    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

                           FULL COMMITTEE HEARING ON
                     OVERSIGHT OF THE SBA AND ITS PROGRAMS

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

                                    HEARING

                                   before the

                          COMMITTEE ON SMALL BUSINESS
                                 UNITED STATES
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  HEARING HELD
                                 JULY 29, 2009

                                   __________

             [GRAPHIC(S)] NOT AVAILABLE IN TIFF FORMAT]

                Small Business Committee Document Number 111-040
    Available via the GPO Website: http://www.access.gpo.gov/congress/house

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                       HOUSE COMMITTEE ON SMALL BUSINESS

                    NYDIA M. VELAZQUEZ, New York, Chairwoman

                              DENNIS MOORE, Kansas

                          HEATH SHULER, North Carolina

                         KATHY DAHLKEMPER, Pennsylvania

                             KURT SCHRADER, Oregon

                            ANN KIRKPATRICK, Arizona

                              GLENN NYE, Virginia

                             MICHAEL MICHAUD, Maine

                             MELISSA BEAN, Illinois

                             DAN LIPINSKI, Illinois

                          JASON ALTMIRE, Pennsylvania

                            YVETTE CLARKE, New York

                            BRAD ELLSWORTH, Indiana

                            JOE SESTAK, Pennsylvania

                             BOBBY BRIGHT, Alabama

                            PARKER GRIFFITH, Alabama

                          DEBORAH HALVORSON, Illinois

                      SAM GRAVES, Missouri, Ranking Member

                          ROSCOE G. BARTLETT, Maryland

                             W. TODD AKIN, Missouri

                                STEVE KING, Iowa

                         LYNN A. WESTMORELAND, Georgia

                              LOUIE GOHMERT, Texas

                             MARY FALLIN, Oklahoma

                             VERN BUCHANAN, Florida

                          BLAINE LUETKEMEYER, Missouri

                             AARON SCHOCK, Illinois

                          GLENN THOMPSON, Pennsylvania

                             MIKE COFFMAN, Colorado

                      Michael Day, Majority Staff Director

                     Adam Minehardt, Deputy Staff Director

                          Tim Slattery, Chief Counsel

                      Karen Haas, Minority Staff Director

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

                                      (ii)

                             STANDING SUBCOMMITTEES

                                     ______

                   Subcommittee on Contracting and Technology

                         GLENN NYE, Virginia, Chairman

    YVETTE CLARKE, New York              AARON SCHOCK, Illinois, Ranking
    BRAD ELLSWORTH, Indiana              ROSCOE BARTLETT, Maryland
    KURT SCHRADER, Oregon                W. TODD AKIN, Missouri
    DEBORAH HALVORSON, Illinois          MARY FALLIN, Oklahoma
    MELISSA BEAN, Illinois               GLENN THOMPSON, Pennsylvania
    JOE SESTAK, Pennsylvania
    PARKER GRIFFITH, Alabama

                                     ______

                        Subcommittee on Finance and Tax

                        KURT SCHRADER, Oregon, Chairman

    DENNIS MOORE, Kansas                 VERN BUCHANAN, Florida, Ranking
    ANN KIRKPATRICK, Arizona             STEVE KING, Iowa
    MELISSA BEAN, Illinois               W. TODD AKIN, Missouri
    JOE SESTAK, Pennsylvania             BLAINE LUETKEMEYER, Missouri
    DEBORAH HALVORSON, Illinois          MIKE COFFMAN, Colorado
    GLENN NYE, Virginia
    MICHAEL MICHAUD, Maine

                                     ______

                  Subcommittee on Investigations and Oversight

                     JASON ALTMIRE, Pennsylvania, Chairman

    HEATH SHULER, North Carolina         MARY FALLIN, Oklahoma, Ranking
    BRAD ELLSWORTH, Indiana              LOUIE GOHMERT, Texas
    PARKER GRIFFITH, Alabama

                                     (iii)

                   Subcommittee on Regulations and Healthcare

                   KATHY DAHLKEMPER, Pennsylvania, Chairwoman

    DAN LIPINSKI, Illinois               LYNN WESTMORELAND, Georgia,
    PARKER GRIFFITH, Alabama             Ranking
    MELISSA BEAN, Illinois               STEVE KING, Iowa
    JASON ALTMIRE, Pennsylvania          VERN BUCHANAN, Florida
    JOE SESTAK, Pennsylvania             GLENN THOMPSON, Pennsylvania
    BOBBY BRIGHT, Alabama                MIKE COFFMAN, Colorado

                                     ______

         Subcommittee on Rural Development, Entrepreneurship and Trade

                     HEATH SHULER, North Carolina, Chairman

    MICHAEL MICHAUD, Maine               BLAINE LUETKEMEYER, Missouri,
    BOBBY BRIGHT, Alabama                Ranking
    KATHY DAHLKEMPER, Pennsylvania       STEVE KING, Iowa
    ANN KIRKPATRICK, Arizona             AARON SCHOCK, Illinois
    YVETTE CLARKE, New York              GLENN THOMPSON, Pennsylvania

                                      (iv)

                                C O N T E N T S

                                  ----------

                               OPENING STATEMENTS

                                                                       Page

    Velazquez, Hon. Nydia M..........................................     1
    Graves, Hon. Sam.................................................     2

                                   WITNESSES

    Mills, Hon. Karen, Administrator, U.S. Small Business
      Administration.................................................     3
    Shear, Mr. William, Director, Financial Markets and Community
      Investment, U.S. Government Accountability Office..............     5

                                    APPENDIX

    Prepared Statements:
    Velazquez, Hon. Nydia M..........................................    23
    Graves, Hon. Sam.................................................    25
    Mills, Hon. Karen, Administrator, U.S. Small Business
      Administration.................................................    27
    Shear, Mr. William, Director, Financial Markets and Community
      Investment, U.S. Government Accountability Office..............    34

    Statements for the Record:
    GAO Report to the Chairwoman: Additional Steps Should be Taken to
      Address Reforms to the Disaster Loan Program and Improve the
      Application Process for Future Disasters.......................    46
    Small Business Administration Response to Questions for the
      Record: August 2009............................................    88

                                      (v)

                           FULL COMMITTEE HEARING ON
                          RECENT GAO REPORTS ON SMALL
                        BUSINESS ADMINISTRATION PROGRAMS

