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




 
                       FULL COMMITTEE HEARING ON
                    OVERSIGHT OF THE SMALL BUSINESS
                    ADMINISTRATION AND ITS PROGRAMS

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

                                HEARING

                               before the


                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                             APRIL 21, 2010

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 111-064
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

                      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

                                 ______

                    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

                                 (iii)

  
?

               Subcommittee on Regulations and Healthcare

               KATHY DAHLKEMPER, Pennsylvania, Chairwoman


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

Hon. Mills, Karen, Administrator, U.S. Small Business 
  Administration.................................................     3
Hon. Gustafson, Peggy, Inspector General, U.S. Small Business 
  Administration.................................................     5

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    28
Graves, Hon. Sam.................................................    30
Hon. Mills, Karen, Administrator, U.S. Small Business 
  Administration.................................................    32
Hon. Gustafson, Peggy, Inspector General, U.S. Small Business 
  Administration.................................................    34

                                  (v)

  


                       FULL COMMITTEE HEARING ON
                    OVERSIGHT OF THE SMALL BUSINESS
                    ADMINISTRATION AND ITS PROGRAMS

                              ----------                              


                       Wednesday, April 21, 2010

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in Room 
2360 Rayburn House Office Building, Hon. Nydia Velazquez 
[chairwoman of the Committee] presiding.
    Present: Representatives Velazquez, Moore, Dahlkemper, 
Schrader, Kirkpatrick, Nye, Altmire, Halvorson, Graves, 
Bartlett, Buchanan, Luetkemeyer and Thompson.
    Chairwoman Velazquez. Good morning. This hearing is now 
called to order.
    In January of last year, the House adopted Rule 11 
requiring regular hearings on waste, fraud, and mismanagement 
of programs under the Committee's jurisdiction. Since then, we 
have held no fewer than 18 oversight hearings, spanning a broad 
range of issues from federal contracting to SBA disaster loans.
    Today's discussion is in that vein. It will allow us to 
build on past oversight hearings, providing a much-needed 
opportunity to examine some of the agency's most critical 
programs, and it could not come at a more pressing time.
    Over the last two years, our economy has endured a 
seemingly endless parade of challenges. While these setbacks 
have differed in scope and industry, they have managed to have 
the same impact on small firms. Even today, as we steadily 
climb back towards recovery, entrepreneurs face obstacles. Now, 
more than ever, they need the resources necessary to not only 
overcome those roadblocks, but to keep our recovery strong.
    Historically, the SBA has helped deliver that support. It 
has served as a vital source of stability for small companies, 
particularly during periods of economic decline. But as this 
Committee is well aware, the agency has also struggled in areas 
ranging from lending to procurement.
    After years of underfunding, SBA continues to wrestle with 
a legacy of neglect--one that has eroded its oversight 
mechanisms and left many office programs in disarray. With an 
emphasis on accountability, and a strong commitment from the 
Inspector General, we can tackle those issues directly.
    As Judge Brandeis famously said, ``Sunshine is the best 
possible disinfectant.'' And make no mistake--there is no 
better tool for scrubbing out waste than transparency. When it 
comes to holding agencies accountable, the Inspector General 
has a critical role to play, and I am pleased the IG is with us 
today.
    It is my hope that our conversation will serve as a frank 
and open forum for examining SBA's problem areas, because until 
we have identified those concerns we can neither move forward 
with solutions, nor expect to see improvements.
    When SBA programs are running at full capacity, they are 
true economic catalysts. Just look at the small business 
development centers. In 2008 alone, they helped generate 58,000 
new jobs at a cost of $3,000 apiece. Or, consider the Recovery 
Act's SBA loan provisions. They have allowed the agency to 
support more than $23 billion in lending. At a time of historic 
declines in the small business capital markets, that particular 
effort has been nothing less than a lifetime. But, 
unfortunately, not all of SBA's initiatives have been quite so 
successful.
    Later this morning we will look at a number of IG reports, 
all of which point to problems within SBA programs. In some 
instances, core initiatives have been racked by fraud. In other 
cases, they have been undermined by questionable practices. It 
is imperative that these troubled programs be restored to 
reflect their original mission--strengthening and supporting 
small businesses, because at the end of the day small firms 
aren't just the backbone of our economy, they are our greatest 
source of job growth.
    According to a recent study by the Kauffman Foundation, 
virtually all new jobs created between 1980 and 2005 came from 
startup companies. With unemployment at 9.7 percent, it only 
makes sense to focus on these firms--the small and startup 
businesses that have always provided job security. With a 
portfolio of strong, well-managed SBA programs, we can do that 
very thing.
    I know I speak for all members of the Committee when I say 
we are dedicated to upholding the integrity of the agency's 
programs and to ensuring small firms have the tools and 
resources they need to thrive.
    I would like to thank our witnesses, both Administrator 
Mills and Ms. Gustafson, for being here today.
    This marks the Committee's first hearing with the IG, and I 
know we are all looking forward to today's discussion.
    I will now yield to Ranking Member Graves for his opening 
remarks.
    Mr. Graves. Thank you, Madam Chair, and thank you also for 
holding this important hearing on the oversight of the Small 
Business Administration and its programs. I look forward to 
hearing from Administrator Mills and the Inspector General on 
the agency's lending programs.
    The SBA programs operate in coordination with the private 
sector by guaranteeing loans made by banks and certified 
development companies. Due to the possibility that taxpayers 
could have to pay on the guarantee, the programs should be 
overseen with the utmost care and transparency.
    SBA regulations and procedures are supposed to be designed 
to protect the Federal Government. However, the Inspector 
General's recent report indicates that lenders have been 
failing to comply with SBA requirements. This should raise a 
red flag at the agency, but it appears that little has been 
done to correct the problem.
    Additionally, the Inspector General's report raises some 
significant concerns about SBA program management. Poor 
oversight increases the risk to the taxpayer. And while I am 
generally supportive of programs designed to assist small 
businesses in obtaining scarce credit and capital, I cannot and 
will not maintain that support if the programs are not properly 
monitored to protect the taxpayers from unnecessary risk.
    Ultimately, the issue of today's hearing is whether the SBA 
lending programs operate primarily for the benefit of the 
lenders or for the small business borrower. I believe that 
Congress wants these programs to assist small business 
borrowers. If that is in fact the case, the agency must take 
aggressive action to ensure that only the most responsible 
lenders are involved in these programs. Anything less would be 
unacceptable to Congress and the tax-paying public.
    Again, I want to thank you, Madam Chair, for holding this 
hearing. I am looking forward to hearing the witnesses' 
recommendations on how we can increase the availability of 
capital to small businesses without placing the taxpayers in 
jeopardy for poor business management decisions.
    Thanks.
    Chairwoman Velazquez. Thank you.
    And it is my pleasure to welcome The Honorable Karen Mills. 
She was sworn in April 6, 2009, as the 23rd Administrator of 
the U.S. Small Business Administration. The SBA helps small 
business owners and entrepreneurs secure financing, technical 
assistance, and training on federal contracts.
    Welcome.

