.
    Mr. Preston. Right. What I am saying is even though RAND 
mentioned that strict scrutiny, the standard we applied was 
intermediate scrutiny. I will have to rely upon my legal 
colleagues to get into this in more depth, if you want to at 
some point. But my understanding was that the issues that need 
to be addressed between strict and intermediate are the same 
issues. It is a matter of degree rather than what needs to be 
considered. And I think, Senator, that deals more with the 
issue of discrimination rather than what we are talking about 
in the RAND study.
    Chairman Kerry. Well, under either way, Mr. Administrator, 
it seems clear to us that you ought to be able to go back to 
the drawing board here and broaden this. I mean, there are 
women sitting behind you right here in this audience who are 
owners of some of these kinds of businesses. There is a woman 
by the name of Norma Byron here who is owner of the Ashlawn 
Group. She is one of the only, if not the only woman munitions 
developer in the country. She could be selling. Magdalah Silva 
is here today. She owns an IT company, and she testified before 
this committee previously on the difficulties that she has in 
the Federal contracting area getting a fair share. We have a 
supply chain consultant here, Jennifer Sully, who is fighting 
for these opportunities, and under your rule, they don't get a 
shot.
    Mr. Preston. Well, I think they have a shot. We are talking 
about a preference program. We are not talking about blocking 
them or not letting them compete on the same basis with other--
--
    Chairman Kerry. Well, when I say shot, I am talking about--
--
    Mr. Preston. But you know, the reason that concerns me is 
when you look at the reports in the media, when you look at the 
statements that are coming out of some of your colleagues, it 
is being implied that somehow, we are erecting a barrier that 
doesn't exist today. I think it is very important for us to 
understand that because it is a preference program, we have 
standards that we have to hit. And I understand----
    Chairman Kerry. Erecting a barrier that doesn't--well, in a 
sense you are----
    Mr. Preston. We are not----
    Chairman Kerry [continuing]. And I will tell you how, 
because you could have chosen a different road. You are 
erecting your standard of interpretation of the law, which is 
not necessary here. So in a sense, you are erecting a barrier. 
But in another sense, what you are also doing is not, giving 
the opportunity, of taking down a barrier----
    Mr. Preston. I think----
    Chairman Kerry [continuing]. And that is the really big 
difference here.
    Mr. Preston [continuing]. That if we all believe that there 
is broad-based discrimination that is resulting in barriers, 
then we are in a whole different playing field and that is 
certainly not something that we addressed in our study, but----
    Chairman Kerry. Women-based preference is not based solely 
on the discrimination. It is based on the valid government 
purpose articulated in the law of wanting to broaden, because 
of the numbers of women who own businesses, their participation 
in fair share. I guess the Senator from Maine said it, a fair, 
equitable share. That is a government purpose, defensible under 
almost any standard. And so the whole purpose here is to try to 
broaden that.
    Mr. Preston. And what I would tell you, Senator----
    Chairman Kerry. This is such a home run missed kind of deal 
where you guys could just embrace and say, wow, what a 
productive thing. We are going to be the administration that 
makes certain that we have opened up more opportunity and we 
are going to get more procurement----
    Mr. Preston. Well, I think where it comes to expanded 
outreach, where it comes to holding Federal agencies 
accountable, they all have women-owned procurement goals. We 
have rolled out IT tools to help them find women-owned 
businesses more easily than they ever have before. When it 
comes to this agency putting an effort behind reaching out and 
making connections with people, working with our Federal 
procuring partners to drive this number forward, we are doing a 
tremendous amount. I think when it comes into designing a 
preference program, we are in a different realm, and that is 
why I think we have some of the challenges we do here.
    Chairman Kerry. Well, let me ask you this so we can wrap 
this part of it up anyway, and I will turn to Senator Snowe and 
see if she has any more questions on that part of it. But are 
you prepared to engage in a dialog with us and open this up to 
hopefully some kind of more sensible, mutually agreed upon rule 
that might----
    Mr. Preston. Yes. We are in the middle of a public comment 
period right now, we will be looking very hard at all the 
comments we get. To the extent that comments address the NAS 
methodology as applied by RAND, I think it will be important 
for us to understand the substance behind why a different 
methodology is better. To the extent that they address the 
legality issues or the constitutional issues, which you and the 
Senator alluded to earlier, it will be important for us to 
understand the precedents that those arguments are based in, 
but we will be looking at those very carefully and open-
mindedly.
    Chairman Kerry. Senator Snowe, did you want to pursue that 
further?
