[Senate Hearing 112-500]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 112-500

    THE FY 2013 BUDGET REQUEST FOR THE SMALL BUSINESS ADMINISTRATION

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

                                HEARING

                               BEFORE THE

            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 29, 2012

                               __________

    Printed for the Committee on Small Business and Entrepreneurship









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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                      ONE HUNDRED TWELFTH CONGRESS

                              ----------                              
                   MARY L. LANDRIEU, Louisiana, Chair
                OLYMPIA J. SNOWE, Maine, Ranking Member
CARL LEVIN, Michigan                 DAVID VITTER, Louisiana
TOM HARKIN, Iowa                     JAMES E. RISCH, Idaho
JOHN F. KERRY, Massachusetts         MARCO RUBIO, Florida
JOSEPH I. LIEBERMAN, Connecticut     RAND PAUL, Kentucky
MARIA CANTWELL, Washington           KELLY AYOTTE, New Hampshire
MARK L. PRYOR, Arkansas              MICHAEL B. ENZI, Wyoming
BENJAMIN L. CARDIN, Maryland         SCOTT P. BROWN, Massachusetts
JEANNE SHAHEEN, New Hampshire        JERRY MORAN, Kansas
KAY R. HAGAN, North Carolina
  Donald R. Cravins, Jr., Democratic Staff Director and Chief Counsel
              Wallace K. Hsueh, Republican Staff Director
         Claire O'Rourke, Democratic Professional Staff Member
          Meredith West, Republican Senior Professional Staff













                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

Landrieu, Hon. Mary L., Chair, and a U.S. Senator from Louisiana.     1
Snowe, Hon. Olympia J., Ranking Member, and a U.S. Senator from 
  Maine..........................................................     3

                               Witnesses

Mills, Hon. Karen, Administrator, United States Small Business 
  Administration.................................................     7
Gustafson, Hon. Peggy, Inspector General, United States Small 
  Business Administration........................................    22
Sargeant, Hon. Winslow, Chief Counsel for Advocacy, United States 
  Small Business Administration..................................    35
Wilkinson, Tony, President, National Association of Government 
  Guaranteed Lenders.............................................    53
Shear, Bill, Director, Financial Markets and Community 
  Investment, United States Government Accountability Office.....    71
Hurn, Christopher G., Chief Executive Officer and Cofounder, 
  Mercantile Capital Corporation.................................    87
Evers, Ridgely C., Managing Partner, Tapit Partners, L.L.C.......   101

          Alphabetical Listing and Appendix Material Submitted

Evers, Ridgely C.
    Testimony....................................................   101
    Prepared statement...........................................   103
Gustafson, Hon. Peggy
    Tesimony.....................................................    22
    Prepared statement...........................................    24
Hurn, Christopher G.
    Testimony....................................................    87
    Prepared statement...........................................    89
Landrieu, Hon. Mary L.
    Testimony....................................................     1
    Letter dated March 28, 2012, from the Chamber of Commerce....    52
    Chart titled ``Grow Businesses and Create Jobs--Access To 
      Capital''..................................................   108
Mills, Hon. Karen
    Testimony....................................................     7
    Prepared statement...........................................     9
    Responses to post-hearing questions from Chair Landrieu......   117
    Responses to post-hearing questions from Senator Tom Harkin..   128
    Responses to post-hearing questions from Senator Mark Pryor..   130
Pryor, Mark L.
    Testimony....................................................     5
    Prepared statement...........................................     6
Rowe, C. E. ``Tee''
    SCORE presentation...........................................   147
    Prepared statement...........................................   154
Sargeant, Hon. Winslow
    Testimony....................................................    35
    Prepared statement...........................................    37
    Responses to post-hearing questions from Senator Mark Pryor..   138
    Response to post-hearing question from Senator Jerry Moran...   140
Shear, Bill
    Testimony....................................................    71
    Prepared statement...........................................    73
    Responses to post-hearing questions from Chair Landrieu......   141
Snowe, Hon. Olympia J.
    Testimony....................................................     3
    Chart titled ``SBA Loan Subsidies Skyrocketing''.............    13
    Items for the Record from Administrator Mills................   114
U.S. Small Business Administration
    Press release titled ``SBA Program Helps to Bridge the Small 
      Business Gap''.............................................   152
Wilkinson, Tony
    Testimony....................................................    53
    Statement from the National Association of Development 
      Companies..................................................    54
    Prepared statement...........................................    66

 
    THE FY 2013 BUDGET REQUEST FOR THE SMALL BUSINESS ADMINISTRATION

                              ----------                              


                        THURSDAY, MARCH 29, 2012

                      United States Senate,
                        Committee on Small Business
                                      and Entrepreneurship,
                                                    Washington, DC.
    The Committee met in a roundtable discussion, pursuant to 
notice, at 10:23 a.m., in Room 428A, Russell Senate Office 
Building, Hon. Mary L. Landrieu, Chair of the Committee, 
presiding.
    Present: Senators Landrieu, Pryor, Cardin, Shaheen, Hagan, 
and Snowe.