                    STATEMENT OF KAREN MILLS

    Ms. Mills. Thank you very much. Chairwoman Velazquez, 
Ranking Member Graves, members of the Committee, it is an honor 
to be with you. In working with you over the past year, these 
meetings have been important and helpful. This is a shared 
endeavor to improve oversight and risk management while 
removing waste, fraud, and abuse.
    I am pleased to say that we are making good progress. One 
tangible metric is that we have cut the number of overdue IG 
findings in half, from 97 last June to 48 this March. We also 
have less than 50 open recommendations from GAO, having closed 
six full audits since 2008.
    And just last week we received an award from the 
Association of Government Accountants for excellence in 
accountability reporting. But there is more work to do.
    It is now part of the SBA's strategic priorities to build 
on this progress in two particular areas. The first areas are 
government contracting and business development programs, where 
we have efforts aimed at all three steps in the process.
    At the front end, it means more efforts with upfront 
certification and eligibility. For those already in the 
program, it means more emphasis on ongoing compliance and site 
visits. And, finally, if they are found to be out of 
compliance, it means pursuing and removing bad actors.
    Already we have made dramatic increases in site visits and 
HUBZone firms from fewer than 100 in 2008 to over 900 in 2009, 
and we are on track to do more than 1,000 this year. We are 
working to ensure that only legitimate, eligible firms are 
benefiting from the HUBZone program.
    In our 8(a) program, we agree with nearly all of GAO's 
recent recommendations, and we have begun to implement them. 
Already we are training our field staff to more quickly 
identify ineligible firms. And when it is clear that fraud 
exists, we are taking steps to debar and/or work with the 
Department of Justice to prosecute.
    We also did the first comprehensive review of 8(a) in a 
decade, and proposed regulatory changes. We went to 10 cities. 
We held two tribal consultations and received extensive public 
comments. GAO has given us positive feedback on how we handled 
this process.
    For all our contracting programs, the President's FY11 
budget requests $2 million for strengthening efforts to prevent 
waste, fraud, and abuse.
    The second area is lender oversight. We are working to 
instill best practices that will ensure compliance and manage 
risk more effectively, as we work with our lending partners.
    In the 2011 budget, we request $2 million more for lender 
oversight and onsite reviews, as well as $1 million for 
stronger program assessments. This will help us address areas 
that the Inspector General has recently brought to our 
attention, including the premier certified lenders in the 504 
program.
    Overall, the entire SBA team is focused on continued 
vigilance in identifying, tracking, and reducing risk. Through 
our partnership with this Committee, and with insights from the 
GAO and our Inspector General, I know we have moved in the 
right direction this past year. And we commit to continue to 
take even bigger steps in the future.
    Separately, an important issue has come up in the past few 
weeks that I want to bring to the Committee's attention. The 
SBA and the White House support the congressional intent of 
parity--equal treatment among our contracting programs, 8(a), 
HUBZone, service-disabled veterans, and soon women-owned small 
businesses.
    However, a recent court decision potentially undermines 
this policy by interpreting the Small Business Act to provide 
for a HUBZone preference over the other programs. The 
administration supports legislative efforts to confirm 
Congress' original intent to provide for parity.
    I welcome any questions. Thank you very much for having me 
here.
    [The prepared statement of Ms. Mills is included in the 
appendix.]
    Chairwoman Velazquez. Thank you, Administrator Mills.
    And now I welcome The Honorable Peggy Gustafson. She was 
worn in as the Inspector General of the U.S. Small Business 
Administration on October 2, 2009. The Office of Inspector 
General conducts and supervises audits, inspections, and 
investigations relating to SBA programs and supporting 
operations.
    Welcome.

