[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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