 OPENING STATEMENT OF HON. MARY L. LANDRIEU, CHAIR, AND A U.S. 
                     SENATOR FROM LOUISIANA

    Chair Landrieu. Good morning. Let me call our Small 
Business budget hearing to order and apologize for the delay. I 
had an early morning speech way over in Old Town, Virginia, and 
traffic is not easy in the morning. So I thank everyone for 
being here, and I am going to go right into my opening 
statement.
    Thank you all for joining us today. I would like to thank 
particularly Administrator Mills and our witnesses for coming 
today. There is nothing small about small business in America. 
According to the SBA, small businesses are responsible for 
employing roughly half of all working Americans. Entrepreneurs 
pump almost $1 trillion into the economy and have generated 60 
to 80 percent of net new jobs annually over the last decade.
    Many of these small business owners rely on SBA counseling, 
contracting, and loan programs to help get their businesses 
started, expand their business, and develop their business 
plans.
    In his fiscal year 2013 request for the SBA, President 
Obama once again signaled his commitment to our nation's nearly 
28 million small businesses by submitting a strong and fiscally 
responsible budget of $949 million in funding for the agency, 
plus $167 million for disaster loans. This is a good budget in 
tough budgetary times. It makes investments in key programs 
that will enable the agency to fulfill its core mission.
    One of the things I wanted to mention before we get into 
the budget specifically is our Small Business Jobs Act, which 
this Committee, Senator Pryor particularly, and others, worked 
so hard with me to spearhead. The President signed it into law 
18 months ago.
    It has had a very, very positive effect on bank lending and 
retail sales. The GDP, an important indicator of our nation's 
economic health, has grown for the tenth consecutive quarter. 
This landmark Small Business bill added billions of dollars of 
lending and investment to America's entrepreneurs and provided 
$12 billion in tax cuts to small businesses from coast to 
coast.
    In addition, recognizing that less than 1 percent of small 
businesses export, we stepped up in that bill some important 
export opportunities. I just was recently hearing from my state 
that they are absolutely thrilled to have received one of the 
40 STEP grants that were given competitively.
    They have never received a grant like this from the Federal 
Government and they are very excited about stepping up their 
export opportunities. So the partnerships that are being 
created, I think, Administrator Mills, at the state level are 
quite exciting when it comes to export. I know you will have a 
lot more to say about that.
    The SBA approved nearly 22,000 loans during the first 
quarter of 2011. This was a record quarter. We now have 157 
active lenders, as we financed almost 1,000 small business 
commercial mortgages totaling $1 billion in volume through the 
504 Commercial Mortgage Refinancing Program, which has been 
extremely popular and, I think, very helpful to keeping 
people's balance sheets in order and helping some our 
businesses roll through this very tough time.
    I mentioned the STEP grants, so I will not go through 
those, but I will highlight a few other interesting facts. More 
than 2,400 small businesses have received loans above $2 
million. More than 338 microloans have been made above $35,000. 
The SBA has 20 new microloan lenders on board to participate in 
the ILP Program championed by Senator Levin.
    The other good feedback we are getting, Senator Snowe, is 
from our state partners, particularly Michigan and North 
Carolina, and there are some other states that have been really 
excited about the new partnerships that we have with them.
    Let me just say something about the budget and then I will 
turn it over to Senator Snowe. The $348 million to support $16 
billion in 7(a) and $6 billion in 504 lending, both of these 
programs have proved enormously successful over the course of 
their lifetimes. I would like to see these programs expand. I 
know there is some subsidy required to do that. I would like to 
talk about how to potentially do that as we move forward on the 
budget.
    The $167 million to administer the SBA Disaster Loan 
Program is critical to getting loans out to places along the 
East Coast and, of course, through our mid section of the 
country with the recovery still in progress from tornados, et 
cetera.
    This is a strong budget for the agency, but I am concerned 
about reducing the budget for counseling and technical 
assistance. The negative impact such cuts could have on 
critical core services for American entrepreneurs--and over and 
over again I will say in the hearings that I have, 
Administrator Mills, people that are on the street, 
entrepreneurs say that partnerships, mentorships, besides 
capital, besides access to capital, is crucial.
    We have had business people sit here and say, right where 
Senator Pryor is sitting, ``If it was not for my mentor from 
the SCORE organization, I never would have been able to 
restructure my business in a difficult time.''
    In times where the economy is constricting, our efforts on 
mentorship and apprenticeship need to be moving upwards, 
because we have to counter the downpull on these businesses and 
help businesses to think differently, how to market their 
product differently, maybe even change their business plan, and 
that takes know-how and you are not going to learn that in 
college. You are going to learn it from an experienced business 
person.
    The final thing I want to say is that I am going to take a 
very strong interest in focusing on the quality of our programs 
and measures of success. I believe, Senator Snowe, and I know 
you do, when we try to manage something, you have got to be 
able to measure it before you can manage it well. I know that 
you understand this.
    I am having a little difficulty getting some quality 
control information from some of the things that we fund in 
this budget. I just want the Committee to know that is going to 
be one of my priorities. I am anxious to hear your priorities 
and to work with all of my members on fashioning the very best 
budget we can to do the very best work out of Washington, 
partnering with local banks, community banks, other non-bank 
lenders, and our states to help get money to Main Street.
    Senator Snowe.

OPENING STATEMENT OF HON. OLYMPIA J. SNOWE, RANKING MEMBER, AND 
                   A U.S. SENATOR FROM MAINE

    Senator Snowe. Thank you, Chair Landrieu, for calling this 
hearing today to discuss the Small Business Administration's 
fiscal year 2013 budget request. I am very pleased that we have 
Administrator Mills testifying here today. Our nation could not 
ask for a better small business champion.
    As an early and ardent proponent of restoring the SBA 
Administrator position to Cabinet-level status, it was a 
tremendous victory for small businesses that this long overdue 
promotion has finally come to fruition. Creating a seat for SBA 
at the President's highest table is a signal to our fragile 
economy that America's small business will, in fact, drive our 
nation to full recovery.
    I am as confident now as I was when I first called for this 
position's elevation that Administrator Mills is precisely the 
right person at the reins of the agency responsible for 
America's preeminent job generators.
    And especially at this critical time where we need economic 
growth and we need to bolster small businesses, SBA is 
certainly filling the vacuum with a record level amount of 
lending of more than $30 billion to 60,000 businesses, which I 
gather is record level lending for small business in SBA 
history, and is an indication of the fundamental pivotal role 
that the SBA is playing at this moment in time with the 
exceptional leadership of Administrator Mills. I think it is 
without question, as we talk to small businesses, that they 
desperately need access to capital, especially at a time when 
more than $2 trillion is sitting on the sidelines among other 
businesses who are not in a position or are not willing to make 
the investments within their businesses or for additional 
hires.
    I would also like to thank Dr. Sargeant from the Office of 
Advocacy and SBA Inspector General Peggy Gustafson for coming 
today, and for their tireless work on two of my biggest 
priorities, which is to reduce the Federal regulatory burden on 
small businesses and rooting out fraud, waste, and abuse in the 
Federal Government.
    Finally, I would also like to thank our knowledgeable 
witnesses, most especially Bill Shear from the Government 
Accountability Office, Chris Hurn with Mercantile Capital, Tony 
Wilkinson with the National Association for Government 
Guaranteed Lenders, and Ridgely Evers with the Board of 
Directors for SCORE. I certainly appreciate everybody being 
here today to provide suggestions for streamlining the SBA's 
budget.
    In my capacity as Ranking Member, this marks my tenth SBA 
budget hearing. It is hard to believe it has been a decade, 
Chair Landrieu, either as Chair or Ranking Member. It is 
through this lens that I am considering the 2013 budget. With 
our country's economic recovery from the recent recession still 
lackluster at best, because the economic growth numbers are not 
where they should be that would generate the kind of job growth 
that we should have at this moment in time, we have to ensure 
the SBA can be the catalyst small businesses require to get 
Americans back to work.
    It has not been an easy task, considering the fact that we 
are facing alarming budget challenges and deficits. But as I 
indicated, with Administrator Mills at the helm, there is no 
doubt that that is happening.
    The 2012 SBA budget, excluding disaster funding, was 
approximately $800 million. The 2013 request is a 15 percent 
increase over last year. A full 96 percent of this increase is 
to subsidize the SBA's lending programs, due in large part to 
rising defaults. Administrator Mills and I discussed this 
yesterday, about my concerns regarding the skyrocketing 
increases in loan subsidies.
    I have a chart that I will illustrate in my question 
period, but it indicates that the 7(a) and the 504 programs, 
when they operated at zero subsidy, mean the programs paid for 
themselves with no fees, with no requirement for taxpayer 
support. In each of fiscal years 2010 and 2011, the SBA 
required $80 million to subsidize these programs due to 
increased defaults, and this year, subsidies have grown $350 
million, marking an astounding increase from the 2009 level of 
zero. We had five years of zero subsidies and then we went from 
$80 million to $350 million.
    Last year, I expressed concerns about the subsidies being 
too high, at $210 million, but was told the request represented 
an anomaly because the SBA was working through the bad loans. 
This year, however, marks the second consecutive year with yet 
higher subsidies with an explanation that obviously the worse 
loans are still filtering through the system and things should 
bounce back by next year. But I am not so sure that the problem 
is simply going to get better with time, and although I agree 
that SBA loans are still a good return on investment, that does 
not mean that we shouldn't focus like a laser in addressing the 
very real concerns of increased subsidies.
    The SBA should establish a clear plan to reduce its subsidy 
costs in the future. Looking at historical data, subsidies 
compared to the overall SBA budget just get higher every year. 
They accounted for 12 percent of the total SBA budget in 2011, 
26 percent in 2012, and now a 37 percent increase in 2013. This 
is the paramount issue, in my view, in the agency's 2013 
budget.
    On the one hand, the Administration is asking for more 
money to cover increased subsidies; on the other hand, the 
Administration is failing to recover losses on defaulted loans, 
and thus, lower the subsidy rate. According to the SBA's own 
estimates, the Administration has written off nearly $2 billion 
in the 504 program alone. A recent independent audit of the 
Administration's 2011 financial statements revealed that the 
SBA failed to refer over 5,000 eligible co-borrowers and 
guarantors to the Treasury for cost servicing and offset for at 
least $226 million.
    Even the SBA's Inspector General has highlighted in her 
testimony today the need for the SBA to address the heightened 
risk of losses. The Administration must formulate a meaningful 
plan to address defaults, recover on losses, and cease the out-
of-control costs of these programs to taxpayers. There are 
other issues that I have of concern that I will raise during 
the course of question and answers so that we can move to the 
testimony.
    I do want to commend Administrator Mills for reining in the 
administrative expenses of the agency. The increase in the 
executive direction budget from 2012 to 2013 is negligible at 
just $115,000, down 21 percent from the 2011 level of $26 
million.
    Further, agency-wide, overhead costs are largely held 
steady or reduced in this year's budget request. So again, I 
want to commend you, Administrator Mills, for your leadership 
in this regard. Thank you, Madam Chair, and we will proceed to 
questions.
    Chair Landrieu. Senator Pryor.
    Senator Pryor. I will just submit mine for the record, but 
thank you very much.
    [The prepared statement of Senator Pryor follows:]