                  STATEMENT OF PEGGY GUSTAFSON

    Ms. Gustafson. Thank you. Madam Chairwoman, Ranking Member 
Graves, and distinguished members of the Committee. Thank you 
very much for allowing me to discuss the IG's current efforts 
to deter and detect waste, fraud, abuse, and inefficiencies in 
SBA programs.
    Today I would like to focus on several recent audits, some 
recent criminal indictments and convictions, and two new 
management challenges that my office issued to the agency in 
October of 2009.
    Regarding our audits, during the first seven months of 
FY2010, my office has issued 24 audit reports and other 
reviews. These reports contain 97 recommendations to SBA to 
promote efficiency and reduce waste. We recently issued a 
report on an audit of the underwriting practices and compliance 
of three of the largest premier certified lenders, or PCLs, 
that are authorized to approve loans in the CDC 504 loan 
program with limited prior SBA review.
    My office found a high rate of errors on PCL loans 
involving poor loan underwriting and eligibility or loan 
closing issues. Based upon our sample, we project that for 
loans disbursed in fiscal year 2008 by the three PCLs, a total 
of $209 million worth of loans involved problems with borrower 
eligibility or loan closing issues, and that loans totaling 
nearly $56-1/2 million had weaknesses in underwriting.
    We also found that a number of CDCs pay a sizable 
percentage of gross receipts to their executives, which reduces 
the amount of funds available to that CDC for economic 
development activity.
    In response to the provisions of the Recovery Act, my 
office has developed a recovery oversight plan, created a 
separate recovery oversight group within our Auditing Division, 
and has so far issued 14 recovery oversight reports identifying 
programmatic and other deficiencies.
    As part of this oversight work, my office recently reviewed 
origination and closing of Recovery Act loans made in the 7(a) 
Loan Program. We identified deficiencies in 53 percent of the 
sample of loans we reviewed made by lenders with no prior SBA 
approval, and errors in 23 percent of the loans, which SBA had 
themselves approved.
    We also recently completed three audits that raised 
concerns with SBA's procurement of goods and services. To 
summarize the findings in these reports, we found that 92 
percent of a sample of contract actions reported by SBA for 
fiscal year 2008 contained one or more inaccurate or incomplete 
data elements in the FPDS government database, and that fiscal 
year 2009 had a higher error rate of 97 percent of the sample 
contract actions having errors.
    We determined that SBA's current workforce involved in 
procurement actions is insufficient to effectively award, 
administer, and oversee SBA contracts, and is increasing the 
risk of mismanagement and improper payments on SBA contracts. 
And we found that SBA did not report all non-competitive 
Recovery Act contracts to Recovery.gov and has mischaracterized 
some of the actions that have been reported to Recovery.gov.
    During the first six months of this fiscal year, IG 
criminal investigations have resulted in 51 indictments and 14 
convictions, and obtained approximately $16 million in 
potential recoveries and fines. Most of our investigations 
involve false statements to obtain SBA guaranteed loans, SBA 
disaster loans, or government contracts that are supposed to be 
set aside for disadvantaged small businesses.
    Our investigations have identified an ongoing pattern of 
fraud by unscrupulous loan agents and other consultants who 
orchestrate multi-million dollar schemes where numerous SBA 
guaranteed loans are originated based on falsified information.
    During the past decade alone, we have had numerous cases 
involving loan agent fraud on loans totaling over $260 million. 
Fraud in the 8(a) and HUBZone programs, and other SBA 
preferential contracting programs, is also a problem. Recent IG 
audits and investigations, and recent reports from the GAO, 
show that ineligible companies continue to obtain set-aside 
contracts, and that non-disadvantaged individuals are 
exploiting these programs.
    We are working with the Justice Department to pursue 
criminal and civil fraud prosecution against companies that 
have improperly obtained contracts under the HUBZone and 
service-disabled veteran programs, and we are working with the 
agency to develop a more robust debarment and suspension 
program.
    As required by law, my office issues a report in October 
identifying key management challenges for SBA. Our most recent 
report had two new challenges. One challenge is based on 
significant projected improper payments in both the Disaster 
Loan Program and the 7(a) Loan Program. And the second 
challenge identified concerns with SBA's management of its 
largest current IT project to upgrade its loan monitoring and 
financial management systems, a project with an estimated cost 
of over $250 million.
    Again, I want to thank you for the opportunity to comment 
on these issues, and look forward to your questions.
    [The prepared statement of Ms. Gustafson is included in the 
appendix.]
    Chairwoman Velazquez. Thank you, Inspector General.
    Administrator Mills, it has been a month since the IG 
delivered its report on acquisition personnel. And we would 
like to know, what changes has the SBA made to address the 
problems raised in that report? And what is your timeline to 
fix those issues?
    Ms. Mills. Madam Chair, earlier this week we announced a 
reorganization of our internal acquisition department. We are 
following the best practices of 10 other agencies--we are 
actually the tenth agency to reorganize under the Chief 
Financial Officer, so that the Internal Control Department will 
then be aligned with the Procurement Department, and those 
experts in internal control will provide better oversight to 
procurement.
    We operate our procurement operation out of our Denver 
Finance Center, and we will be moving our procurement operation 
to be under that with new procedures.
    Chairwoman Velazquez. What about personnel?
    Ms. Mills. We have really important, terrific people in 
this area at the SBA. And change is very difficult, so--
    Chairwoman Velazquez. Well, the Inspector General's report 
particularly addressed the issue of the inadequacy of the SBA 
acquisition office in terms of failed to adequately staff the 
office that was doing procurement work for the Recovery Act.
    Ms. Mills. Yes. And this is one of the reasons for the move 
to Denver, where we have a pool of very strong personnel. We 
are going to offer all of our people in this area, the 
opportunity to move to Denver and support them. And if they 
don't move, I just want to reiterate that we are going to take 
care of them here.
    Chairwoman Velazquez. But my concern--if this is to 
implement those provisions of the Recovery Act, will require 
the expertise and the staff. And nine months ago you learned 
from the IG that you were not in compliance with the OMB 
requirements regarding the staff. But you are telling me that 
this week you are moving to do this.
    Ms. Mills. Yes. We have been working on this move for quite 
a long time. There has been extensive review of what the best 
practices are to get the right staff, whether that staffing 
would be available here, and how to change the procedures and 
the supervision, so that we have the quality of supervision. 
And this is the solution that we are pursuing.
    Chairwoman Velazquez. For more than a decade there have 
been inaccuracies in federal small business contracting data. 
And when you and I, we have a first meeting, that is one of the 
issues that I raised with you.
    A recent IG report found that SBA's own data had an error 
rate of 92 percent for FY2008, 97 percent in 2009. In many 
cases, SBA was misreporting small business contracts that 
actually went to large businesses. Do these findings call into 
question the agency's credibility and ability to monitor 
government-wide reporting problems?
    Ms. Mills. Your point is exactly correct. This is extremely 
disturbing and is unacceptable. We have to be the standard for 
the rest of the agencies.
    Chairwoman Velazquez. So, Ms. Gustafson, has the agency 
implemented any of the IG's recommendations yet on this area?
    Ms. Gustafson. Representative Velazquez, they have 
committed to implementing those recommendations. In all candor, 
the audit is a couple months old. I am not certain that they 
have been finally implemented. I will get that answer back to 
you. I will check on that and get that answer back to you.
    Chairwoman Velazquez. Administrator Mills, can we get a 
timeline--
    Ms. Mills. Yes, Madam Chair.
    Chairwoman Velazquez. --when the agencies plan to implement 
those?
    Ms. Mills. Yes, Madam Chair.
    Chairwoman Velazquez. Okay. Last month this Committee was 
working to secure documents from the SBA's Office of Inspector 
General related to an active audit. During that process, the 
SBA General Counsel interjected herself in the matter, actually 
calling the House General Counsel. Was this done at your 
direction or at the direction of your staff?
    Ms. Mills. No.
    Chairwoman Velazquez. No, it wasn't--
    Ms. Mills. That was not done.
    Chairwoman Velazquez. It was at the direction of who?
    Ms. Mills. I don't have any direction about this effort.
    Chairwoman Velazquez. Do you think that was an appropriate 
action?
    Ms. Mills. My understanding of the situation is that we 
will try to be helpful in any case that we could.
    Chairwoman Velazquez. Ms. Gustafson, should it be a source 
of concern if the SBA's General Counsel has taken it upon 
herself to act as an intermediary between this Committee and 
the IG in matters pertaining to agency oversight?
    Ms. Gustafson. Madam Chairwoman, there is no question that 
the agency's General Counsel does not act for me. And being 
very involved in the IG Reform Act of 2008, one of the things 
that Act did was very specifically state that the IG is to have 
her own counsel, or his own counsel. And I have my own counsel.
    And so to your exact question, which is, is it 
appropriate--would it be appropriate for an agency General 
Counsel to act on my behalf, I would say no, that is not 
appropriate, and I would--
    Chairwoman Velazquez. Administrator Mills, I hope that in 
the future your General Counsel will refrain from interjecting 
herself into matters that are related to the Inspector General 
and the work--the oversight work of this Committee.
    This is to the IG. The findings of your report on the PCL 
program paint a picture of lax SBA oversight and deficient 
internal controls. Given what you have found in your report, if 
Congress were to undertake a major expansion of the CDC 
program, could the agency effectively administer the program?
    Ms. Gustafson. What I think the message of the report needs 
to be is not that the agency can't undertake effective 
oversight of the CDC program, but that we are concerned with 
how that oversight has been undertaken so far. SBA has the 
ability to set forth guidelines for the CDCs to eliminate or 
reduce the possibility of some of the underwriting concerns 
that we really had.
    SBA does on-site reviews where they look at these types of 
issues. And one of the things that our report says is that 
there needs to be a tieback. The agency needs to look back and 
see if CDCs are doing better when they find these issues. We 