                                  ----------

                            Wednesday, July 29, 2009

                         U.S. House of Representatives,
                                   Committee on Small Business,
                                                        Washington, DC.
        The Committee met, pursuant to call, at 1:00 p.m., in Room
    2360 Rayburn House Office Building, Hon. Nydia Velazquez
    [chairwoman of the Committee] presiding.
        Present: Representatives Velazquez, Moore, Dahlkemper,
    Bean, Clarke, Ellsworth, Graves, Buchanan and Luetkemeyer.
        Chairwoman Velazquez. This hearing is now called to order.
        This past January, the House adopted Rule 11, which
    requires quarterly hearings on waste, fraud, abuse and
    mismanagement of programs under the Committee's jurisdiction.
    In the last six months, we have held 13 oversight hearings on a
    broad range of issues. Today we will continue that track record
    of upholding transparency. Our discussion will include an
    examination of several SBA programs and an evaluation of steps
    that the agency has taken thus far.
        In recent months, Americans have been reminded of the
    important role that small films play in our economy. The
    Recovery Act alone contains several provisions designed to help
    small businesses, and the majority of those measures fall under
    the SBA umbrella. That is why it is important that we take time
    to assess the agency's progress.
        Even as our economy starts to rebound, small firms are
    facing significant challenges in accessing capital. The
    Recovery Act took steps to address those obstacles. For one, it
    increased the SBA loan guarantees, giving banks greater
    incentive to lend. Any policy that puts cash back into the
    hands of entrepreneurs is critical. And yet SBA has not
    implemented these provisions as quickly as we would have hoped.
        Lending measures are vital, and we need to be sure SBA has
    the direction it needs to put them in place.
        As those of us who have been on the Committee for some time
    know, SBA has a history of struggles with lending. Perhaps the
    most salient example would be the Disaster Loan Program, which
    faced significant challenges following Hurricane Katrina. At
    the time, we asked GAO to take a look at the initiative and to
    evaluate SBA's response to the hurricane.
        The resulting report led to the passage of the Disaster
    Response and Loan Improvements Act. Later in this hearing, we
    are going to hear from GAO about what SBA has accomplished
    since the act was passed. We will also discuss areas in which
    work is yet to be done. That way we can be sure that the agency
    is fully primed and fully prepared the next time around.
        In addition to obstacles in lending, SBA has often grappled
    with contracting issues, perhaps most notably the embattled
    HUBZone program. It is important that we have an idea of where
    that initiative stands. Fraud within the program was the
    primary focus of our oversight hearing in May, and it is this
    Committee's hope that the abuse has since then been rooted out.
        Oversight is a critical part of the legislative process.
    For federal agencies, it provides an honest analysis of current
    programs and an opportunity to change direction. After all,
    that is the primary purpose of GAO. As the investigative arm of
    the United States Congress, it does not seek to simply point
    out wrongs. Its ultimate goal is to provide objective
    recommendations for efficiency and improvement.
        In examining the current state of SBA, it is clear that
    there is still significant work to be done, and the stakes
    could not be higher. Our economy, while recovering, has a ways
    to go. Now more than ever, we are counting on small firms to
    drive growth and create jobs. In making sure they are able to
    do that, we need an SBA that can step up to the plate and
    fulfill its role as a champion of small business.
        With renewed focus and a fresh direction, I feel confident
    that SBA can play that role. I look forward to seeing progress
    unfold in the coming weeks and months ahead.
        I would like to thank both Administrator Mills.
    Congratulations on your appointment. Welcome to this Committee.
    This is your first appearance, and Mr. Shear for being here for
    this discussion. I know we all look forward to hearing what
    they have to say, and with that, I yield to Ranking Member
    Graves for his opening remark.
        Mr. Graves. Thank you, Madam Chair.
        And I also want to thank Administrator Mills for being here
    and Mr. Shear for being here. We appreciate you coming in. We
    look forward to hearing what you have to say about all the many
    different programs at SBA.
        The Small Business Administration is tasked with a great
    responsibility providing all of the necessary tools for
    entrepreneurs to start and grow small businesses. In order to
    complete this task, the SBA employs a number of programs,
    including the HUBZone Program, the 8(a) Program, the Disaster
    Loan Program, and the 7(a) Program, just to name a few of them.
        It is the responsibility of the Committee on Small Business
    to insure that the SBA operates efficiently and effectively,
    and when it becomes apparent that the SBA is failing to reach
    its goals or serve its purpose, it is also the duty of this
    Committee to evaluate the program and assess the Small Business
    Administration and get it back on track so that it can continue
    to serve America's entrepreneurs.
        In the wake of Hurricanes Katrina and Rita, it became
    apparent that the Small Business Administration was not
    equipped to carry out the responsibilities of its disaster loan
    program, and as a result, new requirements were put in place to
    strengthen the program and make sure it was, in fact, as
    efficient and helpful to victims as possible in the event of an
    emergency.
        Similarly, the HUBZone Program at the Small Business
    Administration, which is designed to bring businesses to areas
    that have been traditionally under served, has struggled to
    correctly identify and enforce those who are eligible to
    participate in the program. And, again, recommendations have
    been made to begin to remedy that problem.
        This hearing provides an opportunity to examine these
    problems and others in which the Small Business Administration
    may be struggling and to ascertain the success they have had in
    implementing these new requirements. The small businesses of
    America play a crucial role in maintaining a healthy economy.
    Consequently, the manner in which the Small Business
    Administration conducts itself has a direct result on the
    health of the American economy.
        This is a very important hearing taking place at a very
    important time, and the testimony that we hear today will have
    a direct impact on the health of America's small businesses.
        And, again, I want to thank the witnesses, both of you, for
    being here and, Madam Chair, thank you for holding the hearing.
        Chairwoman Velazquez. Thank you, Mr. Graves.
        And it is my pleasure to welcome the Honorable Karen Mills.
    Ms. Mills was sworn in April 6th, 2009, as the 23rd
    Administrator of the United States Small Business
    Administration.
        Prior to being confirmed as SBA Administrator, most
    recently Ms. Mills served as the president of A&P Group in
    Brunswick, Maine. The SBA helps small business owners and
    entrepreneurs secure financing, technical assistance, training,
    and fairer contracts.
        Welcome, Ms. Mills.

                 STATEMENT OF THE HONORABLE KAREN MILLS

        Ms. Mills. Thank you very much.
        Chairwoman Velazquez, Ranking Member Graves, members of the
    Committee, it is a great honor to testify before you as my
    first time as the SBA Administrator. Given the Obama
    administration's mandate to us to eliminate and prevent waste,
    fraud, and abuse in government programs, I am pleased to
    testify as my first of these regularly scheduled hearings on
    this topic. I consider this to be one of my most important
    responsibilities.
        As you know, as all of you know and as you mentioned, small
    businesses account for 60 to 80 percent of the new jobs that
    are created. Over half of Americans who work own or work for a
    small business, and small businesses are going to continue to
    be the foundation of innovation and competitiveness and the
    creation of our 21st Century jobs.
        But we know that these are difficult times for small
    businesses, making the SBA's mission more important than ever.
    We maintain a lending portfolio at the SBA that supports nearly
    $90 billion, mostly in loan guarantees. We are charged with
    making sure that 23 percent of federal government contracts are
    given to small businesses.
        We have a strong network of over 14,000 affiliated
    counselors that help small business owners grow their
    businesses, and we currently have on call more than 2,000
    employees who stand ready to help in case of a disaster. We are
    committed to integrity, accountability and effectiveness in all
    of these programs. These principals are at the core of what we
    do as an agency, and at the core of who we are.
        The Recovery Act, which was passed with all of your help
    and creation, is a great example of this commitment. Since the
    act passed, the SBA has supported nearly seven billion in
    lending approvals to small business. Weekly volumes are up 45
    percent over the weeks before the Recovery Act, and most
    importantly, more than 750 lenders who had not made a loan
    since October when the lending markets froze are back in the
    program making SBA loans, and some of them had not made a loan
    since 2007.
        We have a chart here in the green of where we are in the
    Recovery Act programs. The light green is sort of when it was
    in the planning phase and when it is in the dark green, it is
    in the market, and I will be happy to take questions on that as
    well.
        But one of the first actions I took on becoming
    Administrator was in implementing these Recovery Act programs,
    to make sure there was a senior level risk management team in
    place to oversee the roll-out, and we work closely with the
    Inspector General in terms of risk mitigation and with small
    teams in each individual program to build them.
        I just want to mention the ARC Loan Program, America's
    Recovery Act, as an example of how this risk management worked.
    This is a new program for a specific purpose in a unique time.
    It is a bridge over troubled water for viable but struggling
    small businesses. This is not in our traditional risk profile,
    but we were charged with creating a program that was 100
    percent guaranteed by the SBA with zero interest cost for the
    borrower. So we knew we would have a considerably higher
    default rate.
        We also knew we would have to do extensive lender
    education, and I am happy to say that we trained about 1,300
    institutions in the week following the roll-out. As a result,
    we have 47 states where ARC loans have been made and 26 million
    in the hands of small business owners.
        That level of discipline that we are putting forth in the
    Recovery Act is now the model that we are transferring to the
    core programs at the SBA. We are optimizing operations in areas
    such as disaster assistance, where we have added to the on-call
    employees. We have added surge space in case of a catastrophic
    disaster, and we are doing marketing and outreach in order to
    prepare areas to know what it is they need to do in a disaster,
    and we have instituted electronic loan processing, which now
    accounts for about a third of the applications we received.
        But overall there is a number of issues that still need to
    be addressed. Many of these problems have built over a number
    of years. They will not be solved in days or weeks, but they
    will, indeed, be solved.
        I look forward to working with the distinguished members of
    the Committee to make that happen, and I look forward to your
    questions.
        Thank you.
        [The prepared statement of Ms. Mills is included in the
    appendix.]