    Senator Snowe. I think we have obviously explored this 
issue extensively, and certainly Mr. Administrator, you 
recognize disappointment with the direction the SBA has taken 
in this regard. With no question, when we are trying to open up 
pathways for women-owned small businesses to access Federal 
contracts and there are other ways, and just looking at the 
list here, in terms of the one down here, but there are many 
other ways in which to accomplish that and using contract 
dollars with industries that show a high percentage of 
underrepresentation of women ownership.
    So I hope we can work together on this. This is something 
that has to be rectified. It has been part of the Small 
Business Act and removing these barriers, these discriminatory 
barriers, and to only achieve a result of 2 percent of all 
women-owned small businesses simply isn't realistic--it 
certainly is not fair. There is another way. So I am hoping 
that we can work together to figure this one out, because this 
isn't where we should be today.
    We should be exploring a pathway that we can make sure that 
women who are participating as small business owners have the 
right to access Federal contracts. We have set a goal. It has 
not been accomplished. The law hasn't been implemented in 7 
years, and we have got 50 agencies that have failed to even 
achieve the 5 percent, with hundreds and hundreds of billions 
of dollars worth of Federal contracts and women cannot 
participate. It simply isn't fair and it is not equitable and 
it could have been done differently.
    So I am hoping that we can work together to forge that 
relationship. It is going to be essential in the days ahead, 
and certainly I will work with the Chairman in that regard, as 
well.
    Chairman Kerry. Thank you, Senator Snowe.
    Mr. Administrator, let me run into a couple of other areas, 
if we can. As I had mentioned earlier, I think people are 
excited about the progress on the Women's Business Centers 
Program. Can you just share with us, though, on the contracted 
out grants disbursement process to the Department of Health and 
Human Services, which I know was geared to try to prevent some 
of the problems that had existed, can you just share with us 
the thinking behind the outsourcing on that?
    Mr. Preston. Yes. A lot of other agencies outsource to HHS. 
They have a very sophisticated, very responsive operation in 
place. They, Senator, will primarily be doing the processing of 
the requests for dollars. So we will continue to do the 
paperwork behind that. The difference is, historically, these 
Women's Business Centers had to provide us with all their 
paperwork ahead of time. We would review it, we would go back 
and forth, and they would have to go through the entire process 
before they got any money. We----
    Chairman Kerry. How are the Women's Business Centers going 
to get paid under this process?
    Mr. Preston. They get paid--once they are eligible for a 
grant, once they know, they will be able to submit the request 
to HHS. HHS will pay them quickly and then on the back end we 
will do a reconciliation of the paperwork. So they won't have 
to get----
    Chairman Kerry. Is there an interruption at all in that 
process----
    Mr. Preston. No----
    Chairman Kerry [continuing]. Before they take it over----
    Mr. Preston [continuing]. No, that is going to be--no, in 
fact, right after----
    Chairman Kerry. That will be a seamless transition?
    Mr. Preston. Yes. Right after they find out they are going 
to get their grants, in the weeks after that, we will be going 
through training with all the Women's Business Centers to take 
them through how to apply for those grants on the HHS system, 
but it will be much more responsive and it is a pretty 
straightforward process.
    Chairman Kerry. Great. And one of the things we learned at 
the September hearing was that the Women's Business Centers are 
not being clearly told what their criteria are for evaluation, 
why they get the score that they do, and I understand the 
funding level is based on that, so it is important for them to 
do. Can you share with us what SBA is doing to deal with that 
or what it has done?
    Mr. Preston. Well, certainly what we try to do is make the 
standards clear----
    Chairman Kerry. You sort of communicate to them and have a 
transparency to that process?
    Mr. Preston. Right. We are pulling that whole process into 
the Women's Business Centers Group. Historically, the granting 
process was in a grant administration group that didn't work 
directly with the Office of Women's Business Ownership. We are 
pulling that into Entrepreneurial Development. It is going to 
be done in the same way that we do Small Business Centers right 
now, which is a very responsive process. So I am hoping that 
those issues will be resolved, but as a follow-up, I will make 
sure to see where this issue is coming from--to make sure we 
don't drop the ball on that.
    Chairman Kerry. That would be helpful. And also, when Mr. 
Prakash was here and testified, there was discussion--the IG 
report had recommended putting the training handbook and 
program online, the changes, and also allowing Women's Business 
Centers to provide missing or incomplete sections of the 
application without submitting the whole new application. Do 
you know if those----
    Mr. Preston. I know the training for the grant process will 
be online in March. They are going to find out at the end of 
February, and then the second week or first week of March, that 
is going to be online. I don't know about the process of 
partial submissions, but I will check on that as well.