didn't really find that here.
    So I wouldn't say that it is a question that it couldn't be 
done, but--
    Chairwoman Velazquez. Can they do it today?
    Ms. Gustafson. They would have to devote more resources 
than they are devoting now.
    Chairwoman Velazquez. Thank you. The PCL lender program was 
intended to reduce SBA costs by delegating authority for CDCs 
to process, close, service, and liquidate loans. In other 
words, PCLs were thought to be the most qualified to 
effectively administer this program with minimal SBA 
involvement. In light of your report on the program, does it 
appear the PCL program is meeting the intended goals?
    Ms. Gustafson. I really hesitate to paint a broad brush 
over the entire program based on this audit. We looked at three 
of the larger PCL lenders, and, again, I don't think that this 
audit should be taken to mean that they cannot do that. I just 
think that there is smaller oversight and there is lax 
oversight. And, again, I think the emphasis needs to be that 
there needs to be stronger oversight.
    Chairwoman Velazquez. Thank you. Mr. Graves.
    Mr. Graves. Thank you, Madam Chair.
    Thanks, Administrator, for being here. A couple of 
questions for both of you. The first one is, some of these 
lenders are not complying with some of the standards, but my 
question is, has the SBA ever revoked the status of any of its 
lending partners?
    Ms. Mills. Yes. Yes, we do revoke the status of the lending 
partners.
    Mr. Graves. Recently or--
    Ms. Mills. Yes, we do on a continuous basis.
    Mr. Graves. --regular basis?
    Ms. Mills. Yes.
    Mr. Graves. And the second one is a completely different 
question, because we get some complaints from some folks when 
it comes to the standards review for certain industries. And 
some of them are very frustrated, because they think that the 
standard is so outdated it is making it very difficult for them 
to compete for federal programs.
    My question is: can we modify the order in which the 
standards are reviewed, or change that priority for some 
industries, or speed it up, do something? Because we are 
getting a lot of complaints from different folks.
    Ms. Mills. Yes. Representative Graves, I understand that 
you might be talking about the size standards industry by 
industry.
    Mr. Graves. Absolutely.
    Ms. Mills. --yes, we would be happy to focus on industries 
in which membership feels that a review needs to happen. And we 
would be happy to take a look.
    Mr. Graves. In some cases, we need that review right away. 
But I will have the staff work with your staff.
    And for you, Ms. Gustafson, my question is--and it is a 
real simple question--what are the risks to the taxpayer from 
the PCL program?
    Ms. Gustafson. Well, the PCL program obviously includes a 
portion that is guaranteed by the Federal Government.
    Mr. Graves. Right.
    Ms. Gustafson. And there really isn't a lot, once these 
loans are due--once these loans are given, there is not a lot 
that the Federal Government can do to not pay a guarantee on 
that loan. And so that is really the biggest risk.
    Again, this is a program where it was envisioned that there 
would be a lot of authority given to lenders, and the 
government was going to have to just kind of accept that, under 
the understanding that they were trusting the lenders to do the 
right decision. And so the risk comes in the--and I forget the 
hundreds of millions--the millions of dollars--I apologize, I 
forget the numbers--of outstanding loans that are out there 
that would probably have to be paid as a guarantee under the 
program.
    Mr. Graves. Okay. Can we get that number?
    Ms. Gustafson. Oh, absolutely. Yes.
    Mr. Graves. Thanks, Madam Chair.
    Chairwoman Velazquez. Ms. Dahlkemper.
    Ms. Dahlkemper. Thank you, Madam Chair.
    Administrator Mills, as you know, I have introduced some 
legislation for the 7(a) Express Loan Program to increase the 
size of the loans, as well as the guarantees. I really see this 
legislation as just one of the important tools we need to give 
our struggling small businesses. I have talked to many 
businesses. I have talked to my small banks in my region about 
this piece of legislation, and they believe it is another tool 
to get access to our small businesses for that working capital 
that they need.
    I introduced this legislation, and many of my colleagues 
have actually joined me in co-sponsoring this legislation. But 
as I am, you know, listening to this I just want to ask you, 
the 7(a) Express Loan Program, do you think that it should be 
discontinued? Or do you think that we can move that forward in 
a way that we won't see some of the abuses going on that we 
have seen?
    Ms. Mills. The 7(a) Express Program is an extremely 
powerful program, particularly in this time when many people 
have had their lines of credit pulled. In the last year in the 
Recovery Act we did 20,000 loans, so we helped 20,000 
businesses with $1.5 billion.
    We believe that people like this program quite a bit, 
because it allows banks to use their own paperwork. It does 
have a limit of $350,000. If that limit were higher, the 
statistics say that the larger loans perform better, so it 
actually would reduce the risk of the overall pool as well.
    We feel that all of these oversight issues that are brought 
up are serious and need attention across the board, and we are 
committed to increasing our oversight, not only of the programs 
raised today but in all of our programs.
    Ms. Dahlkemper. Well, just as a follow-up to that, I know 
that there is also a proposal by the administration to allow 
the 504 loans to be refinanced. And how does the 504 loan 
refinancing plan proposed by the administration support our 
small businesses in the current economic climate?
    Ms. Mills. We have analyzed all of the gaps in creating the 
small business jobs package proposed by the President. One of 
these gaps is in refinancing owner-occupied real estate. We 
know that there are enormous numbers of small businesses-- such 
as a dentist who owns the office or a manufacturer who owns the 
warehouse--who took out a bullet mortgage that will become due 
in 2010, 2011, 2012.
    We have proposed using the 504 program in a non-delegated 
manner, so it would not go to the lenders that the Inspector 
General reviewed for delegated authority. We would review all 
of these loans, and we believe that we would only take loans 
that were in good standing, and for refinancing, and that the 
risk in this matter has been assessed and modeled as being 
lower than the current 504 risk pool, because that is for an 
expansion. And when a small business owner has an expansion, he 
or she doesn't actually know what the next year's cashflow 
coverage will be, because they are growing.
    So we are looking to meet this market gap, and we believe 
that this is a lower risk way of reaching probably seven to ten 
billion small businesses who will really potentially be out of 
business if they can't refinance these bullet mortgages.
    Ms. Dahlkemper. Thank you. Ms. Gustafson, can I just ask 
you about the 7(a) Express Loan Program? Particularly with my 
legislation that I brought forward, do you see any issues with 
that program?
    Ms. Gustafson. Well, in the interest of full disclosure, we 
haven't done an audit very recently--I have been there not very 
long--on SBA Express, so I don't want to go too far out on a 
limb, except to say that any time--one of the things that SBA 
Express does, again, when you have delegated authority, there 
is always an increased risk due to that, which isn't to say 
that it would necessarily mean that your legislation would not 
be a good idea.
    I don't feel like I have the--it is just all of these 
programs with delegated authority always give auditors a little 
bit of pause, just because there is a risk when you are having 
the lenders do some of this process. But it is not a question 
of being unmanageable. Again, the key is that SBA is doing 
effective oversight on the programs that they are 
administering. And with that, if that is in place, and with 
that commitment from the SBA, there is no reason to think that 
it would be unwise.
    Ms. Dahlkemper. Thank you. I know my businesses are very 
interested in this. It is a crucial time to get this type of 
legislation passed. So thank you very much. My time is up.
    Chairwoman Velazquez. Time is expired. Mr. Thompson.
    Mr. Thompson. Thank you, Madam Chair. Thank you to both of 
you for coming today, testifying, and for--you know, for the 
efforts that you are putting in to assure and really safeguard 
the resources that we use for strengthening small businesses, 
working to eliminate the waste and fraud and abuse.
    Administrator Mills, one of my questions is, since our last 
hearing, what further actions has the Small Business 
Administration taken to remove and to eliminate firms that do 
not qualify under HUBZone or the service-disabled programs?
    Ms. Mills. Thank you. We found the last hearing, 
particularly on service-disabled veterans, extremely helpful, 
and have put in a three-part action plan to address many of the 
issues that came up. The first action is that we are working on 
the front end on identification of service-disabled veterans, 
and there the VA holds the database.
    I have met with General Shinseki, and with Department of 
Veteran Affairs Deputy. The SBA has their cooperation on 
improving that database, so we can find out who is a service-
disabled veteran.
    The second thing is that we have enhanced our bid protest 
process, and we are now doing about double the bid protests. If 
a service-disabled firm is found to be ineligible, we require 
them to de-list themselves from the contract register, the CCR, 
within 30 days. If they don't do it, we do it. So an ineligible 
firm can't stay in the register, which was something that we 
found was a problem.
    And the third is that we have investigated the 10 
fraudulent examples in the last GAO report. We have referred 
all 10 to the Inspector General, and will pursue anybody who is 
proven to be acting inappropriately to the Department of 
Justice.
    Mr. Thompson. In follow-up, given the GAO report, one of 
the problems with HUBZone service-disabled veteran contracting, 
it sounds like--and I throw this out there for you to respond 
to--has the agency become more aggressive in suspending and 
preparing debarment proceedings against federal contractors, if 
found to be ineligible?
    Ms. Mills. Yes.
    Mr. Thompson. Okay.
    Ms. Mills. We call that going after the bad actors.
    Mr. Thompson. Okay. Very good. I read that the White House 
sent out kind of--a little different question, sent out 
postcards to millions of small businesses concerning tax credit 
and the recent health bill. And what actions has SBA taken to 
inform small businesses of the potential impacts of the health 
care bill, you know, such as mandate to provide insurance to 
the employees, you know, the details that businesses need to 
know proactively to prepare their business plans?
    Ms. Mills. Right now, on our website, a small business can 
find a very clear description of how to determine eligibility 
for tax credits. We have estimated that about four million of 
the six million employer-owned employee small businesses could 
potentially be eligible. But it is hard for them to know, so it 
is our role to walk them through it.
    We are also committed to training and educating all of our 