    
    Chair Landrieu. Thank you so much. Proceed, please.

  STATEMENT OF HON. KAREN MILLS, ADMINISTRATOR, UNITED STATES 
                 SMALL BUSINESS ADMINISTRATION

    Ms. Mills. Chair Landrieu and Ranking Member Snowe and 
members of the Committee, I am very pleased to testify before 
you. First I want to thank this Committee for its strong 
support of our agency and for its unwavering commitment to 
America's small businesses.
    I also want to thank the Committee for the passage of the 
long-term SBIR preauthorization. This extension supports 
critical funds for research and innovation for entrepreneurs 
and has helped found some important companies like Qualcomm and 
Symantec.
    You all know the facts and Chair Landrieu just reiterated 
some of them. Over the last 15 years, small businesses have 
created two out of every three net new private sector jobs and 
over half of all working Americans own or work for a small 
business. Our goal at the SBA is to make sure small businesses 
remain well-positioned to do what they do best, grow and create 
jobs.
    The President's proposed fiscal 2013 budget for the SBA of 
$1.1 billion, which includes the funds for our disaster-related 
programs, is focused on helping more entrepreneurs and small 
business owners compete and win in today's economy. Government 
does not create private sector jobs. We provide small 
businesses with the tools that they need to start, to grow, and 
to create these jobs.
    I think the owner of a company we work with called Quality 
Electrodynamics in Ohio summed it up best. He said, Government 
cannot start your business, but they can help accelerate what 
you do. To make that possible, we are focused on three key 
objectives that are reflected in the President's proposed 
budget.
    First is continued access to capital. As the Chair 
mentioned and the Ranking Member mentioned, in 2011, we had a 
record year. We supported more than $30 billion in lending to 
over 60,000 small businesses. This is the most capital going 
into small businesses in a single year in our agency's history.
    Today, credit markets are improving, but there are still 
gaps, particularly for smaller loans and in under-served 
communities and we are working to make sure those gaps are 
filled.
    Second, the fiscal 2013 budget reflects the needs of high 
growth entrepreneurs. These companies are proven job creators, 
but they require specialized tools, long-term capital to 
accelerate their business growth. In 2011, our small business 
investment companies also had a record year, putting $2.6 
billion directly into the hands of more than 1,300 of these 
high-growth businesses. I would like to thank the Chair and the 
Ranking Member for their efforts to build on the SBIC's program 
success through increased authorization levels and other 
legislative improvements.
    Third is our counseling and mentoring activities. These 
programs assisted more than one million people in 2011. In 
fiscal year 2013, we are strengthening our veterans' program 
and the skills-based training and counseling programs that are 
needed to ensure a path to successful entrepreneurship.
    Estimates show there will be approximately 300,000 
returning veterans looking to transition to the civilian 
workforce in fiscal 2013. These returning veterans are natural 
business leaders and we are committed to providing them with 
the training and the resources they need to be successful 
business leaders.
    This includes an SBA-led National Government-wide veterans' 
Entrepreneurship Training Initiative. The fiscal 2013 budget 
also reflects our continued commitment to streamlining our 
processes while creating efficiencies and eliminating 
duplication, as well as our ongoing efforts to combat fraud, 
waste, and abuse.
    Two examples of these initiatives are our efforts to 
consolidate our data infrastructure and continued development 
of BusinessUSA.gov, a user-friendly virtual one stop for 
accessing small business-related programs across the Federal 
Government.
    Overall, our goals remain twofold, getting the right 
resources into the hands of more small business owners and 
entrepreneurs, and making sure these programs are effective, 
easy to use, and most importantly, that they give the American 
taxpayer a good bang for the buck. I look forward to working 
with all of you to ensure that small businesses are front and 
center in our efforts to create jobs and foster a 21st century 
American economy that is built to last. Thank you very much.
    [The prepared statement of Ms. Mills follows:]