    Chairman Kerry. That would be great. That would be helpful 
to them. I know they were particularly concerned about that and 
I think he took that as something----
    Mr. Preston. Yes, and what I would tell you is we have had 
very good, very, I think, rich dialogs with the representatives 
of the Women's Business Centers, so all the changes we are 
making are really based on direct feedback that we have gotten 
from them and it has been very helpful, because this is an area 
where we do want to be responsive to them.
    Chairman Kerry. Well, we really have heard and we welcome 
the fact that the Business Centers are singing the praises of 
that increased cooperative effort, so we certainly want to make 
sure people are aware that there are those good things 
happening.
    On the lender oversight reforms, who is the head of the 
Office of Risk Management charged with lender oversight?
    Mr. Preston. Well, the head of all Capital Access is a new 
Associate Administrator that we hired a couple of months ago 
named Eric Zarnikow, who has got a very deep background in 
credit. He is a career-long financial person, and when we 
brought him in, we specifically charged him as his top 
responsibility to ensure that we continue to make progress in 
improving expanding the lender oversight process. Underneath 
him, he has got a deputy named Janet Tasker, and then a 
gentleman named Bryan Hooper specifically runs that segment of 
the----
    Chairman Kerry. Is that office going to be independent from 
the Office of Capital Access?
    Mr. Preston. It is independent of that office today, but 
they both are part of the broader Capital Access organization. 
But they are headed by two different individuals----
    Chairman Kerry. Is there a conflict there? Will they be 
making independent decisions?
    Mr. Preston. I think they make independent decisions today. 
Now, what I will say is, and I think you are probably referring 
to an IG recommendation that Lender Oversight be totally pulled 
out of the Capital Access area. What I would tell you is any 
financial institution in our country has got oversight 
practices and outreach practices in the same institution. At 
some point, they come up into the same individual. But in terms 
of those separate groups, they are run completely separately at 
the working level and they don't come together until we get to 
the top of the Capital Access Office, which is the Deputy and 
the Associate Administrator.
    Chairman Kerry. We also at the last hearing discussed the 
BLX fraud issue and whether or not it might have raised a red 
flag, and particularly I asked the question whether or not 
repurchases of $28 million, or whatever it was, from one 
officer, and one branch might have raised a red flag or whether 
it was sort of a normal process. You acknowledged then that you 
weren't aware of whether or not that was, in fact, so. Have you 
since considered enhancing diagnostic tools to track loans by 
lending officer and branch. Can you sort of share with us where 
we are in that?
    Mr. Preston. Well, I think one of the important things to 
understand is most of the BLX fraud was perpetrated in sort of 
the 2002-2004 time line. I don't have the exact loans and the 
dates here with me and I would be happy to provide that with 
you.
    Most of the enhancements in lender oversight have been in 
the 2004 to 2008 timeframe, we have dramatically expanded our 
onsite reviews. We have dramatically expanded the analytical 
work we do. We are in the process of significantly improving 
the loan purchasing process and the reviews we do there. And in 
the process of managing the BLX issues, we are working with a 
third-party vendor. One of my teams is working with them to 
come back and give us any lessons learned from their 
perspective of a third party, looking at how these loans were 
made, why they were made, and how we might have been able to 
see that.
    I do want to remind the Committee, and I know this isn't a 
perfect answer, but we don't expect the taxpayer to lose any 
money based on this. When something like this happens because 
of the lender negligence, they keep the risk. Obviously, it 
reflects badly on everybody.
    So I think our lender oversight processes, purchase reviews 
and the whole gamut have dramatically improved since those 
frauds were perpetrated and they will continue to improve----
    Chairman Kerry. Well, one area of concern where I am not 
sure that there has been any motion yet is the Sacramento 504 
center. We heard three recommendations that were made here 
during the hearing regarding that center, and as of last 
Friday, I am not sure they had been implemented. Have they 
reinstituted lender oversight at the Sacramento office?
    Mr. Preston. The Sacramento----
    Chairman Kerry. That is the Abridged Submission Method 
audits, what is known as ASM?
    Mr. Preston. Well, they still have the ASM method, and I 
think the issue that the 504 industry is concerned about in 
Sacramento was some of the backlog issues that we had out there 
in terms of turning around decisions quickly so that they could 
then close their loans in a timely basis. I am not familiar 
with specific oversight issues that you are referring to, but I 
would be happy to follow up on them for the record.