        Chairwoman Velazquez. Thank you, Ms. Mills.
        Our next witness is Mr. Bill Shear, and he is the Director
    of the General Accountability Office, Financial Markets and
    Community Investment. The Financial Markets team works to
    improve the effectiveness of regulatory oversight in financial
    and housing markets. It also oversees the management of
    community development programs.
        Mr. Shear, welcome.

                       STATEMENT OF WILLIAM SHEAR

        Mr. Shear. Thank you.
        Madam Chairwoman, Representative Graves and members of the
    Committee, it is a pleasure to be here today to discuss our
    work at the Small Business Administration. My statement is
    based on our report, Small Business Administration: Additional
    steps should be taken to address reforms to the Disaster Loan
    Program and improve the application process for future
    disasters. This report is being released at today's hearing.
        In that this is a general oversight hearing, I also look
    forward to contributing to the discussion at the hearing on
    other SBA programs.
        After the 2005 Gulf Coast hurricanes, many deficiencies
    were exposed in the agency's disaster loan program and
    demonstrated the need for reform. For example, as we state in
    our February 2007 report, SBA did not engage in or complete
    comprehensive disaster plans before the Gulf Coast hurricanes.
        Since then SBA has taken several steps to reform its
    disaster loan program, which includes creating a online loan
    application and increasing the capacity of its disaster credit
    management system.
        In June 2008, Congress enacted the Small Business Disaster
    Response and Loan Improvement Act to expand steps taken by SBA
    and require new measures to ensure that SBA is prepared for
    future catastrophic disasters. In my statement today, I will
    summarize the extent to which SBA addressed the requirements of
    the Act and how SBA's response following the major disasters of
    2008 aligned with key components of its June 2007 disaster
    recovery plan.
        First, with respect to addressing the requirements of the
    act, as of June 2009, SBA met 13 of 26 requirements of the act,
    partially addressed eight, and did not take action on five
    which are not applicable at this time. SBA officials told GAO
    the agency has not yet completely addressed some provisions
    that require new regulations because to do so, the agency must
    make extensive changes to current programs or implement new
    programs.
        For two requirements that will involve private lenders, SBA
    plans to implement pilots before finalizing regulations. SBA
    has not yet addressed the act's requirements for region
    specific marketing and outreach, nor has it insured that
    disaster loan program information is readily available to
    regional entities, such as small business development centers.
        By doing so, SBA could leverage the efforts and capacity of
    local resources and emergency management groups, and it could
    better ensure that it and they will be better prepared for
    future disasters.
        Also, as of June 2009, SBA has not met deadlines to issue
    an annual report to Congress or an updated disaster response
    plan. Failure to do so can lead to a lack of transparency on
    the agency's progress in reforming the program, and it can
    limit its ability to adequately prepare for and respond to
    disasters.
        Furthermore, SBA did not have an implementation plan for
    addressing the remaining requirements.
        Second, with respect to SBA's response to major disasters
    in 2008, SBA's initial response after the 2008 midwest floods
    and Hurricane Ike aligned with certain components of the
    initial disaster recovery plan, such as using technology and
    outreach efforts to insure timely assistance. The individuals
    GAO interviewed and results from SBA's 2008 disaster loan
    program customer satisfaction survey provided some positive
    feedback about SBA's performance following these recent
    disasters.
        However, interviewees and survey results indicated areas
    for improvement. In particular, both indicated that application
    paperwork was burdensome, and that the application process
    needed improvement.
        SBA officials told GAO that they have been taking steps to
    improve the application process, but did not provide
    documentation of such efforts. As a result, it did not appear
    to us that SBA has a formal process for identifying problems in
    the application process and making needed improvements.
        In our report, we make five recommendations that we think
    will facilitate SBA's progress in meeting the requirements of
    the act and improve the disaster loan program.
        Madam Chairwoman, it is a privilege to testify before this
    Committee. I would be pleased to answer any questions on this
    work and other recent work we have conducted at SBA.
        [The prepared statement of Mr. Shear is included in the
    appendix.]