900 small business development centers, our women's business 
centers, and our SCORE representatives, so that they also could 
walk a small business through it. And I don't know about you, 
but I personally have actually walked a number of small 
businesses through this question, because this is money in 
their pocket in 2010, and they need to have it.
    Mr. Thompson. Okay. Thank you. Inspector General, I just 
want to pursue kind of a previous follow-up on premier 
certified lenders. You know, what additional oversight do you 
believe the SBA should take with respect to the PCLs?
    Ms. Gustafson. Well, first and foremost, I think they need 
to reconsider some of their responses to our audit. I would 
really like to see them tighten up some of the standards that 
the PCLs are using, as far as underwriting. I do think that 
that's a problem.
    Again, I think it is crucial that these onsite reviews be 
done regularly. I think they are probably being done pretty 
regularly, but there has to be follow-up and there has to be 
consequences. And I don't really--we didn't really see that 
happening.
    And they don't always have to be just bad consequences, but 
I do think that they need to be encouraged and told to be more 
prudent in some of the practices. I really think that that was 
the main--
    Chairwoman Velazquez. Would the gentleman yield?
    Mr. Thompson. Sure. Please.
    Chairwoman Velazquez. IG, and one of those areas that 
really raised concern could be the exorbitant salaries that 
some of the CDC executives are getting. And the IRS reported 
that some of the executives make more than $500,000 a year, 
with some earning close to $1 million annually. Isn't that 
contradicting the mission of the CDCs?
    Ms. Gustafson. With the exception of a very few CDCs, which 
were not part of our sample on salary, these are nonprofits, 
and so these are eye-popping salaries. And, again, the crucial 
thing for us is all of the money that is being paid to salaries 
is necessarily not available for either reserve or for economic 
development in that community. And that is really what those 
CDCs are expected and really charged with doing. So it is a 
concern.
    And so I hope that they do follow through with their 
agreement to look at maybe some requirements on reserves, how 
much needs to be there, use--
    Chairwoman Velazquez. Is that an area for SBA to--
    Ms. Gustafson. Absolutely. Yes.
    Chairwoman Velazquez. Thank you for yielding. Did you have 
another--
    Mr. Thompson. No. My time had well expired beyond at that 
point when I yielded. Thanks.
    Chairwoman Velazquez. Mr. Schrader.
    Mr. Schrader. Thank you, Madam Chair. Following up on that 
last line of questioning, I guess I would ask the 
Administrator, who, frankly, is new to the position, within a 
year, so a lot of this has happened on other people's watch, 
and she is working hard I think to correct that, is what I am 
hearing.
    But with regard to the salaries, that has been a big issue 
in the financial debate. So how are you anticipating dealing 
with that with some of the CDC programs?
    Ms. Mills. These excessive salaries are deeply disturbing, 
and for exactly the reasons that the Inspector General just 
described. These are nonprofits, and any excesses are supposed 
to be reinvested in community development. And if they are not, 
this is inappropriate and has to change.
    We are responsible for oversight of these CDCs, and we are 
now preparing new guidelines on corporate governance to address 
exactly this issue.
    Mr. Schrader. To follow it, I guess I would ask the IG, you 
have talked a little bit about the HUBZone issue with the 
courts interpreting it one way versus another. I guess I would 
be interested in what you would--what direction you are looking 
for from the Congress. And, frankly, I would be interested in 
Ms. Mills' response to that also.
    Ms. Gustafson. Well, in all candor, that was actually 
Administrator Mills who talked about that--
    Mr. Schrader. Oh, sorry about that.
    Ms. Gustafson. --talked about the HUBZone. But while--
    Mr. Schrader. Chat away.
    Ms. Gustafson. While I am here, the one thing I do want to 
point out, without getting into a policy debate on 
preferential--on priorities of these programs, we have 
longstanding concerns about the ability to really enforce the 
HUBZone, just to put it out there. HUBZone is a difficult 
animal to get hold of, because it is hard to figure out where 
these companies--the majority of the employees live and whether 
they are really attempting to maintain the statistics that they 
have to as far as how many employees live in an economically 
disadvantaged area.
    So this would be preferential treatment for the program 
that we think is hardest to really enforce, and very hard--
Administrator Mills talked about an enhanced bid protest 
procedure. A lot of times these things are kind of dependent on 
the person who loses the bid to protest, and it is really hard 
for a losing bidder to know exactly where these companies are, 
especially in the really limited amount of time they have to do 
the protest.
    And so those are the concerns that I personally--that I 
have as IG on this, but--
    Mr. Schrader. Ms. Mills, would you comment, then, please?
    Ms. Mills. Yes. The SBA and the White House support the 
congressional intent of parity, or equal treatment, among the 
contracting programs, which is 8(a), HUBZone, service-disabled 
veterans, and the women-owned small business. The concern is 
that there was a recent court decision that potentially 
undermines the policy, because it interpreted the Small 
Business Act to provide for a HUBZone preference.
    The administration supports the legislative efforts, which 
would confirm Congress's original intent to provide for parity.
    Mr. Schrader. All right. Very good. A little different 
strain--we have tried it before, Administrator Mills, about 
some of the existing small business programs. And there has 
been interest, both in Congress and the administration, to 
increase some of the levels of opportunity within the 7(a) and 
504 programs.
    And we have had a conversation about larger small 
businesses and smaller small businesses, and talked a little 
bit about making sure that some of the smaller small businesses 
had enough in the pot that they could compete for, because some 
of the larger small businesses could eat up a lot of the 
increases that we both, you know, could argue about the number, 
but I think are important. Could you address that? How do you 
see us addressing that going forward?
    Ms. Mills. The President and the administration have asked 
Congress to consider raising the loan limits on 7(a) and 504 to 
$5 million. Currently, there are $2 million loan limits. The 
reason for this is that there is a gap in the marketplace. Many 
of the institutions that did do these larger loans for 
warehouses, and for financing some of these business 
development companies, are not in the market anymore. And so 
there is enormous pressure from everyone, from car dealerships 
and franchisees to manufacturers, who have capped out at the $2 
million limit.
    The concern was raised by you and also by the Chairwoman 
from the start that this would crowd out the smaller loans. The 
smaller loans are really extraordinarily important at the SBA, 
and these are the main street small businesses which we serve 
as the core of what we do.
    So one of the things that has been suggested is that we cap 
the number of these jumbo loans that would be allowed, so that 
we serve that market, and do not allow them to crowd out the 
smaller loans. The concern is that these large loans are more 
profitable, larger, easier to do, and that the banks might not 
pay attention to the smaller loans. We cannot let that happen.
    Mr. Schrader. I appreciate that. I yield back.
    Chairwoman Velazquez. Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Madam Chair. Ms. Gustafson, 
very quickly, in your testimony you talk about a lot of things 
that are wrong or things to be changed or doing differently. 
Have you seen improvement over the last year or two in the way 
things have been done?
    Ms. Gustafson. Well, I have been here six months, but I 
will try to speak--
    Mr. Luetkemeyer. Okay.
    Ms. Gustafson. --on behalf of the office in general. I 
think--
    Mr. Luetkemeyer. You qualified your answer already. Okay.
    Ms. Gustafson. I think that, you know, I came into the job 
kind of at the tail end of the preliminary work that SBA had 
done on the Recovery Act, and big increase in those programs. 
And I know from speaking to my auditors, and working on it when 
I got there in October, we were really heartened by the amount 
of thought and work that went into trying to implement these 
programs and institute a risk management plan on these types of 
things, as opposed to doing it very quickly and dealing with 
the aftermath afterwards.
    I am very heartened by Administrator Mills' statement that 
she is very serious about suspension, debarment, and 
enforcement. I do think that that's something that SBA has been 
lacking in. And because of a lack of resources, or just kind of 
in their more traditional role as an advocacy organization 
almost, I do think that that is somewhere that they have been 
lacking.
    I am hopeful that we continue to work together and we do 
get a stronger suspension and debarment program in SBA. We are 
not there yet. I hope we see some suspensions and debarments. 
Traditionally, it has been very hard to get anybody debarred 
from an SBA program, unless there has been a conviction. And 
that is really not what the law is, and I think it is important 
to start really kicking people out of the program before they 
are going to jail.
    And, you know, I have a commitment from the Administrator 
that she is going to work with us on that, and, you know, I 
think it is going to be very telling in the next several months 
whether we can really get that done. Suspension and debarment 
is a lengthy process, but the proof will be in the pudding 
pretty soon on these.
    Mr. Luetkemeyer. Okay. Great. You mentioned something a 
while ago about loan agent fraud. Can you explain that just a 
little bit for me, please?
    Ms. Gustafson. Yes. Our criminal investigators in the last 
several years have seen a really kind of distressing trend of 
very complex fraud schemes out there, not the traditional 
business owner who might be falsifying an equity injection to 
get a loan for his own personal benefit, or just because he 
can't quite make it.
    We are seeing active conspiracies among people like loan 
agents, where they are packaging loans and taking part and 
falsifying documents, and it is not just one SBA loan, and it 
is certainly not just one government loan, and--
    Mr. Luetkemeyer. So the loan originator himself is a part--
or herself is a part of the scheme to defraud the government or 
get people monies who don't really have--or shouldn't be 
eligible for them.
    Ms. Gustafson. Exactly. As I mentioned in my testimony, in 
the last 10 years, just talking about cases where we have been 
able to pursue criminal action, we are talking about loans of 
$250 million, where one of the bad actors is a loan agent who 
is actively involved in perpetuating the fraud.
    And that is why one of the management challenges for the 
agency has been--it is very hard to track these loan agents, 
and it would be fantastic to be able to go to the database and 