    
    Chair Landrieu. Thank you. We have been joined by Senator 
Shaheen. I so appreciate her continued and extraordinary 
support for the work of this Committee. Thank you, Senator.
    Let me get right into the questions, and I am going to 
follow up on some of the comments that my Ranking Member made, 
because I respect her views so very much and I want to jump 
right into it, this runaway subsidy issue. Could you please 
address that? Because one of the things that I have tried to do 
is to improve the quality of programming for the taxpayers.
    So that we are investing this $1 billion to stretch it, 
which is a small amount of money relative to other budgets. I 
also chair the Appropriations Subcommittee on Homeland Security 
and that budget is $42 billion, just to give you relative 
numbers here. So a billion dollars is a lot of money, but 
relative to other budgets of the Federal Government, I think it 
is one of our--it is our smallest.
    I think this agency does a great deal of good with that 
investment. But we do want to run it as efficiently, as 
effectively, and as business-like as possible, recognizing 
there are differences between government and business that 
sometimes get lost up here.
    But let us talk about the subsidy rate. What would be your 
response to Senator Snowe's comments about runaway subsidies 
and the default rate?
    Ms. Mills. Thank you. As we just discussed, we had a record 
year. We supported $30 billion last year. The fiscal budget 
that we are requesting is for $351 million in subsidy to 
support $22 billion in loans in the hands of small businesses. 
So $351 million in subsidy supports $22 billion. That is about 
a 1.8 percent subsidy rate.
    So we have actually very low default rates, a very low 
subsidy rate. I want to make sure that the Committee 
understands that the increase in subsidy rates is not due to 
increases in default rates in recent loans. Recent loans are 
performing well and default rates are declining.
    The subsidy rates are done by formula and they have a 
number of inputs. First are economic variables and they are set 
a period of time ahead. So once again, they will, going 
forward, begin to reflect the improving unemployment numbers, 
but do not necessarily do so yet.
    Second, the loans' default rates that are in the subsidy 
rate that are causing it to rise are from the 2005, 2006, 2007, 
and 2008 cohorts. At those periods of time, a number of loans 
were made which ended up having poor performance, high default 
rates, and poor recoveries particularly due to the fact that 
commercial real estate values which were high at the time of 
the loan then dropped and did not support the loans and the 
loan recovery.
    Chair Landrieu. So what you are saying is the default rates 
primarily are loans that were made or defaulted in 2005, 2006, 
2007, and 2008? Is that what you said?
    Ms. Mills. That is correct.
    Chair Landrieu. And it was because of the recession and 
former practices, or maybe not, but former practices, perhaps, 
but the constriction in the economy. But that is not reflective 
under your watch, is what you are saying?
    Ms. Mills. Yes. I want to make it very clear that the facts 
support recent loans are performing well. Our default rates are 
declining. So we should expect, over the longer term, those 
will become part of the subsidy rate calculation.
    Chair Landrieu. The other question I want to ask, because 
this is really crucial to these core programs, 7(a) and 504. 
This Committee purposely--and I think we did it all together, 
as I recall--reduced, argued for an elimination of the fees and 
an increase from 75 percent to 90 percent of the guarantee. So 
how did that affect the subsidy rate and what was the effect to 
the businesses?
    Did they receive those reductions in fees which you could 
say was a tax on small business that we took away so that 
people could borrow money in a more economical way to 
themselves, even though it was a cost to our Government?
    Ms. Mills. In the Recovery Act, I want to thank Congress 
because at that absolutely critical time when credit markets 
were frozen, the Recovery Act allowed us, as you just 
mentioned, to reduce or eliminate most of the fees and to raise 
our guarantee to 90 percent. And that was so successful that 
Congress reauthorized more money for it four different times 
and then culminated a fifth time in the Small Business Jobs 
Act.
    That is one of the reasons--the strength of that is one of 
the reasons why we had such a record year. We were able to step 
into a gap where the market had failed, no one could get a 
loan, good small businesses were turning to the SBA, and people 
saved their fees, put them back in their businesses, bought 
more equipment, and were able to come through the recession in 
strong order. So those were definitely very, very successful 
and important programs.
    Chair Landrieu. And just to finalize, one of the things I 
am going to focus on with the members this year of this 
Committee is how we could go into a long-term authorization of 
reduction of fees because I think it has worked so well.
    I would like to see if there is some other way to recoup 
those dollars to the Federal Treasury, because I have been told 
over and over and over again by every business that has used 
the program that that is one of the reasons they used the 
program, because instead of paying $13,000 or $25,000 or 
$33,000 in fees up front, they could put that money in their 
pocket, reinvest in their business, and it really spurred 
additional interest in those programs.
    So let me turn it over to the Ranking Member now and then 
we will go through a series of questions. We have been joined 
by Senator Cardin. Thank you very much.
    Senator Snowe.
    Senator Snowe. Could you put the chart up? Thank you.
    [The chart follows:]