        Chairwoman Velazquez. Thank you, Mr. Shear.
        Ms. Mills, Administrator Mills, GAO has recommended that
    SBA conduct unannounced site visits on HUBZone terms, and as
    you are aware, GAO conducted an investigation, and it was not a
    great message from the government to taxpayers and to agencies
    regarding the responsibility of making sure that taxpayer
    safeguards are in place, to make sure that people are playing
    by the rule.
        Are you doing unannounced site visits? And how many has
    your agency conducted since GAO made this recommendation in
    March?
        Ms. Mills. Yes, Madam Chair, we are making unannounced site
    visits. In the time until the last hearing in March and when
    this report was released, there had been only seven visits in
    six months. Since that time, we have done over 600 in the last
    four months.
        We are using the data from the site visits to build a risk
    based mechanism in order to see what documentation indicate
    noncompliance. So we will continue to make unannounced site
    visits and we will continue to work on this mechanism.
        In addition, I believe you are referring to the March 2009
    GAO report which was very helpful. I just wanted to report back
    on what has been done. There were 19 firms cited. Two had
    already been de-certified when we got the report and one
    actually was okay. Of the remaining 16--
        Chairwoman Velazquez. Administrator.
        Ms. Mills. Yes.
        Chairwoman Velazquez. I want to deal with that specific
    issue later.
        Ms. Mills. Yes.
        Chairwoman Velazquez. So allow me to follow my train of
    thought here.
        Mr. Shear, in your report you note that SBA failed to meet
    several deadlines, some by several months. What were SBA's
    explanations for missing deadlines, and how has this affected
    the agency's preparedness for large scale disasters?
        Mr. Shear. The reasons for not meeting deadlines fall into
    a few different categories. The first one that I will mention
    is one category that has to do with the coordination with FEMA-
    -where you have regulations that have to be coordinated between
    the agencies--and we were told that coordination was a fairly
    extensive, cumbersome process, and that was the reason for
    delay.
        Another category, this is a place where I think one area
    where we just disagree with SBA, we think that the act is clear
    in calling for regional marketing plans and to have plans that
    are specific to the types of disasters that can occur in
    specific parts of the country, and that is one requirement
    where it seems there is some disagreement over whether what is
    already there at the national level meets the requirements of
    that act. So that is one where we just have a fundamental
    disagreement, it seems.
        Some of the others, such as having programs that involve
    private lenders, for those programs SBA wants to conduct pilots
    before rolling out an actual program to have some experience
    with the program. That is one where even though SBA has not met
    the requirements in terms of deadlines, we are fairly
    sympathetic to because from our general work dealing with
    federal loan insurance and guaranty programs, sometimes when
    you go into a new type of venture, pilots could be very
    effective.
        Those are some of the examples as far as why there have
    been delays. One of the reasons we made a recommendation that
    SBA should come up with time frames for the implementation of
    completing the requirements of the act is we think that action
    will help facilitate a certain discipline in terms of getting
    to where it should be.
        Chairwoman Velazquez. Ms. Mills, one of the most surprising
    findings of the report is the fact that nearly four years since
    Hurricane Katrina the agency is still struggling to develop a
    risk based disaster response plan, and as we enter the peak of
    hurricane season next month, will the SBA continue to rely on a
    disaster plan that is over two years old and that contains
    obsolete information.
        Ms. Mills. Now, I presume that you are talking about our
    annual disaster plans. We submit monthly plans to Congress and
    assessments of where we are, but we will complete this annual
    plan. We agree that it is dramatically important and overdue,
    but we will complete it.
        Chairwoman Velazquez. Do you have a time line?
        And my next question is will that disaster plan,
    comprehensive plan, have the components mandated by the law?
        Ms. Mills. Yes, it will, and many of these components are
    in place, and I think we need to just get you the plan.
        Chairwoman Velazquez. When do you think it will be
    expected, since I mentioned that the hurricane season is
    coming?
        Ms. Mills. I will get back to you with an exact date, but
    we promise that we will look to do it as soon as possible.
        I do want to say we want to thank Mr. Shear because these
    actually have been a very helpful template for us to go through
    and execute these things. So I think we are poised to bring you
    this report.
        Chairwoman Velazquez. But you understand the urgency--
        Ms. Mills. Yes, I do.
        Chairwoman Velazquez. --of having this plan in place before
    the hurricane season is over us.
        Ms. Mills. Yes, we do, and we actually have the capacity in
    place. So I think it is a matter of the report, which we owe
    you and will get to you.
        Chairwoman Velazquez. Administrator Mills, this Committee
    has asked SBA on a number of occasions if it has the resources
    and controls necessary to prevent contracting fraud. In the
    past, the agency has said that they have the resources
    necessary to prevent fraud in the HUBZone Program only to have
    the GAO to find otherwise.
        So let me ask you today: do you have sufficient resources
    and internal controls to prevent fraud in the 8(a) program?
        Ms. Mills. Thank you, Madam Chair.
        The 8(a) program is for small businesses. It is not for big
    businesses masquerading as small businesses. This has been a
    concern about this program.
        We have done a number of things to begin to make sure that
    we eliminate fraud and abuse and address the issues that have
    been raised. The first is that we have had a strong up-front
    certification program, and a formal certification that is done
    in two geographic areas specializing in this, Philadelphia and
    San Francisco.
        In addition, we have done some things since our last visit
    to you to specifically invest in this activity. The first is
    leveraging technology. We have added to our business
    development management information system in order to be able
    to better track these companies through their nine-year cycle.
    We are mandated to invest in them for business development, and
    we have two tools.
        Chairwoman Velazquez. Administrator, administrator, excuse
    me one second, but I have a lot of other questions, I just want
    to make sure that today you are telling our Committee that you
    understand that you have the resources and the controls in
    place and necessary to prevent fraud in the 8(a) program.
        Ms. Mills. We are making investments now in those things.
    We have put in the 2010 budget some additional resources that
    would be very helpful, and we are working on a package of
    regulatory changes which will soon be brought public before
    you.
        Chairwoman Velazquez. The same with the service disabled
    veteran program.
        Ms. Mills. Yes, the service disabled veteran program is
    extremely important, as you know. That is slightly different
    because we need to work in conjunction with the Veterans
    Administration. We have a very important report coming, I
    think, from the GAO to help us work with them.
        I have a meeting with the Veterans Administration to work
    on the issue of their database, which is the database that is
    the governing database on who is a service disabled veteran.
    That is critical for this program to only be able to deliver to
    service disabled veterans.
        Chairwoman Velazquez. Mr. Shear, given everything that you
    have reviewed in putting together this report, are you
    comfortable that the SBA is prepared to meet the challenges of
    another natural disaster on the scale of Hurricane Katrina?
        Mr. Shear. I wish I could give another answer, but do I and
    do we feel comfortable about the question you posed, the answer
    is no. These are some of the reasons why.
        There are certain parts of the requirements in the act that
    have not been met, and among them let me just go back to the
    disaster recovery plan from 2007. At the time it was provided
    to us, the Administrator proposed it to us as conceptual
    approach. Part of our view in our recommendations to the
    Administrator and also with respect to the act itself, we think
    strategic planning should be a very living document.
        So, for example, there have been disaster simulations that
    have occurred. Yet we do know that simulation is the best thing
    to do to prepare for disasters the size of Katrina.
        Chairwoman Velazquez. Mr. Shear, let's clarify that. That
    was under the previous Administrator.
        Mr. Shear. Yes, from the previous Administrator, yes. Thank
    you.
        In terms of the disaster simulations, we know the disaster
    simulations the agency used in 2008 and they are of
    catastrophic disasters. Yet what we do not know, and this
    committee does not know is what were the results of those
    simulations in terms of the capacity of the agency to deal with
    a disaster the size of another Hurricane Katrina nor what
    lessons have been learned from running those simulations.
        So in the absence of some evidence that the agency is in a
    position of responding, even on a simulation type basis, causes
    us to answer that question in the way we do.
        Chairwoman Velazquez. Ms. Mills, I hope that you understand