start when you can see a trend, you can stop this stuff a lot 
sooner. And right now we don't have that capability, and so, 
again, in our agency management challenges, tracking loan 
agents and really monitoring that and trying to figure out both 
where the bad actors are and where just the bad loan agents who 
are doing bad loans are is crucial. It is really crucial, so--
    Mr. Luetkemeyer. Very good. Administrator Mills, what do 
you see as the environment out there right now? Do you see the 
continued increased demand for SBA loans? Is it tapering off? 
Do you see the economy--how is your office interacting with 
everybody? What do you see? You are on the front line.
    Ms. Mills. Yes. We are now operating at a very high level. 
We have put about $26 billion into the hands of small business 
through the Recovery Act due to the 90 percent guarantees and 
the fee reductions. So we are at above our 2007/2008 levels. We 
have completely come back at the SBA.
    But the total environment out there is not back. There is 
still a problem with access to capital for small businesses, 
and it comes in a series of pockets. There are all kinds of 
underserved markets that are being left behind in the recovery. 
There are larger loans that aren't being made. There are lines 
of working capital being cut. There are commercial real estate 
issues. What we have done is identify those gaps, and then 
design our small business jobs bill request before Congress to 
meet each of these gaps.
    Chairwoman Velazquez. Time is expired.
    Mr. Luetkemeyer. Thank you, Madam Chair.
    Mr. Graves. Madam Chair, can I interject real quick? To 
dovetail on what Representative Luetkemeyer said, and what I 
was talking about, too, as far as the status revoked of some of 
these firms, could we get a list from the last five years of 
the firms, your lending partners, whose status you have 
revoked?
    Ms. Mills. Yes.
    Mr. Graves. Please.
    Ms. Mills. Yes.
    Chairwoman Velazquez. Mr. Nye.
    Mr. Nye. Thank you, Madam Chairman. Inspector General 
Gustafson, I noted in your testimony--and we have talked a 
little bit today about the fraud that was uncovered in the 
service-disabled veteran program--you mentioned that your 
office is working with the Department of Justice to prosecute 
companies that were found to have defrauded the program. Can 
you give us a little detail on exactly what you are doing with 
Department of Justice and how far along you have gotten?
    Ms. Gustafson. As they are active criminal investigations, 
I can't. I will tell you that we pursued--we opened a case on 
every instance that GAO found, and we are still--some of these 
cases, many of these cases, are still active, and we really do 
anticipate getting some movement and getting some actions, 
getting some indictments. And when that happens, I can fill you 
in. But until then, in an open hearing, I really can't. I am 
sorry.
    Mr. Nye. Okay. Can you talk a little bit about--you 
mentioned talking with Administrator Mills on an action plan 
and getting some input from her on some of the steps that can 
be taken to strengthen the enforcement, particularly on 
debarment and suspension. Can you talk a little bit about some 
of the specific steps you would like to see, and going back to 
the bid protest phase?
    And you mentioned that one of the challenges--and I hear 
this from a lot of constituent companies at home--that they 
feel like the burden has been on them sometimes to point out 
the problem rather than having that happen as a matter of 
automatic course. Can you talk about what you would like to 
see?
    Ms. Gustafson. Right. That's exactly right on the bid 
protest. I mean, it is good to have a robust bid protest 
process, in case a losing bidder happens to have the 
information where they can pursue it. But the timelines are 
short, and the burden is really tough.
    What I would like to see is multi-step. First, again, it is 
important that Administrator Mills has said that she will make 
sure the SBA is kicking people out of the program that don't 
belong there. But it really is going to be a big change for the 
agency to see themselves as a strong enforcement authority.
    There needs to be some very strong training on what these 
programs are, when suspension is appropriate, when debarment is 
appropriate. We are always worried about programs where it is a 
self-certification program where you don't have to do a lot on 
the front end to prove that you should be in there. And 
service-disabled veteran is one of those where there is a lot 
of leeway to just get yourself on the list, and we are 
concerned about that.
    Again, this is something we need to work with the VA on as 
well, but it concerns us. There needs to be--one of the things 
SBA is doing, for example, in the women owned small business 
programs, which is a new program that they have announced some 
regulations for, is requiring documents to be there, so that 
people can see. You know, it is just not enough to just say, 
``Yes, I qualify because I am this, this, and this and this.'' 
You have to submit some documents to show that.
    I think that that is--that is crucial. It is too much--too 
much emphasis on the tail end which will never be completely 
effective. You have to have people hesitate before they decide 
to try to get in these programs, and I am not sure that that is 
happening right now.
    Mr. Nye. Okay. Administrator Mills, can you just comment on 
your thoughts on steps that you will be taking to try to 
enhance that? And also, can you talk a little bit about your 
approach towards perhaps using suspension as maybe an 
intermediary step that might be easier to pursue than 
debarment?
    Ms. Mills. We see, in all our procurement programs, three 
phases of going after fraud, waste, and abuse. The first is on 
the front end, whether it is certification, or, in the cases of 
self-certification, we actually send a letter requiring people, 
under penalty of perjury, to re-self-certify, and we make sure 
that they know that we are serious and that they have to be 
eligible.
    The second is site visits--ongoing and monitoring actual 
businesses. So once someone is in a program, we need to visit 
them. And as I said earlier, we are up to more than 1,000 site 
visits in HUBZone, for instance, in order to make sure that 
people who are supposed to be in the program stay.
    And the third is we are committed to going after the bad 
actors. We are very grateful for the partnership with the IG. 
We think the suggestions the IG has made for training and other 
changes in order to be more effective in going after bad actors 
are very valuable, and we are going to pursue them 
aggressively.
    This is a very high priority.
    Mr. Nye. And just one last question. Do you intend to make 
greater use of unannounced site visits, the kind that really I 
think have a little bit more effect, since they don't know you 
are coming?
    Ms. Mills. Yes.
    Mr. Nye. Thank you. I yield back.
    Chairwoman Velazquez. Mr. Bartlett.
    Mr. Bartlett. Thank you. I first want to apologize for 
being late. We just completed a markup in Armed Services.
    I want to make a couple of comments about HUBZones, and 
then to ask a question about HUBZones. Most of our programs are 
meant to help disabled veterans or women, specific groups. The 
HUBZone program really helps whole communities.
    As an example of that, I have a HUBZone contractor who has 
a facility, both in Howard County near NSA, and out in Garrett 
County. His facility in Garrett County pays his people there 
probably three times the mean annual salary in Garrett County. 
So it is a hugely important economic engine there.
    He recently had an employee that qualified for a job in 
Howard County or one in Garrett County. He told the employee 
that if he went to work in Howard County, he would get 
$100,000; if he went to work to do the same kind of thing in 
Garrett County, he would get $70,000. The worker very wisely 
chose to go to work in Garrett County for $70,000, because he 
will live better in Garrett County on $70,000 than he would 
live with $100,000 in Howard County.
    So this is a win-win program, both for the community 
because now we have people working in Garrett County at roughly 
three times the mean annual salary there, and now NSA can hire 
three people in Garrett County, where they could only hire two 
people in Howard County. So it is a win-win for both the 
government agencies and for the communities.
    But, as you know, this program has been fraught with fraud, 
and that is partly our fault, because if you look at the 8(a) 
program and this program, we gave you, until very recently, 
enormously relatively more money to monitor the 8(a) program 
than we did the HUBZone program.
    We were counting on something which runs contrary to good 
business practice, and that is we were relying on peers to say, 
``Joe over there is cheating. He really doesn't have enough of 
his people in the District, and that is--the office in the 
District is only a fraud. His main office is somewhere else.''
    Now we have given you more money, which we should have 
given you earlier, and I was pleased that you--how many site 
visits you said you had made. How are we doing it, making sure 
that this really worthwhile program is effectively monitored, 
so that people aren't able to cheat so easily?
    Ms. Mills. As I said, we have a three-prong--we are very 
committed to going after this fraud, waste, and abuse, and it 
has--this is an issue where we have done a lot of work. We 
still have more work to do.
    In the front end, we have changed the certification and 
increased our requirements substantially. In the middle part, 
we have done the increased site visits, which went from I think 
seven in the six months before I came to now more than 1,000 in 
this year. And we have trained, so now we are doing unannounced 
site visits, and really much more robust, you know, activity in 
that, and people know we are serious. We are going after the 
bad actors.
    So we are committed to executing this program at another 
whole level, because we have had lots of issues to address. We 
have addressed some of them. We have more work to do.
    Mr. Bartlett. I know that GSA has looked at this 
previously. Is GSA now following--I am sorry, GAO--GAO now 
following the progress that the administration is pursuing?
    Ms. Mills. GAO gave us several audits. We actually accepted 
I think 11 of the 12 recommendations, and really it is 12 of 
the 12, because we don't have any issue with the last one. So 
we are working with GAO. They have given us a very good road 
map in our contracting operations, and we are working to 
implement all of those recommendations.
    We also have $2 million in the FY11 budget for increased 
oversight in our contracting programs.
    Mr. Bartlett. Are they happy with your progress?
    Ms. Mills. The GAO?
    Mr. Bartlett. Yes.
    Ms. Mills. Well, as I said, we accept all of their 
recommendations. So I hope they are happy.
    Mr. Bartlett. Well, but have you implemented them? You may 
accept them--
    Ms. Mills. Yes, we are implementing them.
    Mr. Bartlett. --but implementing something else.
    Ms. Mills. Yes, we are implementing all of them.
    Mr. Bartlett. And they are happy with the extent to which 
you have implemented them?
    Ms. Mills. You know, they are--
    Mr. Bartlett. Is there something in writing saying that, or 
have they not yet had an opportunity to do that specifically?