    
    Thank you, Madam Chair. I would like to get to the loan 
subsidy issue. I would appreciate if we could have those 
numbers in those zero years? Obviously I gathered that 
everything contributed to the real estate devaluation in those 
zero years in which there was no subsidy rate by the taxpayers.
    Ms. Mills. We would be happy to get you those numbers.
    Senator Snowe. As you can see in the chart, there is a 
tremendous growth in subsidies and that is the concern. I am 
wondering, is it all attributed to the fact that those loans 
were issued in the five years in which there was zero subsidy?
    Ms. Mills. Senator, we would be happy to get you the 
background numbers behind those cohort years and those default 
rates. But yes, in fact, the chart there actually shows that 
the subsidy, in 2012 and 2013, is high because it is reflecting 
losses from the 2005, 2006, 2007, and 2008 cohorts.
    Senator Snowe. So it was not a matter of the origination, 
but it was a matter of what happened during the real estate 
time. So is that the reason for the tremendous growth this year 
that you are proposing?
    Ms. Mills. Yes. The subsidies, the formula, it includes 
losses from the portfolio which is driven by those cohort years 
at the moment, and also economic variables.
    Senator Snowe. I am interested in the econometric model 
that the Administration used to calculate the future loan 
performances. What were the unemployment numbers? I understand 
it was about 9.3; is that correct?
    Ms. Mills. We would be happy to get them for you. The 
formula is set in advance so it lags the current numbers.
    Senator Snowe. As I understand, based on the request for 
the subsidy increases, the econometric models with respect to 
unemployment as well as economic growth is much higher and 
based on the wrong indicators. I would appreciate that 
information, as well, to understand the assumptions that were 
used to calculate this subsidy request based on future loan 
performances.
    Ms. Mills. Yes, we would be happy to.
    Senator Snowe. Were there any questions raised about the 
accuracy of those estimates?
    Ms. Mills. Well, there is a series of economic variables 
that are part of the model. It is an econometric model. It is 
set in advance so that, once again, we would anticipate the 
current economic performance, which has improved, to be 
reflected in future subsidy rates and bring them down.
    Senator Snowe. The issue of subsidies is quite substantial. 
I think that that is what is troubling, and obviously we have 
to get to the heart of that matter in terms of what is driving 
it and whether or not that is as accurate as it could be based 
on the accurate unemployment numbers and economic growth.
    In addition to that, why has the Administration written off 
nearly $2 billion in the 504 program and not attempted to 
recover those losses?
    Ms. Mills. I want to assure this Committee, we attempt to 
recover every penny for taxpayers, and we have gone through 
each piece of the process. We are partnered with our CDCs, 
which are our community development companies who help us make 
those loans, and we work across the board. Where we are not 
referring to Treasury, we are now referring to Treasury, and we 
are going to continue to turn over every rock to find every 
possible recovery.
    Senator Snowe. I was raising that question because of the 
Inspector General's report that did a review, an audit of SBA, 
and indicated that the SBA did not refer more than 5,000 
eligible co-borrowers and guarantors to the Treasury for cross-
servicing and offsets.
    Ms. Mills. I am happy to get you the information on that. 
My understanding is that is at the very end of the process and 
that we are now referring them all to Treasury.
    Senator Snowe. Okay. So on the $2 billion, has it been 
written off?
    Ms. Mills. The amounts that have come to Treasury, that $2 
billion, there are a number of pieces of it and we can put it 
together. Part relates to an old program called Participating 
Securities, which is an SBIC program that was terminated in 
2004 that is still creating write-offs, and we have terminated 
and no longer do that program. The other piece is largely 
driven by 504 and commercial real estate is one of the main 
drivers.
    Senator Snowe. Just so I understand, will you be referring 
these 5,000 eligible co-borrowers and guarantors and banks that 
the IG's report has highlighted?
    Ms. Mills. I believe we have.
    Senator Snowe. To Treasury for debt collection?
    Ms. Mills. But if we have not, we absolutely will.
    Senator Snowe. Yes, because this was based on a report that 
was issued in December 2011, in accordance with the Debt 
Collection Improvement Act of 1996. Could we have a report on 
that as well?
    Ms. Mills. Absolutely.
    Senator Snowe. Because I think it is really important for 
us to do everything we can to collect every dollar to the 
extent possible. We realize sometimes it costs more to collect 
the debt than what is owed. We have learned that through even 
the IRS, but we certainly should be making attempts to do that.
    According to this report, it has not been done, and I think 
it is very critical because we have to do everything we can, as 
you well know, to safeguard taxpayers' funds, especially 
because of these large increases in subsidies. I think it gets 
back to the heart of that question because we certainly have 
not had a strong economic recovery, and the growth is 
lackluster.
    We could continue to have serious problems with the loans 
that are even being issued in this period of time. So thank 
you.
    Chair Landrieu. Thank you.
    Mr. Pryor.
    Senator Pryor. Thank you, Madam Chairman. Thank you both 
for hosting this and I want to thank you for being here on 
behalf of the SBA because SBA does a lot of great things around 
the country. Let me say that my understanding is you have 
traveled extensively around the country. You are hearing from 
businesses all over the country. And I know you mentioned some 
of that in your testimony.
    But have you taken some of the ideas that you have picked 
up on the road and are they in your budget? Are you trying to 
translate those into priorities for SBA?
    Ms. Mills. Absolutely. I have traveled to about 40 states, 
trying to make it to every place, many states, of course, 
multiple times. I pretty much travel every week and when I go 
to a state, when I came to your great state, I did go to 
Arkadelphia and we had--I visited a sawmill, met with the 
lumberjacks, actually, and we had a roundtable of lenders. We 
have a processing center there. I visited our SBA offices.
    But each place we have a roundtable of small businesses and 
usually a roundtable of lenders. The inputs from that allow 
us--and my deputy is on the road as well. We understand. We 
make it a point to know what is happening in our network on the 
ground. We make it a point to listen to small business and 
incorporate those things into both our policy pieces and just 
our programmatic changes.
    So if we hear this program needs streamlining, there are 
too many forms, we respond to that as well.
    Senator Pryor. Okay, great. And let me ask about something 
that I am a big supporter of and that is regional innovation 
clusters. I know that is one of your priorities as well. Let us 
see. You are asking for $3.35 million in FY2013 to continue 
your program. My questions are really two or three in number.
    First, what regional innovation clusters have you supported 
in the past? And second, what would your criteria be for that 
support? And then third is, the Economic Development 
Administration also has a regional innovation cluster program. 
I am curious if this is an overlap or if you guys work in 
concert?
    Ms. Mills. Well, number one, thank you for your support of 
clusters. As everybody knows, they are near and dear to my 
heart because I got involved first in public service through a 
cluster of the Maine boat builders and I always say that there 
is nobody less likely to cluster than the Maine boat builders. 
But they did because as small businesses, there was something 
in it for them to be collected together with the University of 
Maine and composite technology.
    We have done clusters all across the country, both through 
our own SBA program that you see represented here, and in 
collaboration with a multi-agency activity led by EDA over in 
Commerce. And what we have found is that clusters have become 
one of the foundation stones of regional economic development.
    They have proven to be very successful, highly cost-
effective, and they involve--where they involve small 
businesses at the core, they are even more successful. Now 
there is very good academic data supporting this and we are 
seeing extremely good results on the ground.
    I want to make the point that these clusters are very 
connected to our Small Business Development Centers, our SCORE 
partners, our district offices, our community colleges, and the 
entire network on the ground.
    Senator Pryor. Well, I appreciate that and I appreciate 
your commitment to the clusters because like I said, I agree 
with the stats you are giving the Committee today. I think it 
is a great asset for this country, and we need to do more of 
it.
    But also, there is a GAO report which Mr. Shear will 
discuss on the second panel today, and he says that there are 
53 programs that support entrepreneurs at SBA, HUD, USDA, and 
Commerce. Many of these programs assist disadvantaged areas and 
small businesses. Now, I realize that SBA and USDA have signed 
a memorandum of understanding to improve service to small 
businesses in under-served areas and I think that is great.
    But what other recommendations do you have in coordinating 
or consolidating some of these programs to make sure they are 
the most cost-effective ways to help small businesses?
    Ms. Mills. Well, I have actually read the GAO report as 
well and I know that you will hear from Bill later. We very 
much appreciated being commended for our collaborative efforts. 
The one that was mentioned was the MOU that we do with the 
Department of Agriculture to make sure that all of our people 
are cross-trained in the Department of Agriculture loan 
programs, for instance, and that all of their offices, which is 
quite extensive, are then cross-trained and are outposts for 
the SBA.
    So this is working extremely well. Our resource partner 
programs and all of our entrepreneurial programs across the 
Administration are actually complementary and additive, and we 
have had quite a bit of conversation with GAO about this, 
showing how needs of entrepreneurs at the beginning of their 
life cycle, at start-up, are very, very different from the need 
of an entrepreneur who has an established business with 100 
people and is looking to expand with exports.
    There are small businesses who need a one-to-one mentor and 
coach at that moment and then a different small business that 
needs help with a technology problem or a loan guarantee. So we 
need to be prepared across the Administration to bring that 
small business into--from whatever door they come in and help 
them navigate to the program that meets their needs, no matter 
which agency it is, and that is what our virtual one-stop 
portal is designed to do, as well as our collaborations like 
our MOUs.
    Senator Pryor. Thank you.
    Chair Landrieu. Senator Shaheen.
    Senator Shaheen. Thank you, Madam Chair, and thank you and 
Ranking Member Snowe very much for holding the hearing today. 
And Administrator Mills, thank you so much for your testimony 
and congratulations. I was very pleased to see the President 
elevate the SBA Administrator to Cabinet level, and I think it 
is about time. So I was delighted to see that.
    I cannot over-emphasize the importance of SBA programs in 
supporting small businesses in New Hampshire and helping 
particularly during the recent recession and during earlier 
recessions in the early 1990s, helping business get through 
those difficult times when access to credit was virtually 
impossible to obtain.
    Now having said that, I appreciate that these are difficult 
fiscal times and that everybody is under constraints to cut 
budgets, including Congress. But I have to raise the concern, 
as I did when we talked earlier this week, about the proposed 
cuts to the Small Business Development Centers, because in a 
state like New Hampshire, which is small and does not have a 
lot of urban areas, those SBDCs provide counseling that young 
businesses really need if they are going to grow.
    Last year, New Hampshire's SBDC directly helped 750 
businesses. Again, in a large state that does not sound like a 
lot, but being from Maine, you appreciate that is a lot of 
businesses and there are a lot of employees who are affected by 
that number of businesses. In this difficult budget climate, I 
would hope that we would look at programs like the SBDCs that 
we know are working in states.
    I am particularly concerned about the effects of the cuts, 
again in a state like New Hampshire, where we do not have the 
ability to absorb those kinds of cuts in the way that a large 
state does. And as you know, it has a double impact because the 
state funding then, also, is affected.
    In New Hampshire, just for an example, I live in the 