    that we are here fulfilling our role and our duty of overseeing
    and making sure that things that need to be in place are in
    place. Hurricane Katrina was a disaster of major proportions
    where people lost their lives, lost their businesses.
        So four years later after that, we need to hear that the
    GAO feels that you have something in place where we can feel
    comfortable.
        Ms. Mills. Thank you, Madam Chair.
        And I very much am listening to this issue that you raised
    about the plan. I would like to just mention that we have
    tactically added. Before Hurricane Katrina we had 880 trained
    staff. We now have 2,400 staff and reservists, and our
    reservists are ready to go across the country anyplace that
    there is a disaster.
        We also used to have 366 work stations and one of the
    things we took from this review that you did which was very
    helpful is we now have 2,100; from 366 to 2,100 work stations
    in our disaster areas of Fort Worth and Surge Seats in
    Sacramento.
        And we upgraded our management information system so that
    we can do 12,000 concurrent users. So in terms of investing in
    fixed infrastructure, trained people, we are in a very, very
    different place.
        We also reengineered our loan processing system. In the
    middle of Katrina, it took us 85 days to process a loan. We now
    in any disaster do 14 days for homes and 18 days for
    businesses, and we are piloting some additional programs.
        Chairwoman Velazquez. Mr. Shear, do you have any comments?
        Mr. Shear. We acknowledge in our report that a lot of
    progress has been made. The types of problems in this program,
    many of them have been addressed, including the expansion in
    DCMS, greater availability of reserves, and the types of things
    the Administrator is talking about. So we acknowledge these
    improvements, and the program has improved.
        The response to the 2008 disasters, which were much smaller
    than anything on the scale of Katrina, was at least somewhat
    positive, but we are pointing out do we feel comfortable yet,
    and there are still other pieces that are related to the other
    provisions in the act, and in particular the lessons learned
    from having gone through simulations and other types of
    exercises that we think are very important to demonstrate the
    type of preparedness I think we're all looking for.
        Chairwoman Velazquez. Thank you. Thank you.
        Mr. Graves.
        Mr. Graves. Thank you, Madam Chair.
        Ms. Mills, the Office of Chief Counsel for Advocacy is
    required by statute to monitor agency compliance for the
    Regulatory Flexibility Act, and given the amount of increased
    legislation that may come from health care reform and from the
    reduction in greenhouse gases, you know, that responsibility is
    just going to get even greater.
        My question to you is: do you expect that the Chief Counsel
    is not going to continue to monitor agency compliance with the
    Regulatory Flexibility Act to the same extent that it did under
    President Clinton's Administration, president Bush's
    administration?
        Ms. Mills. Absolutely, yes. This issue of excess regulation
    causing cost to small business is a critical mandate not only
    for the Office of Advocacy, but for all of the SBA, including
    the Ombudsman's Office, and this is one of the number one
    concerns for small businesses. So it will be a priority.
        Mr. Graves. Mr. Shear, in comparison to other federal
    agencies, how quickly do you think the SBA adopts GAO
    recommendations just compared just to the other agencies you
    obviously have to deal with?
        Mr. Shear. That is a difficult question. I am trying to
    think of how to come up with a tactful answer, but I would say
    over the years it has been an agency that has been relatively
    slow to implement recommendations. I think that the
    recommendations in the Disaster Loan Program from our work back
    then--where we still say there is a way to go--but with respect
    to expanding the disaster credit management system and those
    recommendations, that was a priority, and I think that those
    were implemented over the course of a number of years.
        But you know, there are still remaining recommendations and
    there are many that seem to --what I will call just linger for
    very long periods of time.
        Mr. Graves. Would you like to comment on that?
        Ms. Mills. Yes. Well, we are going to have to change that,
    Mr. Shear, and we are going to have to get into the top end of
    the good performers on that list.
        We are very committed to working in partnership with the
    GAO and with the IG also because if we are going to create a
    culture where there is a real responsiveness on these reports,
    we find them very helpful. They are a very strong road map, and
    we know we can improve these programs on an ongoing basis. So
    we want to be able to change that answer and be at the top end
    of the responders.
        Chairwoman Velazquez. Ms. Clarke.
        Ms. Clarke. Thank you, Madam Chair and Ranking Member
    Graves, for holding this hearing, and thanks to you,
    Administrator Mills and Mr. Shear, for your attendance today
    and your testimony today.
        I look forward to working closely with all of you to insure
    that waste, fraud, mismanagement and abuse are reduced and
    ultimately eliminated. While this is being done, we want to be
    able to maximize on the effectiveness of SBA's fantastic
    programs which serve America's economic engines, her small
    businesses.
        Administrator Mills, my first question is for you. I have
    long been a supporter of the SBA's efforts to create
    opportunities for women and minority, veteran owned businesses,
    and today I would like to focus on women and minority owned
    businesses and their ability to access credit.
        Typically women and minority owned businesses tend to
    employ a more diverse workforce, and this is especially an
    issue today as minority employment is at high levels relative
    to the rest of the country.
        In this vein, I would like to insure that existing
    programs, such as the Women's Business Centers and other
    technical assistance programs have the capacity and capability
    to assist minority and women owned businesses in identifying
    finance opportunities. I think it is vital that they have the
    tools they need to serve this important segment of the business
    population. I think we must maximize the existing resources to
    insure that the WBCs have what they need to help foster our
    economic recovery.
        Has there been some progress in the area of grant
    disbursements by WBCs? And will you commit to working with me
    to discover methods to increase access to credit for women and
    minority owned small businesses right away?
        Ms. Mills. Yes, I would be delighted to commit to you to do
    that. The SBA has part of its core mission, and we are three to
    five times more likely than a conventional lender, to lend to
    women and minority owned businesses. So this is really what we
    do. It is at the essence of what we do.
        I am pleased to report to you that in the Recovery Act
    funding 20 percent of the loans have gone to minority owned
    businesses and 19 to women owned businesses. We have over 100
    women owned business centers in our network. We currently have
    a new and very talented and energetic person running these who
    has conducted regional meetings and has visited all of them and
    is coming back with a lot of ways to improve and help this
    important constituency, and we are going to execute on that,
    and I would look forward to working with you on it.
        Ms. Clarke. Thank you, and I want to also draw your
    attention to the HUBZone Program. We are all aware that the
    HUBZone Program encourages small businesses to locate in and
    hire from the nation's most distressed communities. Given that
    the focus of this hearing is exploring ways to address
    mismanagement, I would be remiss if I did not ask about the
    progress in the areas of certification of HUBZone firms.
        At a hearing before this Committee in March, GAO testified
    that the SBA fell short in removing certain fraudulent
    companies from HUBZone participation, and this oversight
    resulted in another 7.2 million in HUBZone contracts being
    awarded to those same firms.
        I want to be clear that there is no place in this economic
    climate for fraudulent firms to take opportunities that belong
    to more deserving entities.
        So would you please comment on the progress in oversight of
    the HUBZone certification/decertification process in order to
    address this imperfection?
        This is a good program, and it should not suffer due to the
    shortcomings such as the ones that I have described.
        Ms. Mills. Thank you.
        Yes, we at this moment have initiated a business process
    reengineering. So that is a full start to finish reengineering
    with an outside firm that is in place on the certification
    process in HUBZone because of the issues that you have
    described.
        So we have tightened it up. We require more documentation
    already, but we are also going to do a business process
    reengineering of it. So that is on the certification side.
        In addition, on the continued eligibility, as I responded
    to the Chairwoman, that is where we did the extra 600 visits,
    and we are conducting the risk based analysis to try to find
    out how to indicate where there are issues of fraud or
    mismanagement.
        In addition, we went after the 19 that were cited in the
    GAO report. Five voluntarily withdrew. Six were decertified,
    and six we have proposed for decertification. Two are already
    decertified, and one actually is okay.
        Ms. Clarke. Thank you very much, Madam Chair. I yield back.
        Chairwoman Velazquez. Mr. Buchanan.