    Chairman Kerry. Well, on employee retention, there were pay 
issues. There was an issue about additional staff for 
processing loan approvals, et cetera----
    Mr. Preston. Yes.
    Chairman Kerry. There was an issue about the lender 
oversight, expanding ASM audits to loans of the premier 
certified lenders.
    Mr. Preston. Yes. Let me----
    Chairman Kerry. If you would like, I mean, I have got a 
number of questions. We don't have time, obviously, to do them 
all. I would like to leave the record open----
    Mr. Preston. Great.
    Chairman Kerry [continuing]. And we will probably submit 
some in writing, if we can, and----
    Mr. Preston. Let me take 1 minute to comment broadly. One 
of the things we have found, and you all have obviously 
digested it in chunks in a number of our different programs, 
but very broadly speaking, I think many of our processing 
centers in disaster, in 7(a), in 504, and in our 8(a) programs 
have suffered from processes that aren't terribly efficient, 
technologies that aren't very supportive, and backlogs.
    And so as you look at what we are trying to do at this 
agency much more broadly, is to bring in management practices 
where we go in and say, `who are we serving at the end of the 
day, how does this process need to get to them quickly and 
efficiently, how do we need to provide technology so that we 
can communicate with them well, make good decisions,' and it is 
hitting across all of our processing centers and Sacramento is 
no exception.
    Now, the other thing we have, Senator, which frankly we 
didn't have even a year ago was good data on these centers to 
really understand where these problems were.
    So the reason I give you that broader context is this is a 
part of a much broader thing. I would be happy to brief the 
Committee's staff on where we are going with all these 
matters----
    Chairman Kerry. I think that would be really helpful, 
because one of the questions I wanted to ask, and maybe you 
just want to comment on it, you mentioned disaster. Are the IG 
recommendations with respect to that being implemented?
    Mr. Preston. Oh, yes. There are any number of IG 
recommendations, but what I would tell you is the work that we 
are doing in disaster goes far beyond any of the IG 
recommendations in terms of preparedness. So I think the IG 
recommendations tended to look at specific processes or 
problems. They are sort of being encompassed in a much broader 
program to improve the----
    Chairman Kerry. Well, I think it would be great to have 
staff follow up on that and get that briefing in full so we 
can----
    Mr. Preston. Yes, and frankly, we would be happy to take 
you all down to Fort Worth to look at that processing center 
and see what we have done down there. We think it is a great 
example of what can be done.
    Chairman Kerry. Thank you very much. That is a good idea. 
Senator Snowe?
    Senator Snowe. Yes, thank you, Mr. Chairman.
    Just to follow up on that, some of the issues that were 
raised by a former employee of the SBA as well as the Inspector 
General regarding the Office of Disaster Assistance, and you 
mentioned that you were going to convene a meeting of the 
leaders in that office----
    Mr. Preston. Yes.
    Senator Snowe. Has that happened, and what----
    Mr. Preston. Let me tell you what we did----
    Senator Snowe [continuing]. To rectify some of those 
issues?
    Mr. Preston. Right, and you and I talked about it after the 
last hearing, as well. Yes. Let me tell you what we did. We 
wanted to go about this systematically, so we did a couple of 
things. First of all, we decided to do a broad-based employee 
survey down there, similar to the employee survey we did for 
the rest of the agency, and then we worked with the IG to 
expand that survey to include questions specifically that they 
wanted to see to understand the environment down there.
    Right now, we are in the process of hiring a third party to 
come in, review that survey, and then spend time down there to 
make sure that any issues that came out in that survey are 
being addressed. So we are trying to do it in sort of a 
methodical way in conjunction with the IG on the survey and 
then bring a third party in to do the analysis.
    What I would tell you is, and I know some of you may have 
seen a press release on this, when we did our 2007 employee 
survey compared to 2006, neither of which included the disaster 
operation, we saw dramatic improvements in employee morale, 
employees saying that they could do their jobs effectively. 
When we surveyed the disaster business separately, their scores 
dramatically exceed the rest of the agency now. So the very 
part of the agency that was suffering so badly is now in terms 
of employees saying that they can operate effectively, 
employees saying that they respect leadership, is now sort of 
the gold standard in the agency.
    And so we are not only trying to understand whether or not 
we have kind of addressed those issues, we are trying to 
understand how we can make sure to apply those standards to the 
rest of the agency because the feedback we are getting is so 
good.