seacoast. The impact of the cuts that are being proposed would 
force the closure of the seacoast center and that is probably a 
third of the population of New Hampshire. So it is going to 
have a real impact in our state.
    I wonder if you have done any analysis on what that 
potential impact would be on the delivery of services and the 
number of businesses that would be affected nationally.
    Ms. Mills. Well, we have an enormous strength in what we 
call our bone structure, our strong network of over 800 Small 
Business Development Centers, 110 Women's Business Centers, and 
more than 12,000 SCORE representatives. In our budget, you see 
that we have proposed an across-the-board 10 percent cut and we 
have asked our resource partners to tighten the belt in their 
operations, as you have just described.
    Now, I am very sympathetic coming from a big state with a 
lot of rural activities--I mean, big state which is actually 
very small----
    Senator Shaheen. Geographically, yes, I got that.
    Ms. Mills. In terms of number of people where we have a 
great reliance on the counseling efforts of folks like our 
Small Business Development Centers. We have done a number of 
things and will pledge to you to do a number of more things to 
work together to make sure that all of our resource partners on 
the ground and all of our co-resource partners like those 
Department of Agriculture offices are collaborating more than 
they ever have before.
    This is the watch word. Along with the budget cut, we have 
brought our resources partners together so that they have more 
seamless collaboration and may find other ways to provide 
efficiencies and cost savings while servicing the population 
that really so much needs them. So we are going to increase 
efficiency. We are bringing our portals there so that small 
businesses can navigate more easily. And then come to our 
counselors with more specific activity.
    And we are going to try to make sure that our bone 
structure does--remains robust, and we believe that we can with 
this level of activity.
    Senator Shaheen. Well, I appreciate that and my time is up, 
but I have to say, I think collaboration is very important, but 
collaboration that does not include the programs that are 
making a difference for businesses does not have the same 
impact. Thank you.
    Chair Landrieu. Thank you.
    Senator Cardin.
    Senator Cardin. Let me thank the Chairman and Ranking 
Member for this hearing. Administrator Mills, I want to thank 
you for your service. In the three years that you have been 
there under the Obama Administration, we have seen dramatic 
improvement on the SBA as an advocate for small business. I see 
that in Maryland and I thank you very much for what you have 
done to help the climate between the SBA and small business as 
an advocate for programs that can help small business growth.
    One of the first meetings that we were at when you were 
here, I talked about the record as it relates to minority 
businesses, as it relates to women-owned businesses, and 
veteran-owned businesses, and that the numbers were not 
impressive as to the programs being utilized by minorities and 
women and veteran-owned.
    There has been a remarkable improvement. We have been 
following those numbers over the last three years and 
improvements have been made. I am going to ask that you supply 
my office with the information so that we can continue to 
monitor the progress being made in this area. It requires 
continued priorities within your office to work with the local 
offices to make sure that you are advocating on behalf of the 
priority areas that we expect to be done.
    So I compliment you on the progress we made. I just want 
you to know that we want to continue that moving forward and 
would ask that you would make that information available to my 
office. The incentives for small business clearly have helped. 
We have passed a lot of bills here. I really do compliment our 
leadership, Senator Landrieu and Snowe, who have really 
marshaled a lot of very important legislation through.
    I want to share the concern that Senator Snowe has raised 
on the efficiencies of our credit programs to help small 
business. I think that is a very important point. Many of us 
raised concerns initially on the program as to whether it would 
get enough money out at a reasonable cost. Some of us had 
suggested more direct lending or some other options, at least 
evaluate how we could get credit out, because it was such an 
urgent situation.
    So I just want you to know that there is, I think, a large 
number of members of the Senate who are concerned as to whether 
the credit programs are reaching their intended businesses at 
the most cost-effective way and there is still a need for that 
program. So I welcome a way to make that more efficient.
    I want to talk about contracting and Government 
procurement. We have taken an interest in this Committee in 
this matter. We have included in our legislation the trained 
procurement officers so they are more sensitive to the 
requirements of small business to make sure that we prevent the 
bundling which denies small companies the opportunities to 
participate; that we look at more direct contracts rather than 
using subcontracts; that we can improve the opportunities for 
small businesses.
    Can you just go over with me how your budget would allow 
you to continue to be the advocate for small businesses through 
the bureaucracy of the Federal Government, which is not always 
easy, to get more sensitivity to opening up opportunities by 
procurement officers to reach out for new companies rather than 
just using their same old connections with larger companies to 
offer more opportunity for small businesses in our community?
    Ms. Mills. Well, thank you, Senator, for all your support 
for the Small Business Jobs Act provisions, particularly around 
contracting which have been so meaningful and helpful.
    As you know, small business contracting is the largest 
Government program for small business. We are responsible to 
make sure that 23 percent of all Government contracts go to 
small business. That is about $100 billion a year. And we say 
that that is no cost to Government because it is actually a 
win-win. The small businesses get the revenue and Government 
agencies get access to the most innovative companies and 
usually the service of the CEO.
    We have a number of ways in which we have been able to make 
substantial progress, and as I said, in part because of some of 
the legislative pieces of the Small Business Jobs Act on our 
Government contracting goals. Most importantly, the President 
has made this a priority and he has asked every agency head to 
be engaged in this and to make their goals.
    And we have quarterly meetings at the White House with all 
of the sub-agency heads or deputies and they are held 
accountable for their goals. So as you know, tone from the top 
helps a great deal in getting the agencies to act.
    Then we have done a number of things. I just want to 
highlight one. Last week I was in New York with IBM and we 
launched something called Supplier Connection. The private 
sector, IBM, has garnered together 15 major companies that have 
over $300 billion of purchasing, procurement, and they have 
created a portal for small businesses to become part of those 
supply chains.
    We were able to send, that same day, an email, an 
appropriate eGov email to 50,000 of our registered small 
business contractors. By the end of two days, 1,000 of them had 
actually completed all the paperwork to sign up for Supplier 
Connection and be part of those commercial supply chains.
    So this is, we call it, kind of like the common app in 
colleges. You make one application and then you are qualified 
for 15 different companies. Small businesses, we do a lot of 
matchmaking. We do a lot of bringing together agencies and 
small businesses. But this allows us, for instance, to give 
even more contracting opportunities to these small business 
owners.
    Senator Cardin. Thank you. Appreciate that. Thank you, 
Madam Chair.
    Senator Snowe [presiding]. The Senator from North Carolina, 
Senator Hagan.
    Senator Hagan. Thank you, Ranking Member Snowe, and thank 
you for helping to host this hearing today. I just wanted to 
reiterate what Senator Shaheen said, and I am pleased that the 
SBA has been elevated to a Cabinet position, so congratulations 
on that. I know you will add a lot to those discussions.
    And I am very pleased at hearing about this common portal 
for small business. I think that is going to be very important 
as another avenue for our small businesses to have access to 
growing their companies and, obviously, hiring more people 
through that endeavor.
    And I also wanted to mention, recently you were quoted in a 
New York Times article talking about, especially during the 
height of the recession, about the good work that the North 
Carolina Small Business Technical Development Centers, the 
SBTDCs, who were able to really go to the forefront and help 
people who had been rejected by their bank, that the quote was, 
Everybody who is rejected come to us and we will work with you 
on a bank package.
    Through the efforts of the counseling at the SBTDCs, they 
were able to get 70 percent of those businesses credit-worthy, 
and when they got before the banker, they then had success. So 
I think that is another win for the good work that our SBA 
does, and I am certainly pleased with that happening in North 
Carolina.
    I did want to ask a question about our veterans and the 
Veteran's Initiative. The SBA's budget request contains $7 
million in the National Veteran's Entrepreneurial Training 
Program aimed at the increased number of members of the armed 
services who we know now are transitioning into civilian life. 
The Vet Program will be administered through the Department of 
Defense's Transitional Assistance Program.
    And it is certainly no secret to anybody in North Carolina 
that I consider it the most military-friendly state in the 
nation and we certainly have a huge number of veterans, and we 
also have a large number of veterans that are unemployed right 
now.
    Can you tell me more about the Vet Program, what services 
it provides, the program launch, and where will the program 
first be implemented and how are those locations being chosen?
    Ms. Mills. The specific Veteran's Entrepreneurship Training 
Initiative that you are referring to in our budget is designed 
for working with the military on the returning veterans from 
Iraq and Afghanistan. And as you know, approximately 250,000 of 
them are anticipated to return this year. The unemployment rate 
for returning veterans is 11.1 percent for men and 14.7 percent 
for women.
    We know that veterans over-index in entrepreneurship, so 
this program is designed to be a module for every exiting vet, 
military person, through the TAPS Program. They will have first 
the option--they will each first get a 90-minute module on 
entrepreneurship. So all returning veterans will do that as 
part of the TAPS Program.
    They can then opt into a two-day program, and if they are 
interested in pursuing entrepreneurship further, there is an 
eight-week online program.
    Senator Snowe. Excuse me. The mic is off. Is it working 
now?
    Ms. Mills. Now it is on, I think. Better? Sorry. So then if 
they opt into the eight-week program, and after that as they go 
off and they start their businesses, they will be followed up 
with our Small Business Development Centers in our on-the-
ground ongoing veteran and counseling operations.
    The Brigadier was in our offices a few weeks ago and he 
said something that really struck everyone. He said, These are 
men and women who are used to making their own decisions. They 
are out on the battlefields. We are piloting this with Marines. 
And he said, The Marines are ingrained to make these kinds of 
decisions, and then they come home and they are in a job where 
they are told what to do every minute of the day. This does not 
work for them.
    And so, we want to provide a pathway to entrepreneurship 
for those who are inclined, and we have the capacity and the 
expertise through our program we have been running with 
Syracuse University to do that successfully.
    Senator Hagan. So once again, do you know where those 
locations will be and the actual implementation of it?
    Ms. Mills. Yes. We have four pilot locations that will be 
the first with Marines. They will then go to every Marine base, 
and then we have interest, also, from the Army. So we 
anticipate it expanding.
    Senator Hagan. Thank you, Madam Chairman.
    Senator Snowe. Thank you, Administrator Mills. We 
appreciate you being here today and we will follow up on a 
number of the issues that have been raised. But we appreciate 
your testimony and we certainly appreciate your leadership. 
Thank you.
    Ms. Mills. Thank you. And I want to say, Senator Snowe, how 
much the whole small business community has appreciated your 
leadership on this Committee.
    Senator Snowe. I appreciate that. Thank you.
    I will convene the second panel, including the Honorable 
Peggy Gustafson, the Inspector General of the Small Business 
Administration, and the Honorable Winslow Sargeant, Chief 
Counsel for Advocacy at the Small Business Administration.