        Mr. Buchanan. Thank you, Madam Chair, for this hearing and
    congratulations on your new opportunity. It is a big job.
        Let me mention small businesses are getting literally
    killed. When I look at what we have done with TARP, and this is
    not a Republican- Democrat thing. I am just looking at the
    country now. All of the big banks, AIG, everybody got a lot of
    money. Small business was supposed to get something. There was
    supposed to be more credit available.
        There is no credit. I did a town hall meeting with
    businesses about two months ago; had 130 businesses, some in
    southwest Florida just south of Tampa. We had the SBA there.
    They did a very good job, by the way, in terms of answering
    questions, but I asked in the room how many people can get
    credit or have access to credit, you know, that do not work
    with banks? Or how many people has it changed their credit.
        Everybody in the room raised their hand. I want you to know
    I have been in business 30 years. I have been on bank boards
    for 20 years. We in Florida anyway--every region is different
    in the country--there is no credit. They might say there is
    credit, but the reality of it is if you put up a $1 million CD
    they will lend you $1 million.
        Small businesses today, in Florida we had in our federation
    137,000 small businesses. They create, I think everybody
    agrees, 70, 75 percent of the jobs. We talk a good game, and I
    think the President is committed to small business. I have
    talked to him personally about that, but we just are not doing
    anything to get the money out there.
        They have no money. They have access to no capital. So I
    just want to say that in general. Banks will tell you that, but
    they are all under pressure. Their own capital base themselves,
    they are trying to all survive. Small banks, little banks, I am
    talking to them. They are not lending any money.
        So what do you say to these small businesses in my
    community and communities across the country that need credit?
    Because if they have no credit, we are going to lose a third of
    them or a big number of them.
        Ms. Mills. Well, Congressman, I also have been traveling
    and hearing these issues, and I know the Chairwoman has
    mentioned to me as well some of these places that she has gone.
    We are all hearing that small businesses are suffering, and one
    of the things I have to thank you for is that the Recovery Act
    did actually get the formula right because we have been able to
    leverage with the funding that you gave us so far $7 billion
    into the hands of small businesses through the Recovery Act
    funds, and that is going to continue.
        And 750 banks that had stopped lending, they were frozen;
    they were not on our books from October to the start of the
    Recovery Act, but are now back lending. So these are very often
    community banks and other banks, and they are back. Some of
    them had not been in SBA lending since 2007.
        So we are very glad about that. We are going to be working
    very hard to leverage those programs into these places where
    the lending is frozen.
        In addition, as you know, the President is committed to
    small business, and there are a number of additional programs,
    many discussions going on about how to address this. It is a
    critical issue to resolve for the nation's economy.
        Mr. Buchanan. I am telling you in Florida, and I am sure
    Nevada and areas that have been really hit hard, all of these
    banks, even though they are getting capital, they are not
    lending. You know, I will be glad to talk to you about this
    later, but the truth of the matter is they are not lending. So
    these businesses, a lot of them are going to end up going out
    of business.
        I do not understand--
        Chairwoman Velazquez. Would the gentleman yield?
        Mr. Buchanan. Yes.
        Chairwoman Velazquez. One of the issues that we discussed
    is now that, yes, the banks are not lending because the
    secondary market is locked, and so it is important that SBA
    implement the Section 503 and 509. That will help unlock the
    secondary markets so that those banks will have the liquidity
    to start lending again.
        Do you have like a time line of when those programs will be
    up and running?
        Ms. Mills. Madam Chair, you are entirely correct, that if
    the secondary market is not functioning, then banks do not lend
    because they have no place to sell their loan and get the
    liquidity.
        We have the two programs up there on the time line. The two
    ones you mentioned are still in the light green, and that is
    why the Chairwoman is continuing to mention them to me.
        I will say that the secondary market has recovered. It is
    back to pre- October volumes, and we can give you that data and
    information. We track it. It happens on a monthly clearing
    basis. So we are back at about 340 million. We have been back
    there, and there is 15 billion of TARP money that stands ready
    to purchase in the secondary market if that gets stuck again.
        But we have committed to execute those programs, and we
    will execute them.
        Chairwoman Velazquez. When?
        Ms. Mills. Three weeks, two weeks. August.
        Chairwoman Velazquez. Three weeks.
        Ms. Mills. Right where they are on that chart.
        Chairwoman Velazquez. Thank you for yielding.
        Mr. Buchanan. Thank you, Madam Chair. It is a great point.
        Let me just say my thought is if we can give as a country
    in this environment 200 billion, whatever the number, plus all
    of these contingencies to AIG, General Motors 50 billion, why
    don't we take 100 billion, take something significant because
    that is what it is going to take to help these small
    businesses?
        I am just telling you, and I would love to have you come
    down to our area. I will take you anywhere in Florida. I can
    tell you a lot of these businesses are rolling out of business,
    and they have created a lot of the jobs. I mean, most in our
    area, our one Chamber, we had 2,600 businesses. Most of them
    are 20 and 30 employees or less. A lot of them are folding up.
    They are getting their lines of credit pulled. You know, they
    like to work with SBA. Sometimes it takes too long, but we have
    got to find a way where they empower you, and maybe it sunsets
    over time, but we need real money, real results, and right now
    we have lost three million jobs. This is not one administrative
    or another or my mind. The reality is we have lost three
    million jobs. These are a lot of working families.
        We have got to get more money out there in good loans that
    make sense right now, and I will just close with that.
        Chairwoman Velazquez. Time has expired. Mr. Ellsworth.
        Mr. Ellsworth. Thank you, Madam Chair. Thank you, Secretary
    Mills. Good to see you again.
        I would like to make an observation first, and then I will
    have a question.
        First, we talked at the luncheon a few months ago, and one
    of the things I have been on this Committee three years, and I
    have noticed that every time we have a new person come in, we
    would ask them these questions, and they would say, ``We are
    looking into that. We are working on that. We are going to do a
    study on that.'' And three, four, five months later we come
    back and sometimes there was a new person who said, ``I just
    got on the job, and we are looking into that. We are going to
    study that. I was not there then.''
        So I wish you a long tenure, and I also say in four or five
    months I hope you say you can show us the progress that we have
    made in there.
        My question would be now that you are new at the job, what
    are a couple of things that you walked in the door, you start
    peeling stuff apart, and have really shocked you and you have
    said, ``We have got to do this right away,'' either in the
    fraud mitigation? I think you mentioned that in your testimony,
    some of the waste and fraud mitigation efforts you have made.
        And I would like to ask Mr. Shear the same thing when she
    is done. If you had her job, what would you say this is
    something we have to start right now and get done that you
    would implement on day one from your observation of being in
    the agency?
        So, Ms. Mills, if you will go first and then Mr. Shear.
        Ms. Mills. Absolutely. I am looking back to just make sure
    I read the same words to you in my opening statement because I
    am on record with the following, which is that many of the
    problems that have been built up over years and that they are
    not going to be solved in a matter of days or weeks, but they
    will, indeed, be solved.
        We have a top management, risk based approach to addressing
    these issues. They are all on our radar. We track every single
    GAO report and IG recommendation. We work our way through them.
    We either agree with them and execute them or we have further
    discussion as to, you know, how we should move forward with
    them. Because we cannot run an agency that is so critical to
    the economy going forward with our $90 billion loan portfolio,
    with being responsible for 23 percent of government contracts
    going to small business, with being responsible for disasters
    which could be catastrophic.
        We cannot execute unless we execute at the highest levels
    of effectiveness and transparency. So that is the commitment.
    We are working on that.
        I would have to say that what I have found actually on the
    flip side is that we have great people. We have a great team,
    and we have great bone structure. And the secret that I have
    found is that our bone structure is our people and also our
    partners.
        We have over 4,000 lending partners. We have over 14,000
    counselors in our SBDCs and our SCOREs and our Women Business
    Centers. We have a network throughout this whole country where