    Ms. Mills. I don't think that they have come back, but we 
hope that they will be very happy. We are working very much in 
good partnership with them, and we believe, as I said, there is 
more to do. But we are making progress.
    Mr. Bartlett. Thank you very much.
    Chairwoman Velazquez. Mr. Altmire.
    Mr. Altmire. Thank you, Madam Chair. Administrator Mills, 
we have talked extensively about the salaries issues, and I 
just had more point I wanted to ask about that, just for 
clarification. And as context, as you know, the IRS prohibits 
nonprofit entities from engaging in certain activities in order 
to maintain their status.
    Specifically, nonprofits must ensure that earnings do not 
benefit any private shareholder or individual. And, as we have 
discussed, the CDCs at the heart of this report were paying an 
average of 25 percent of their earning in executive 
compensation, which, as most people would agree, is well above 
what you see generally in the nonprofit world. And you have 
said that you identify that as a problem and something you want 
to see corrected through the administration level.
    But my question is: would the SBA--would you support 
legislation that moved forward that strips CDCs of their 
nonprofit status when executive compensation is deemed to be 
excessive?
    Ms. Mills. As we said, this is deeply disturbing, because 
the money that is--that goes into excessive salaries is really 
taken right out of the benefit of the community. And these CDCs 
are subject to our oversight, and we are going to issue 
corporate governance guidelines to this effect.
    Mr. Altmire. Good. But what--
    Chairwoman Velazquez. Would you yield, the gentleman yield?
    Mr. Altmire. I would, Madam Chair.
    Chairwoman Velazquez. Also, I would like to bring to the 
attention of the Committee and the Administrator that recent 
IRS records show that a number of CDCs have luxury cars for 
company use, including a CDC with Lexuses, another CDC driving 
a Mercedes, and yet another one with a high brand Acura.
    So do you think that these type of amenities are consistent 
with the goals of the program? And when you say that you are 
working on corporate and governance, give us a timeline as to 
when those will be implemented.
    Ms. Mills. Well, this is increasingly disturbing 
information, and thank you for bringing that to our attention. 
We will give you a timeline, but this is for immediate 
attention.
    Chairwoman Velazquez. Thank you for yielding.
    Mr. Altmire. Certainly. So the question was about 
legislation moving forward. Do you feel, given your answer, 
that it wouldn't be appropriate, that you have identified this 
as a problem, and you think you can correct it 
administratively? Or if we did decide to move forward 
legislation, is it something that we would have your support 
on?
    Ms. Mills. Well, we certainly will move forward immediately 
on this, and we--I think we share the concern amongst us, so we 
are probably all in the same--of the same mind on this.
    Mr. Altmire. Great. Thank you.
    Inspector General Gustafson, approximately 80 percent of 
loans guaranteed annually by the SBA are made by lenders to 
whom SBA has delegated the loan-making authority, as you know. 
And the SBA has centralized many loan functions and reduced the 
number of staff performing these functions.
    So the SBA has given more responsibility and independence 
to its lenders, but the need for effective oversight would seem 
to be more important than ever, given that fact. So has the OIG 
identified any systemic deficiencies in the SBA's lender 
oversight and risk management efforts?
    Ms. Gustafson. We have been concerned with lender oversight 
as well. I know that there has been a very recent GAO report on 
lender oversight. We were actually intending to begin an audit 
of just the lender oversight process. And given the very 
extensive GAO report, which I thought, quite frankly, was very 
useful, we have held off on that, because it seems kind of 
duplicative to come in at a time when SBA has made attestations 
that they are going to work on the issues that GAO has 
identified.
    We have concerns with lender oversight. We, of course, have 
had instances of lenders with delegated authority really doing 
some kind of bad things, and having delegated authority a lot 
longer than they really should have, based on some prior cases. 
And, obviously, that is a big concern for us.
    So I would just echo what GAO has found. Sorry.
    We have in the past reiterated that we do understand that 
SBA has a limited amount of resources, but still has a very 
important oversight role. We would like to see things like 
their onsite reviews timed more appropriately, so you have an 
onsite review at a time when you may be looking at a lender's 
delegated authority and their risk rating, and having the two 
kind of marry, so that it becomes a useful tool and a timely 
tool.
    That is something that I think GAO echoed in their audit, 
and I think that would go a long way. When you have limited 
resources, directing the resources at the right time is 
crucial. I am going to read my post-it note for a second.
    So we have found in our oversight of Recovery Act loans 
that we are concerned about the quality of purchase reviews. 
That is something that, again, needs to be really emphasized by 
SBA, and we come in and we have concerns about those. And, 
again, we are concerned about the quality of onsite reviews and 
the timing of onsite reviews. That is something that is on our 
radar and that we will be looking at as well.
    Mr. Altmire. Thank you, both.
    Chairwoman Velazquez. Mr. Buchanan
    Mr. Buchanan. Hi. Administrator, I appreciate the 
opportunity. You called me at my office. We had a good 
discussion, so I appreciate the opportunity to be here today.
    I read a little bit--I want to talk about health care. It 
is a little maybe off the subject, but I want to touch base on 
the White House had sent out a bunch of mailers of small 
businesses in terms of talking about tax credits and other 
things. What is the SBA doing to work with small businesses 
about the new health care bill in terms of compliance or in 
terms of tax credits that they might receive? Do you have an 
aggressive effort? Maybe you covered that, I don't know, I got 
here a little late.
    But I just wanted to touch base on that, because that--I am 
hearing of that in the business community. I was back home this 
weekend, and we had an actual hearing in our area. But health 
care is a big issue for small businesses, and they are trying 
to make sense of where we are at in that process.
    Ms. Mills. Yes. We do have an aggressive effort in the area 
of making sure that small businesses that might be eligible for 
the new 2010 health care tax credits know that they might be. 
We immediately posted on our website the IRS guidance along 
with plain, common sense examples, so that a small business can 
walk themselves through what they might be able to apply for as 
a tax credit.
    And I was saying that we are also going to train our 
personnel, and resource partners, to help a small business get 
the money that they need, because this is cash in their pocket 
in 2010. We believe that four million of the six million small 
businesses that have employees may in fact be eligible, so that 
is a pretty big number.
    Mr. Buchanan. The other thing, on a little different note 
maybe, but we just had a conference that I spoke at where we 
had Panama and a lot of our people in our area, small business 
people primarily, looking to do more business in Central and 
South America and Florida. Has the SBA had discussions with the 
Export-Import Bank or the United States Trade Representatives 
on ways to increase exports by small businesses?
    As you recall, the President made that part of his State of 
the Union as to he thought that was a great opportunity to 
create jobs, and I agree. And then, I don't know if you want to 
touch on the other thing, the free trade agreement that came up 
a lot about Panama and the U.S. and why we can't get that done.
    Ms. Mills. We are part of the President's National Export 
Initiative in which we are working to double exports over the 
next five years. Thirty percent of exports are done by small 
business under indexes, so there is a lot of opportunity. Only 
250,000 small businesses export.
    We at the SBA provide the leadership in the Small Business 
Export Trade Coordinating Committee, which includes Department 
of Commerce, Department of State, and the Export-Import Bank. 
So Gary Locke and Fred Hochberg and myself go on the road, and 
we have a big effort around small business exporting that is 
very much an interagency effort. We will be implementing a lot 
of new programs. We right now train 17,000 small businesses a 
year in exporting, but we are going to do more.
    Mr. Buchanan. And my last question is just--we did a 
congressional hearing with a fellow member of the panel--he is 
actually chairman of the Finance and Tax; I am the ranking 
member--Congressman Schrader, in my district, I think Monday--
Monday I guess it was, and we talked about access to capital. 
There still appears to be all the banks in our area--maybe it 
is different in different areas, especially all the community 
banks, but even the bigger banks, have--they are not in the 
business of lending money, but that is their primary source.
    Is there any way that the SBA in this environment, because 
it is so tough for small businesses to get access to credit, 
that they could do any kind of direct lending of qualified 
small businesses? Because I have got to tell you, we had one 
guy as a witness that does consulting for the region, and he 
says he is, you know--credit that was very easy to get or they 
have had more than enough collateral, they can't get--there is 
no credit, absolutely zero, or very little available, because 
they are looking at past earnings in our region, and a lot of 
businesses haven't done very well the last year or two. Is 
there any thought about that at all?
    Ms. Mills. Well, we know you were kind enough to invite one 
of our capital access folks down there with you, and you have a 
particularly--
    Mr. Buchanan. And he did a good job, by the way.
    Ms. Mills. --tough--thank you. We have a great team. But 
you have a particularly tough geography, and your banks have 
been hit hard and are recovering more slowly.
    We have brought our SBA lending back above the 2007/2008 
levels, but the rest of the market is not recovering as fast. 
So what we have done is go through where the gaps of the 
markets are. And we have proposed specific parts of the jobs 
plan, whether it is something for commercial real estate, 
owner-occupied commercial real estate, whether it is something 
for working capital lines of credit, or just continuing this 
really successful 90 percent guarantee and fee reductions.
    That is only continued now through I believe the end of 
May. We very much hope that Congress might consider continuing 
it further, at least for the fiscal year end.
    Mr. Buchanan. Thank you, and I yield back.
    Chairwoman Velazquez. Time is expired. Ms. Kirkpatrick.
    Ms. Kirkpatrick. I want to thank both of you for the good 
job that you have done in a relatively short time, and, you 
know, I have seen an improvement in my district. And, 
Administrator Mills, I especially want to thank you for your 
attention to rural Arizona, and for coming to Arizona, and the 