 STATEMENT OF HON. PEGGY GUSTAFSON, INSPECTOR GENERAL, UNITED 
              STATES SMALL BUSINESS ADMINISTRATION

    Ms. Gustafson. Senator Snowe, thank you very much for 
inviting me to testify in front of Senate Small Business today. 
My name is Peggy Gustafson. I am the Inspector General for the 
Small Business Administration. My office, as you know, is an 
independent office within SBA and we conduct and supervise 
audits, inspections, and investigations relating to SBA 
programs, and we seek to detect and prevent waste, fraud, and 
abuse.
    I want to talk just briefly about the President's budget 
request for my office, some things that I would like to talk 
about what we have done, and some things we would like to do in 
the future, and then, of course, take any questions.
    During fiscal year 2011, my office issued 24 reports 
containing 136 recommendations for improving SBA operations, 
reducing fraud and unnecessary losses, and recovering funds. In 
addition, the work of my Investigations Division led to 69 
indictments and 47 convictions of subjects who had defrauded 
the Federal Government. In all, OIG efforts resulted in more 
than $120 million in office-wide dollar accomplishments during 
FY2011.
    The operating budget for my office in fiscal year 2011 was 
$17.3 million, which included a $1 million transfer from the 
agency's Disaster Loan Program account. So this number 
represents about a sevenfold return on investment for the 
Federal Government through the work of my office.
    However, even though these figures are reassuring, I am 
concerned that SBA's financial and operational risk are 
actually increasing. For example, in the 7(a) and 504 lending 
programs, as you know, the maximum allowable guarantee per loan 
has grown from $2 million to $5 million. For manufacturers in 
the 504 loan program, it has gone up to $5.5 million. And this, 
of course, dramatically expands the potential exposure to the 
taxpayer through the guarantees that need to be paid on 
defaulted loans.
    This exposure, combined with a growing portfolio and 
concerns about limited agency oversight, has increased the 
possibility of future losses. SBA's payments of guarantees on 
defaulted loans have increased significantly, from $1 billion 
in FY07 to $5 billion in FY10, and $3.4 billion in FY11. In 
addition, SBA's preferential contracting programs continue to 
be subject to fraud and weak Federal oversight.
    Finally, we have concerns that shortcomings in the Agency's 
IT systems may hinder SBA's ability to effectively manage these 
programs. As you are aware, the OIG--the President has 
requested of Congress that my office receive a $3.1 million 
increase in our budget. These additional resources are 
necessary to effectively target at early defaulted loans for 
fraud and lender negligence and to increase the capacity of our 
investigative personnel.
    In particular, we have--the President has requested that 
these additional resources be used to allow us to establish a 
dedicated Early Defaulted Loan Review Group to identify loans 
that default within 18 months, which is an early default loan; 
enhance our investigative capacity; and enhance the operations 
of our hotline.
    The Early Defaulted Loan Review Group would recommend non-
payment of the guarantee in the appropriate circumstances, 
would identify trends for operational improvements in the area 
of loan guarantee payments and lender oversight, and refer 
suspected fraud to my Investigations Unit.
    On average, my Investigations Unit handles 250 criminal and 
civil fraud investigations per year and obtains multiple 
indictments and convictions of recoveries of tens of millions 
of dollars. However, our resources are very limited. For 
example, over the last four years, the OIG has administratively 
closed 272 allegations with potential losses estimated at $172 
million that may have met prosecutorial thresholds, but could 
not be further investigated due to a lack of resources.
    Also, over the last three years, our Early Fraud Detection 
Working Group has proactively identified 688 suspect loans with 
values estimated at over $636 million that contained 
characteristics typical of problem loans, but due to limited 
resources, these loans could not be further reviewed for 
indications of fraud.
    In short, much work has been done. I am incredibly proud of 
the amount of work we do for what is, in general, an extremely 
small staff given the risk inherent in SBA's programs. And I 
thank you very much for your support and welcome any questions.
    [The prepared statement of Ms. Gustafson follows:]