    we touch businesses. We are within, one person told me, an hour
    to 40 minutes of most businesses with a counselor.
        So we have an important and critical role to play. We are
    breaking down silos, and that also helps with this waste, fraud
    and abuse because it cannot live in this open, transparent
    environment, and we are working together to bring the power of
    that entire network to small businesses in order to bring the
    economy out of the recession and give it strength and make it
    competitive going forward.
        Mr. Ellsworth. Mr. Shear, if you were in charge, what is
    the number one thing you would tackle? It may be on the same
    line.
        Mr. Shear. I will make one flippant remark, which is we are
    not supposed to make management decisions. So let me just make
    some observations if you could live with observations.
        As an accountability organization, when we see the what
    I'll call a complete lack of internal control in fraud
    prevention in a program like the HUBZone Program, some people
    might say, ``Well, the HUBZone Program is not that important,''
    but whenever we look at anything in government dealing with
    HUBZone or contracting programs, internal control and fraud
    prevention is something that, as an audit agency, something
    that we think is very important to address and address
    aggressively for these programs to work.
        With respect to the Capital Access Programs, this I will
    make a statement just because it is such a big part of what SBA
    does, and it is such an even more important part now, now that
    we have the credit crisis that faces us.
        Over the years, among the things we have recommended is
    that in running its programs where SBA is delegating authority
    to lenders and SBA is so compliance oriented, and compliance is
    good, but SBA does not get into questions as far as how are
    those lenders using the authority SBA is granting to them. Are
    they meeting the intent of the program?
        So as we go forward, for example, now in looking at the
    Recovery Act, we say can SBA step back and become more
    evaluative in the way it manages its capital access programs so
    SBA can help figure out how to implement different provisions
    that are to meet an intent in the credit markets where you are
    relying on private lenders to carry out certain authorities. So
    that would be the second area.
        The third area I would point out and as an audit agency, we
    do not make recommendations to either increase or decrease any
    agency's budget. I mean, we are just not in that business. It
    is a congressional prerogative.
        But with SBA over the last few years, at a minimum we
    always are asking a budget-related question in your
    entrepreneurial development programs like Women's Business
    Centers, in running various programs, including the contracting
    programs, including 8(a), do you have the resources needed in
    place?
        So what we tend to look for is some type of strategic
    planning. What do you need to get the job done?
        So those are the three areas I would point out.
        Chairwoman Velazquez. Mr. Shear, and to have all of those
    things in place, the agency will need resources because when
    Mr. Graves addressed the question to you about how does this
    agency compare to other agencies, we have to answer the way you
    answer it, but also take into account that this is the agency
    where for the last six, seven years the budget was cut by
    almost 40 percent. That is another element that we need to
    factor in.
        Mr. Luetkemeyer.
        Mr. Luetkemeyer. Thank you, Madam Chair.
        Ms. Mills, the Committee has heard that you and your staff
    have been approving contracts requested by the Office of
    Inspector General, and we are concerned that this could
    interfere with an ongoing investigation in violation of the
    Inspector General statute. Are you approving contracts
    requested by the Inspector General's Office?
        And, if you are, how are you ensuring that there is no
    interference with the ongoing investigation of the Inspector
    General's Office?
        Ms. Mills. So the question is are we approving contracts,
    and maybe you could clarify what sort of contracts.
        Mr. Luetkemeyer. Dealing with the Inspector General. Can
    you explain the relationship first, I guess, and maybe we can
    go from there?
        Ms. Mills. Yes. The Inspector General is an independent
    actor in the agency. They are funded independently. They are
    very active and work separately from us but we hope collegially
    and in partnership. We provide information as requested.
        Mr. Luetkemeyer. Do you work together in any sort of
    contractual obligations?
        Ms. Mills. Not to my understanding, but I am happy to get
    back to you with an answer on that for the record.
        Mr. Luetkemeyer. Okay. That is fine.
        A while ago you mentioned something about you were looking
    at a number of programs based on a risk-based approach. Can you
    explain to me what your description of and how you would
    determine a risk-based approach?
        Ms. Mills. Yes. There are two times, I think I mentioned
    that. One, overall we have a senior risk team that looks at a
    number of things because although we have small risk teams that
    go program by program, we are now looking more on a
    comprehensive basis on a senior level about how much risk are
    we taking on in various aspects of what we do.
        And consciously, for instance, in the ARC program there may
    be a mandate or we may decide that a program should be a higher
    risk program. We should do that consciously.
        Mr. Luetkemeyer. I assume when you are talking about risk,
    you are talking about how you discern, how you evaluate a loan
    application and whether you are willing to look at, say,
    somebody who is less financially able or less financially
    stable. Is that where you are going with this?
        Ms. Mills. So, for instance, the ARC Loan Program that is
    part of the Recovery Act is a much riskier program than the SBA
    usually does in its profile, and we expect very high default
    rates from that program, but it is a very important program for
    this particular time. It is for viable businesses who are
    experiencing some difficulty, but it is a bridge over troubled
    water for them.
        So we are making a conscious assessment that that is a
    program where we are executing as part of the Recovery Act, but
    it is also a program that is not within our normal risk
    profile. So that is one of the risk assessments.
        Mr. Luetkemeyer. At what point do you pull back on a
    program if you feel it is becoming too risky?
        Ms. Mills. Well, we set the parameters in the beginning.
        Mr. Luetkemeyer. What are your parameters?
        Ms. Mills. About what the default rates will be. We work a
    model--
        Mr. Luetkemeyer. What are your default rate specifications?
        Ms. Mills. The default rate specification was in a model
    that we built with OMB, and it is quite high. it is over 60
    percent for the ARC loans, and that is well beyond what we have
    in any of our other programs. So our expectation is, you know,
    that is what we will get.
        Mr. Luetkemeyer. Okay. Just one final comment here. Mr.
    Shear also made the same comment, and we got a question here I
    was wanting to ask also. A couple of weeks ago we had a group
    in here that talked about the amount of paperwork that is
    involved in the 7(a) program, and Mr. Shear made the same
    comment a minute ago, that it was so cumbersome that many of
    the people were refusing to participate because of that.
        Have you looked into that at all or do you have any plans
    or is it on your radar at all to try and do something about the
    paperwork?
        My family is in the banking business. I used to do this. It
    is horrible, absolutely horrible, and to go through this
    process, and a minute ago you made a comment that you on your
    Disaster Relief Program here went from 14 days to 18 days. I
    just wish that it was 14 days on an SBA bank loan.
        Ms. Mills. Well, actually it is less on an SBA bank loan. I
    believe it is under seven business days, five to seven days--
        Mr. Luetkemeyer. Not in my area, but that is fine. Go
    ahead.
        Ms. Mills. --for an SBA bank loan, but that is because
    since we have done process reengineering. That is a continuous
    task. I am a big advocate of process reengineering, and we need
    to make these programs effective and efficient for the borrower
    while maintaining the oversight and getting the information and
    calculating the information we need so that we have good loans.
        But we have significantly reduced the turnaround time and
    made the process much more friendly for the bank and the
    borrower.
        Mr. Luetkemeyer. That did not sound like a commitment to
    me. Are you going to make us a commitment that you are going to
    look at the 7(a) program and fine-tune that?
        Ms. Mills. Yes, I am.
        Mr. Luetkemeyer. Thank you very much.
        I yield back. Thank you, Madam Chairman.
        Chairwoman Velazquez. Mr. Moore.
        Mr. Moore. Thank you, Madam Chair.
        On July 1st, I hosted a forum in my district for small
    business owners to discuss access to capital. I have heard from
    many of my constituents, and I can tell you that there is a
    great deal of demand for these ARC loans, but last week the
    Finance and Tax Subcommittee held a hearing on access to
    capital, and witnesses testified there are very few banks
    actually making ARC loans.
        I know in the Kansas City area, and I am on the Kansas
    side, but in the whole Kansas City metropolitan area fewer than
    a dozen of these loans have been made and issued throughout the
    entire metropolitan area.
        One witness last week made the important point, I think,
    that there is really no incentive for banks to make ARC loans.