    But we are on a pathway. We are hiring a third party. The 
input is going to be independent. The IG will be part of it----
    Senator Snowe. That is outstanding. I think that is 
important and I applaud you for your efforts in that regard. I 
know that the employee morale prior to your tenure was 
remarkably low, and so----
    Mr. Preston. We still have a ways to go.
    Senator Snowe. You have a ways to go, but----
    Mr. Preston. We still have a ways to go.
    Senator Snowe [continuing]. You are moving--that you are on 
the ascent is very important in that regard, the right 
direction. I applaud you and----
    Mr. Preston. I appreciate that----
    Senator Snowe.--I hope you will continue those efforts, 
because I think it means a great difference to the employees 
and their families within that agency, so thank you for doing 
that.
    Mr. Preston. You know, the thing, I think, that is--one of 
the things that is most heartening about the results we have is 
we are seeing specific improvements in areas like employees 
saying that they have the skills to do their jobs, they have 
the training, they have the development capability. So it is 
not just ``I feel good about being here''. It is, ``I feel like 
I can do my job effectively and serve effectively'', and those 
are really the outcomes that we are hoping to see.
    Senator Snowe. That is critical. That is very good.
    Mr. Administrator, the American Banker reported that at 
your State of the Agency speech last Tuesday, you indicated 
that the SBA loan volume has dropped by roughly 3,000 loans 
compared to the previous September-December quarter----
    Mr. Preston. Hmm----
    Senator Snowe [continuing]. Because the banks now have 
automated systems and it is hard to work with the outdated, 
non-automated system at SBA. Is that true?
    Mr. Preston. I don't think I cited a number, but I would be 
happy to give you those numbers. I don't have them at the top 
of my head. What we are seeing in loan volume is the following. 
We are seeing a decline in SBA Express. As you know, SBA 
Express is sort of a very simple process. A lot of them, 
especially the larger banks, had programs set up that were 
heavily credit scored, and as they began to experience some of 
the issues in their broader portfolios, what they began to do 
was require higher credit scores for SBA Express. So in the 
smaller high-volume Express loans were seeing a fall-off.
    On the PLP loans, which are typically larger loans, they 
are more integrated, I think, into sort of the broader 
relationship management side of the bank, we are seeing much 
more stability in the volume. So as a result, we are seeing a 
higher decline in numbers of loans than dollars because the 
little ones are the ones that are falling off.
    When I look at that, the concern I have is, and this is 
something we are dissecting from every angle. The concern I 
have is the potential that those smaller loans often go to 
startup businesses, and what we found in the Urban Institute 
study on all of our programs is that we have a dramatically 
higher penetration as a percentage of our portfolio in startup 
businesses than the conventional lending sector. So we want to 
make sure we are doing everything we can to reach those 
businesses.
    Now, in the last couple of weeks, we have rolled out 
relationship plans throughout our national network so that our 
district offices are looking at their top 15 banks, putting in 
place calling programs, reaching out to them to make sure we 
understand what we can be doing to expand our relationship with 
them. My team has come to me with a personal outreach plan for 
me, for my deputy, and for the head of Capital Access to reach 
out to senior levels at the major lending institutions around 
the country. We are having a lender roundtable in a couple of 
weeks with senior lenders coming in and I have personally had 
meetings with any number of them, even in the last couple of 
months. So we are working very hard to make sure that we are 
coordinated with them and doing everything we can to expand the 
usage of our products where it makes sense.
    Senator Snowe. Is it a direct result of organizational 
issues----
    Mr. Preston. Yes.
    Senator Snowe [continuing]. Or is it a result of the 
economy?
    Mr. Preston. You know, I think that the organizational 
issues are being led by other challenges that some of these 
banks have in their portfolios. Some of the banks, I think, 
that have reported the largest credit challenges have been ones 
that are making the most immediate decisions to pull back.
    What I would also tell you is that we are not seeing a 
tremendous amount of continuity across banks in terms of what 
decisions they are making. Some of them are actually expanding. 
Some of them are contracting heavily. The one piece of common 
information, I think, across the banks is that the Express 
products are seeing some decline.
    Senator Snowe. And the American Banker also indicated that 
over the last 2 years, 368 lenders have dropped out of the 
SBA's lending program----
    Mr. Preston. Yes, that----
    Senator Snowe [continuing]. Is that true?
    Mr. Preston. Yes----
    Senator Snowe. And how does that exacerbate matters in 
terms of delivering these products----
    Mr. Preston. It does exacerbate matters, it absolutely 
does, and this is why we are rolling out Rural Lender Express. 