time that you have spent on the phone with me talking about 
this.
    You know, it is still that balance between adequate 
documentation for small businesses and making sure they get the 
money they need. I am still seeing that problem in rural 
Arizona where even in good times small businesses struggle. And 
so when the criteria is really tightened, they don't look good 
compared to the urban businesses, and we are still struggling 
with that.
    And I just wondered--I wanted to follow up a little bit 
with Mr. Buchanan's line that, you know, I hear it from a lot 
of my small businesses, they would prefer to apply directly to 
the SBA and not to have to go through a bank, because the major 
banks who are carrying the SBA loans have good relationships 
with metropolitan businesses, but they are not informed about 
how small businesses in rural areas work.
    And so maybe--I would like your thoughts about the SBA, you 
know, lending directly. Also, you know, is there any criteria 
with the major banks that they fund a certain portion of small 
business loans in rural America?
    Ms. Mills. On the question about rural loans, you know, we 
are working very hard on that, and I am actually pleased that I 
have recently seen some data that actually in Arizona things 
are lightening, because that was one of the areas that had 
lagged.
    On the issue of direct lending, I think the Chairwoman has 
also raised that issue, you know, from the beginning. We looked 
at it very hard. We had a whole task force around it. The issue 
of actually executing and operationalizing that has some 
unintended consequences and some costs related to it.
    And so we have gone in the direction of looking at the 
specific gaps and driving the program that we have to reach the 
areas that are not getting reached, you know, particularly the 
underserved markets, some of the smaller loans, which are still 
highly problematic.
    Ms. Kirkpatrick. Would part of that effort be requiring the 
banks who receive SBA funds to fund a certain number of--or a 
certain percentage of small business rural businesses?
    Ms. Mills. We have not yet considered that.
    Ms. Kirkpatrick. Okay. All right. And then, Inspector 
General Gustafson, you talked--I am a former prosecutor, so I 
know a little bit about how hard it is to prosecute white 
collar crime. What kind of resources do you need to be able to 
do a better job?
    Ms. Gustafson. Well, everybody could use more resources. I 
have a tremendous staff of criminal investigators, but I 
appreciate your discussion about prosecutors. I was a former 
prosecutor, too, and I remember white collar cases, and I hated 
them because they are hard and they are complex. I would rather 
take a drug case any day, in all candor.
    I think what would really be helpful for us to get more 
bang for our buck would be, quite frankly, some change in the 
laws. Right now, not only are these cases tough and complex, 
but a lot of them, especially those in the contracting area, 
are no loss cases, which is to say the government got a 
contract, the government got services, and especially under 
federal sentencing guidelines it becomes very unappealing to go 
to an Assistant U.S. Attorney and say, ``I need you to devote 
six months to this case,'' and the guy is probably going to get 
probation.
    And that is something that in my understanding, there had 
been an approach to the Federal Sentencing Commission, and some 
resistance to that. A lot of times that kind of movement takes 
a statutory change. And if these people who really are 
defrauding the government, and taking money that is not meant 
for them, are going to prison, some of this--a lot of this 
would stop. And so that is something that would be incredibly 
helpful.
    On these complex cases, we have suggested longer statutes 
of limitation, because they are very complex. And, you know, I 
have a good staff, but I have under 50 investigators and 
billions of dollars out there that I am trying to oversee. And 
so it is tough.
    Chairwoman Velazquez. Would you--
    Ms. Gustafson. Yes, I am sorry.
    Chairwoman Velazquez. I am sorry.
    Ms. Gustafson. Yes, I will yield. Go ahead.
    Chairwoman Velazquez. I am sorry I interrupted you.
    Ms. Gustafson. That is okay.
    Chairwoman Velazquez. Just finish your line of thought.
    Ms. Gustafson. I have lost it.
    [Laughter]
    Chairwoman Velazquez. I am sorry. I am sorry. Would you 
yield? I know you are talking about how difficult it is to 
prosecute this type of white collar cases. But if we have 
proper oversight by the agency, and then it will make your job 
much easier.
    Ms. Gustafson. Actually, the best way to deter these people 
is to hit them in the pocketbook, and that can be done with 
stronger enforcement. If they think on the front end that they 
are not going to get to where they are getting the money, that 
is a really strong deterrent, as opposed to maybe getting 
restitution at the end. It is a lot harder to get it back once 
it is out the door, so I agree with you wholeheartedly.
    Chairwoman Velazquez. Thank you for yielding.
    Ms. Kirkpatrick. Thank you. Thank you, Madam Chairman.
    Chairwoman Velazquez. Who else? Do you have any other 
questions?
    [No response.]
    I do have more questions. I would like to talk about SBA 
lender oversight. And, Ms. Mills, or, no, Ms. Gustafson, in May 
2003, an IG audit of the microloan program identified 
deficiencies in the SBA's oversight of lenders. Six years 
later, in April 2009, the IG reported that SBA still had not 
taken final action to develop a comprehensive microloan program 
standard operating procedures.
    It also has not set program goals or moved to require 
outcome-oriented data from all program participants. Why are we 
seeing this failure to take appropriate corrective actions?
    Ms. Gustafson. That is a question that would be hard for me 
to answer. You are right, I think the microloan program is 
woefully understaffed. I think that they definitely need to 
have this oversight in place. I can't explain why it hasn't 
happened. I would note that lender oversight in general has 
been a management challenge for the agency for years, and last 
year, just looking at a report, we haven't seen a change, we 
haven't seen an improvement yet on some of these. So it is a 
problem.
    Chairwoman Velazquez. Administrator Mills, particularly at 
a time when small businesses are struggling in getting capital, 
microloan lending has been an important element that really 
helped some of those who have not been able to access capital. 
So we need to make sure that microloan lenders are complying 
with the law. And for that, we need proper oversight.
    Ms. Mills. Madam Chair, you are exactly right. And this is 
now on us, and we are addressing it. We are working with the 
IG, increasing the staff, and writing the SOP. We need more 
clarity and more simplification. We actually have a program for 
automation. The place had no automated systems, all paper.
    Chairwoman Velazquez. Timeline?
    Ms. Mills. That is unacceptable.
    Chairwoman Velazquez. Ms. Mills?
    Ms. Mills. Pardon?
    Chairwoman Velazquez. Timeline?
    Ms. Mills. Timeline?
    Chairwoman Velazquez. Yes.
    Ms. Mills. Well, this is immediate. We are in process. We 
just--
    Chairwoman Velazquez. Okay.
    Ms. Mills. --hired a new branch chief last week, and the 
SOP is being written. And we can give you a timeline.
    Chairwoman Velazquez. Okay. Administrator Mills, SBA 
recently put out a request for quotation worth up to $5 million 
for a task order consulting contract. This potential award has 
now been limited to four companies, including McKinsey and 
Company. This contract expands on work done under a previous 
contract performed by McKinsey.
    Given that a number of senior officials, including 
yourself, worked for McKinsey, does the agency have any 
officials outside reviewing these contracts?
    Ms. Mills. We have a very robust competitive contract 
system.
    Chairwoman Velazquez. I am asking about a truly independent 
third party. I am not--does the Board have outside people who 
do not--are not working for the agency or have worked for 
McKinsey?
    Ms. Mills. The contracting process is an independent 
competitive process. I don't personally get involved with any 
individual contracts. It is very important that that process be 
complied within an orderly process, because, as you said 
earlier, we are the standard.
    Chairwoman Velazquez. Okay. My question is: does SBA have 
officials outside the SBA reviewing these contracts?
    Ms. Mills. I am not familiar with the individual contract, 
and we would be happy to get back with you and answer your 
question.
    Chairwoman Velazquez. Okay. In addition to the problems 
identified in the recent CDC PCL audit, the IG also conducted a 
review of the 7(a) loans disbursed pursuant to ARRA. The IG 
found numerous deficiencies in this program. The SBA has an 
outstanding request for over half a billion dollars to fund the 
7(a) and 504 programs through the end of the fiscal year. What 
is the SBA doing to address the problems identified by the IG? 
And how is the agency working to ensure taxpayers' money is 
being used responsibly?
    Ms. Mills. This review of the IG actually turned out to be 
extremely helpful in giving us guidance of how to solve a 
problem which was unacceptable, and that was that the 
guidelines that we had given, according to the Recovery Act, 
required additional documentation, but it turned out the loans 
didn't have that documentation, because it wasn't clear to the 
lenders and the borrowers that they had to have these 
certifications. I think it was an additional immigration 
certification or a workforce certification.
    But now, thanks to the IG for pointing it out in this early 
audit, we were able to simplify and clarify what the 
requirements were and get it on track in an efficient way. And 
to us it is an example of how to work productively with the IG.
    Chairwoman Velazquez. In exercising our oversight role, 
this Committee could request contract file of the agency 
whenever we are in that process. We did so, and the SBA General 
Counsel indicated that they lost materials associated with an 
award. Is that a common occurrence, or is this the first time 
that such a thing happened?
    Ms. Mills. Well, whether it is common or the first time, it 
is deeply disturbing. And we are getting--I am aware--that this 
file went missing. We are able to reconstruct the file. I think 
we have sent half of it to you, and the rest of it will come to 
you, and we will get it to you. And we are doing an 
investigation.
    Chairwoman Velazquez. I take the responsibility, the 
oversight responsibility, of this Committee very seriously, 
whether it be a Democratic administration or a Republican 
administration in the White House. And I want to make that 
clear. So it is nothing personal. It is our duty to do that. 
And I expect that when documents are requested, they are made 
available to us.
    Ms. Mills. Absolutely.
    Chairwoman Velazquez. Thank you. Any other member has any 
question?
    [No response.]
    So with that, I ask unanimous consent that members will 
have five days to submit a statement and supporting materials 
for the record. Without objection, so ordered.
    This hearing is now adjourned.
    [Whereupon, at 11:30 a.m., the Committee was adjourned.]

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