    There is no secondary market in paper work and reg requirements
    are just as stringent as they are for 7(a) or 504 loans which
    offer businesses far more than just $35,000.
        What, if anything, can SBA do to make these loans more
    attractive to lenders and get the process moving?
        Ms. Mills. Thank you.
        ARC loans, now we have over 300 lenders. We are lending in
    47 states. We are on track to have a limited number of ARC
    loans available. There will be approximately 10,000 before the
    funding runs out, and it is likely that demand will greatly
    exceed supply.
        We trained 1,300 lenders in the first week on the call, and
    lenders have no risk. It is 100 percent guaranteed by the bank,
    and they do make a profit because although the borrower pays no
    interest, the SBA funds the interest.
        Mr. Moore. I yield back, Madam Chair.
        Chairwoman Velazquez. Ms. Bean.
        Ms. Bean. Thank you, Madam Chair.
        And thank you both for testifying today and sharing your
    expertise.
        Administrator Mills, I want to commend your leadership at
    the SBA. We have seen a real rebound in the secondary market.
    We are seeing increased lending participation from new lenders,
    lending activity in terms of loans and amounts being lent. So
    important to the small business community as we try to ease the
    credit crunch from limiting their access to capital.
        But you also talked about process reengineering. I know
    from our past conversations you are one very committed to
    continuous improvement. There are some lenders where there
    needs to be trust rebuilt between the SBA and those lenders
    because of something in the history that may be undermined
    that.
        What comments would you share that you are doing to help
    rebuild those relationships where there are lenders who are not
    participating but who could be participating, whether it be the
    ARC loans, 7(a), or other SBA lending programs?
        And before you answer, I also do want to acknowledge I
    worked with some of your folks in Chicago. Senator Durbin and I
    held a forum about not just the roll-out of the ARC lending
    program, but some of the other things going on to stimulate the
    secondary market, and it was very well received, and your folks
    did a really good job.
        Ms. Mills. Well, thank you very much.
        It is very important that we rebuild and that we build,
    continue to build our relationships with our lenders. Let me
    just tell you quickly two things. One is transparency. We are
    making sure that lenders know how they are rated in our lender
    oversight system, and that was something of concern to them.
        And we also are continuing our programs, our preferred
    lender programs and our delegated authority programs. Once we
    have experience with a lender, we are able to do various
    things, let them use their own paperwork, let them make their
    own decisions, and then we monitor them, and we find that our
    best lenders end up in those programs, and it is something that
    then we have a very good, transparent and trustful relationship
    between us.
        Thank you.
        Ms. Bean. Thank you so much.
        I yield back.
        Chairwoman Velazquez. Mr. Graves.
        Mr. Graves. I do have another question, Madam Chair.
        Administrator Mills, we are concerned not only about the
    amount of time it takes to implement recommendations, for
    instance, from the GAO, but we are also concerned about how
    much time it takes to implement things required by law. You
    know, we talked a lot about the ARC Program, and we know for a
    fact that it was supposed to be implemented within 15 days of
    enactment, which would have been March 2nd. It took until June
    15th. We do not know if that was because of a specific
    provision in the law or if it was because of other diversions.
        But my question to you is I would like a commitment from
    you that the agency is going to implement programs that are
    required by law before implementing some of the pilot programs
    that you are working on like the Floor Plan Financing
    Initiative and some of the other things. We would like to hear
    you say that you will do those things that are required or that
    Congress has passed before doing some of the other diversions.
        Ms. Mills. Well, I very much am committed to those things
    that are required by law, and these Recovery Act things are our
    top priority list.
        I do want to tell you that we did the ARC loan. The reason
    for the time in the ARC loan is what I mentioned in my opening
    statement, that this was a risk profile that was very, very
    much higher than the standard risk profile that the agency
    takes on, and that is what took the time to create the risk
    mitigation that would allow us to go out and make these loans
    appropriately.
        But the second thing is the dealer floor plan. The Chairman
    had mentioned to me the same issue, and you mentioned to me
    that issue, and we did sequence them because that was the right
    thing to do behind ARC.
        Chairwoman Velazquez. Ms. Mills, we are concerned about the
    fact that there are certain provisions that the Congress passed
    requiring SBA to issue regulations and to get those programs up
    and running. In answering your question to Mr. Graves, you
    mentioned that those were high risk and so you needed to act
    cautiously.
        My question to you: floor financing is not risk?
        Ms. Mills. The floor financing risk profile is the same
    risk profile as the standard 7(a) risk profile. So that is how
    it was constructed.
        Chairwoman Velazquez. Okay. I want to go with you over some
    of the provisions that we passed, and this happened when you
    were not the administrator. I just want to make sure that you
    tell us your intention and commitment to get those provisions
    up and running.
        For example, in the Energy Independence and Security Act,
    this includes the Energy Efficiency Technology Loan Program and
    the Renewable Fuel Capital Investment Company. Those provisions
    have not been implemented.
        In the Military Service and Veterans Small Business
    Reauthorization and Opportunity Act of 2008, this includes
    Section 105, increasing the number of veteran outreach centers,
    has not been implemented.
        Section 106, study regarding gaps in availability of
    outreach centers, and Section 208, the Veterans Loan Program,
    have not been implemented, and these initiatives are in excess
    of two years.
        So can you tell this Committee when the agency will have
    each of these provisions up and running?
        Ms. Mills. Well, absolutely we are committed to executing
    those things that you give us to execute. I would like to take
    the opportunity to come back to you on each of those specific
    ones and make a timetable so that you can know when to expect
    it, and if there are any issues why we are not able to do it,
    we would say so at that time. But at this point I think we need
    to commit to you to come back to you with what an
    implementation time and plan for each of those is because they
    need to be done.
        Chairwoman Velazquez. Yes, and if there is anything that
    the Committee needs to do, then that should be part of the
    legislative package that the administration should be sending
    to us.
        The map of HUBZone eligibility is what the agency and firms
    use to determine if they can participate. When was the last
    time that your agency updated its HUBZone map?
        Ms. Mills. The last time the map was updated was last fall.
    It will be updated again this fall.
        Chairwoman Velazquez. Ms. Mills, the SBA's latest budget
    requests nine million for operating the HUBZone Program, and I
    am going back to the HUBZone Program because it has taken a lot
    of time to implement some of the recommendations that the
    Government Accountability Office included in its report.
        For operating the HUBZone Program, this worked out to about
    700 to 900 per participant in the program. While that seems
    significant, GAO examined 52 firms in the program and found
    over half, 29, were ineligible.
        So what are taxpayers getting for their $9 million and what
    are you going to do about it?
        Ms. Mills. Well, as you know, 10.8 billion went to HUBZone
    firms, and that is about 11,000 firms, and the specifications
    are that you have to be a U.S. citizen. You have to be a small
    business. You have to have your principal office in the
    HUBZone, and you have to employ 35 percent of your workers
    inside this HUBZone.
        We are, as you know, in the process of executing some
    oversight improvements in order to make sure that those
    criteria are met up front in the certification and that those
    firms remain eligible. And that is where we are doing the site
    visits, and that is where we plan to improve our processes.
        And we need to get that program to a place where we have a
    better outcome from Mr. Shear.
        Chairwoman Velazquez. Administrator Mills, I will request
    from you that you submit to the Committee the following
    specific time frames for when the SBA will have implemented the
    following items: an updated written disaster plan that
    integrates regional marketing information, that distinguishes
    the agency response to a hurricane in Florida, and in
    California; the bridge loan programs mandated by the act; the
    annual report to Congress on disaster assistance. And I would
    like to have those time frames and responses in our offices in
    two weeks.
        Ms. Mills. Yes, we can do that.
        Chairwoman Velazquez. With that the witnesses are
    dismissed, and I take this opportunity to really thank you for
    joining us today.
        Ms. Mills. Thank you, Madam Chair.
        Mr. Shear. Thank you very much.
        [Whereupon, at 3:12 p.m., the Committee meeting was
    concluded.]

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