We have an outreach effort right now with a new loan process to 
bring community banks back into the program. Because what the 
community banks have told us is our processes are too 
difficult, they have to go up a learning curve. So what we are 
doing right now----
    Chairman Kerry. Is that why most of them are dropping out?
    Mr. Preston. The anecdotal feedback we get from our field 
is yes, that if I am doing three loans a year, it doesn't make 
any sense for me to try to learn now to do an SBA loan. So what 
we are doing is we are rolling out something that is a two- or 
three-page application. They can do it online. It is relatively 
simple. We are promising them turnaround time on the loan in a 
few days. And if they have questions, we have set up a help 
desk for them so they can get real-time support. We are 
piloting it right now in eight States and as soon as we find 
out--as soon as we feel like we have got the product where it 
needs to be in terms of ease of use and the support in 
Sacramento to handle it, we are going to begin adding regions.
    But, you know, I think, Senator, you have been on this 
issue a long time, which is are you doing the right kind of 
outreach to community banks. I think this product will be a big 
solution for us. It will take us a number of months to get this 
out across the country, but it is going to be very important 
for us.
    Senator Snowe. Also, one other area is lender oversight 
fees and the impact it has on lender participation. I 
understand that the SBA is now going to increase lender 
oversight fees in April, is that true, for three quarters----
    Mr. Preston. Yes, the lender oversight----
    Senator Snowe. What impact is that going to have on lender 
participation and the overall health of the lending programs?
    Mr. Preston. Yes. The cost of the lender oversight fee 
relative to the size of the portfolio, the banks that are 
getting hit by the fees, in most cases is relatively small. The 
offset fee is $73 per million, I think, so it is a fraction of 
a basis point. In addition, the larger lenders, $10 million and 
above, require an onsite exam every 2 years and we charge them 
for the cost of that exam. It is generally--I think it is 
$26,000. The IG recommended that we perform onsite exams for 
loans with portfolios as small as $4 million. We felt that that 
was too small. We did portfolios as small as $10 million.
    So generally, I think 350 of our 5,000 lenders will have 
onsite exams. Most of them are not affected by it. It is really 
the larger ones. I have some concern that when you look at the 
smaller lenders that have the onsite exams, it may be a bit of 
a challenge. I think it will be ten or 11 basis points on their 
portfolio. So one of the things we are looking at right now is 
whether or not that bottom part of the tier, right when they 
come in, whether or not we can be doing something there.
    But broadly speaking, I don't think it is going to have a 
significant impact. I think there is a----
    Senator Snowe. Well, it dovetails with the decline in the 
economy, too, so I wonder if the timing of that, raising those 
fees in the midst of a declining economy won't have----
    Mr. Preston. Yes----
    Senator Snowe [continuing]. An adverse impact on the 
overall participation in the program, or losing more lenders, 
for that matter. I don't know.
    Mr. Preston. Yes.
    Senator Snowe. I think this is obviously something you have 
to gauge----
    Mr. Preston. It is an issue I have been discussing with my 
staff, but by the same token, that is allowing us to go from 50 
lenders a year to about 250 lenders a year in terms of doing 
good onsite reviews, so we are significantly expanding our 
oversight based on those fees.
    Senator Snowe. No, I understand because I think it is 
important to enhance accountability and also certainly in 
conducting oversight. That is one of the other issues that 
emerged in one of the hearings with Inspector General Thorson 
and with the Preferred Lenders Program, as well, making sure 
that the SBA exacts accountability.
    Mr. Preston. Yes. Now, we have seen a decline in our 
delinquencies until very recently, and I think when you look at 
when we began instituting heavier lender oversight, we actually 
began to see the portfolio quality improve over time. I have to 
say, though, given what is happening in the economy today, 
these banks are reporting higher delinquencies and we are 
starting to see some pressure there----
    Senator Snowe. I would hope that you would submit to the 
Committee the delinquency rate and what is happening there. 
That is something that obviously we should be privy to----
    Mr. Preston. We will come over and brief your staff----
    Senator Snowe. Definitely----
    Mr. Preston [continuing]. We will show them the graphs and 
tell them what is happening and why we think it is happening. 
We have looked at regions and industries and to really get a 
handle on this data.
    Senator Snowe. Definitely. And finally, on the SBA energy 
clearinghouse, is that operational yet?
    Mr. Preston. Right now, we are working to make sure that we 
are complying with the 2007 law as well as the one enacted in 
2005. I think in some places it modified it, and I know I spoke 
with my Chief of Staff this morning. She feels good about the 
progress we are making. She is meeting with the Energy Star 
people tomorrow. But if you would like us to come back with any 
detailed outline of what we are doing for the record, we would 
be happy to do that.
    Senator Snowe. We would definitely like that. It is 
obviously an area_
    Mr. Preston. Yes.
    Senator Snowe [continuing]. Where small businesses are 
looking----
    Mr. Preston. Especially considering energy costs today, 
sure.
    Senator Snowe. Exactly, and only 43 percent are 
participating in that regard, so clearly we have to do more, so 
if we can get it up and operational and working to satisfy the 
interests of those who are wanting to engage in energy programs 
and adopt energy efficient programs in their industry, they 
ought to have the ability to have that information.
    Mr. Preston. Okay.
    Senator Snowe. Okay. Thank you, Mr. Administrator.
    Mr. Preston. Thank you.
    Chairman Kerry. Just a final couple of questions, if I can. 
Thank you, Senator Snowe.
    I want to follow up on Senator Snowe's question on the 
lender oversight fees. I think, Mr. Administrator, I mean, I 
hope you can hear this. I think it is a huge mistake to move 
down that road, especially in light of what you have just said 
about what the sort of pull-back of many people in this economy 
already troubled from the lending. SBA got out of the business 
of direct lending because it decided it didn't want to carry 
that expense of doing it. We would let the private sector do 
it. And the one thing the SBA would do is oversight, be 
responsible for guaranteeing the safety and security of the 
process.
    In addition to the other fees which we have been trying to 
lower which have been raised, to now charge those folks for 
their own oversight is sort of to send a message to them, in my 
judgment, you know, we just don't care that much about this and 
you guys carry the cost. If you want to participate, terrific.
    I think you have got to make it--you know, it is a 
relationship and I think you are at risk in those fees of 
driving more people away and of actually having a counter-
impact on the marketplace from what you want to have right now, 
particularly at this moment.
    Mr. Preston. Right. We are doing a number of things, 
actually, to bring down the cost for banks through all sorts of 
automation initiatives, initiatives to simplify our 
interactions with them, initiatives to reduce their paperwork. 
All that resonates very strongly with the banks because they 
are going in that direction. If they go in that direction with 
us, it brings down their costs.
    Chairman Kerry [continuing]. Oversight_shouldn't that be in 
the SBA's budget?
    Mr. Preston. It is no--well, I don't see it any different 
than----
    Chairman Kerry. It is government protection and function, 
the oversight. We are asking to make a government-backed loan.
    Mr. Preston. Well----
    Chairman Kerry. We need to be the ones----
    Mr. Preston [continuing]. First of all----
    Chairman Kerry [continuing]. To know what is going on. It 
is our responsibility. And that is the part of the relationship 
that sort of encourages them to do it, I think.
    Mr. Preston. Well, I am not sure that I would look at it--
--
    Chairman Kerry. All the lenders are against it, aren't 
they?
    Mr. Preston. Uh----
    Chairman Kerry. The lenders clearly----
    Mr. Preston. I think any time--sir, any time you ask them 
if they want to pay a fee or not, they are going to, you know--
--
    Chairman Kerry. But----
    Mr. Preston. The larger lenders have come back----
    Chairman Kerry [continuing]. If you were in that seat and 
somebody said, okay, here is an extra fee on you, would it not 
conceivably be the tipping point where they would say, okay, to 
hell with this. We don't need to do this.
    Mr. Preston. It could be for certain lenders, but I would 
counter with----
    Chairman Kerry. Why take the risk?
    Mr. Preston.--I think we are making and taking any number 
of actions which go far beyond the challenge with this fee to 
make it easier for them to do business with us, do better 
outreach, simplify our process, and be an easier institution to 
do business with.
    Chairman Kerry. Well, I would love to see the quantifiable 
net sheet on that.
    Mr. Preston. Great. The other thing I would say is----
    Chairman Kerry. I am asking you to provide that to the 
Committee.
    Mr. Preston. Okay.
    Chairman Kerry. I would like to see the quantifiable net-
net of how this leaves them plus in terms of their 
expenditures.
    Mr. Preston. Well, I don't think this fee leaves them plus, 
but I don't think----
    Chairman Kerry. Well, then----
    Mr. Preston [continuing]. An FDIC fee----
    Chairman Kerry [continuing]. Why press the tipping point 
here? Why send them the message that you have got to pay for 
your own oversight and----
    Mr. Preston. We are paying to do oversight for the benefit 
of the--I mean, this whole issue we are talking about with all 
these things, this enables us to do sufficient oversight 
because it gives us the funding to do that. And so, you know, 
we are dramatically expanding the number of institutions we can 
get to because of that. And so the other thing I would mention 
is it pales in comparison to the fees that most of these banks 
are paying to other regulators. It is a small fraction of what 
they are going to pay to somebody else. This specifically 
doesn't----
    Chairman Kerry. This is the first time I have heard the 
government make an argument that the private sector ought to 
pay more because they are already paying more to the 
government.
    Mr. Preston. But the government pays about $150 million 
that isn't covered by these fees to run our Capital Access 
Programs. I mean, we run----
    Chairman Kerry. We get something for this. We get them to 
do the lending, to make loans they might not otherwise make.
    Mr. Preston. I agree with you on the value of our programs. 
What I am telling you is I do think that we have a very rich 
investment that we don't charge them for----
    Chairman Kerry. That sounds like we are getting into a 
private sector competitive analysis, which is not what this is 
about.
    Mr. Preston. You know, I think if you look at the cost, 
this is a relatively small number, and I do concede that there 
is a group of banks on whom it may have an impact. But in the 
broad scheme of things, I don't think that these fees are 
significant compared with the profitability they are getting in 
these programs, the fee they would expect to pay to a 
regulator, or our overall cost of doing this business----
    Chairman Kerry. Well, as I said, I would really like to see 
that comparative sheet----
    Mr. Preston. Okay.
    Chairman Kerry. I would like to ask for it as part of the 
record here.
    I have only one other question and that is on the Military 
Reservist Economic Injury Disaster Loans.
    Mr. Preston. Okay.
    Chairman Kerry. How are we doing on that?
    Mr. Preston. Umm----
    Chairman Kerry. Have we issued more loans since the last 
hearing when we were at about 260-some or whatever it is?
    Mr. Preston. I would have to get back to you on that.
    Chairman Kerry. Would you find out for me?
    Mr. Preston. I don't know----
    Chairman Kerry. Do you know what the demand has been like--
--
    Mr. Preston. This is a program that is--you know, we 
continue to do outreach on it. Frankly, Senator, I think it is 
one of the best programs we have and probably the most 
underutilized, so we would love to work with you to get the 
word out there, but certainly every time I am in front of a 
veterans' group, every time I am talking to my counterparts in 
other agencies, I am talking about this program, trying to 
encourage usage and get the information out. It is a great 
program, but whatever number we give you, it is not enough 
because I don't think we are as effective as we need to be in 
getting the word out.
    Chairman Kerry. Well, we would like to know. If you can 
find out and submit that also as part of the record, I would 
like to see where we are in that now. I would like to get a 
sense of the demand on it, too, and what the outreach--what the 
affirmative outreach effort is----
    Mr. Preston. Sure.
    Chairman Kerry [continuing]. Of the agency itself beyond 
your own speeches to the veterans' community because I think it 
is going to be particularly important in this economy.
    Well, I think we really appreciate your taking the time to 
be here with us today. I know it is time you would probably 
love to spend somewhere else, I am sure. But on the other hand, 
I think it is an important part of the process and we 
appreciate it.
    Let me say for myself, and I think Senator Snowe shares 
this, that it is very clear how immersed you are in a lot of 
the details and it is clear also you are providing leadership. 
Sometimes we may disagree with the direction and what you are 
doing, but I think you are engaged and providing some badly 
needed leadership at the agency and we appreciate that very, 
very much. I think you have spoken today with a command of 
detail and certainly expressing your point of view about things 
that has been absent from some of these hearings in the past 
and I want to pay my respect to that. I think you have been 
very articulate, even though obviously, I think on occasion you 
have been wrong, but----
    [Laughter.]
    Chairman Kerry. But that said, we certainly appreciate your 
time.
    Mr. Preston. Thank you.
    Chairman Kerry. Senator Snowe, do you want to add anything?
    Senator Snowe. No.
    Chairman Kerry. So thank you for this. We will see you very 
shortly. The budget will be coming up. We will have the budget 
hearing, will be the next time we see you, and I hope obviously 
your budget is one that reflects the administration's 
commitment to these reforms and efforts and we look forward to 
that discussion.
    We stand adjourned. Thank you.
    [Whereupon, at 11:55 a.m., the committee was adjourned.]

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