    Senator Snowe. Thank you.
    Dr. Sargeant.

STATEMENT OF HON. WINSLOW SARGEANT, CHIEF COUNSEL FOR ADVOCACY, 
          UNITED STATES SMALL BUSINESS ADMINISTRATION

    Dr. Sargeant. Ranking Member Snowe, good morning. Thank you 
for the opportunity to appear today to discuss the Office of 
Advocacy's budget request for fiscal year 2013. In the interest 
of time, I will summarize my prepared remarks and ask that my 
full statement be included in the record.
    The Office of Advocacy's budget submission is part of the 
President's request for SBA and the Government as a whole, and 
it, accordingly, has the full support of the Administration. I 
should note, however, that since my testimony is not circulated 
for comment through OMB or other Federal offices, my views on 
matters other than the official budget request do not 
necessarily reflect the position of the Administration or SBA.
    Before outlining Advocacy's budget request, I would like to 
provide an update on the office. First, let me thank the 
Committee for its support of my nomination by the President to 
become the sixth confirmed Chief Counsel for Advocacy. As Chief 
Counsel, my top priority is ensuring that small businesses are 
considered in the regulatory process. We continue to work with 
agencies across Government to help them mitigate the potential 
cost of regulation on small entities.
    I am pleased to report that during FY2011, we achieved 
$11.7 billion in first-year cost savings, $10.7 billion of 
which will be annually recurring savings. Since I have been 
Chief Counsel, I have signed 66 public comment letters to 27 
agencies on a wide variety of issues. Every comment letter I 
sent represents an opportunity for the Federal Government to do 
a better job for small business.
    Small business advocacy review panels remain a critical 
activity in ensuring early participation by small entities in 
the rural development process. We participated in eight 
separate panels on EPA rules in FY2011 and began work on 
another seven planned rules.
    I recently met with CFPB Director Richard Cordray to 
discuss small business concerns about the Bureau's adherence to 
CFPB-RFA. He assured me that the CFPB is committed to the CFPB-
RFA process. Advocacy has been working closely with the Agency 
as it began to issue new rules. We also have provided RFA 
training to CFPB staff.
    Advocacy continues to provide RFA compliance training to 
other regulatory agencies as well. Last year, 109 regulatory 
and policy officials received RFA training, and so far this 
year, 107 officials have been trained.
    To help us understand small business concerns, we hosted 32 
small business roundtables in FY2011, and we have another 14--
have held another 14 so far this year. Advocacy also maintains 
a strong focus on economic research. We published 25 research 
or data products in FY2011, and another 12 so far this year.
    On the subject of today's hearing, I would like to take 
this opportunity to thank Congress for providing the full $9.12 
million that President Obama requested for Advocacy in FY2012. 
For FY2013, the Office of Advocacy requests $8.9 million for 
its direct expenses. In recognition of the need for Federal 
agencies to reduce their budget requests during these current 
economic conditions, this request represents a reduction from 
FY2012 enacted level.
    This amount includes $7.65 million for personnel costs and 
$800,000 for economic research.
    The remaining balance of $450,000 covers all other direct 
expenses.
    Advocacy's new separate account is fully operational, and 
we have statutory line-item funding that is not commingled with 
other SBA funding.
    I have signed a Memorandum of Understanding with SBA in 
which the agency has agreed to provide Advocacy with 
operational support, without charge to our appropriation 
account.
    I would like to conclude by citing a benchmark that 
demonstrates what a good investment Advocacy is for America's 
taxpayers. At a cost of $8.3 million in FY2011, Advocacy 
achieved $11.7 billion in first-year cost savings. This means 
that taxpayers paid only $710 for Advocacy's expenses to 
realize $1 million in new regulatory cost savings.
    Thank you again for your support for the Office of 
Advocacy. I look forward to continuing to work with you on 
issues of importance to small business and would be happy to 
answer any questions.
    [The prepared statement of Dr. Sargeant follows:]





    Chair Landrieu [presiding]. Thank you very much and I 
apologize for the vote, but that is why members are coming and 
going. Senator Snowe will rejoin us in a minute.
    Let me ask you, Dr. Sargeant, the President's budget has 
asked for an increase of $220,000 in the Advocacy's budget. At 
the same time, you have got heavy responsibilities.
    Do you feel--and I know that your budget does not go 
through OMB so that you are clear to talk about what 
deficiencies might be, and I have got a specific question about 
the Leahy-Smith America Invents Act, which was the patent 
change, but overall, can you just hit one or two highlights 
about some of the shortcomings in your budget that you think 
might keep you from doing the jobs that we have asked you and 
required you to do by law and Congressional directive?
    Dr. Sargeant. Chair Landrieu, the FY2013 budget adequately 
funds the Office of Advocacy, of course, but we could always do 
more with more.
    Chair Landrieu. Do you have the money to fund the study 
that we required that you do to the follow-up of the Leahy-
Smith America Invents Act? And if you do, where are you getting 
that money from? It is, I think, the cost of about $250,000 to 
conduct such a study.
    Dr. Sargeant. Chair Landrieu, the America Invents Act 
mandated that the Office of Advocacy would do a patent study 
and that was for the FY2012 budget. The funds were not set 
aside to do that study, and so we have been talking with the 
appropriate--talking with you and your staff on ways that we 
could do that study.
    Chair Landrieu. Okay. But I am confused because Congress 
has specifically directed you--as you know, we put an amendment 
to that bill because America was the last country in the world 
to be operating off of a First to Invent system and we changed 
to a First Inventor to File system.
    There was a very serious concern by small businesses that 
under a First to File, they would be pushed out of the 
opportunity for patents, having less back office, less ability 
to use that system. And so, we specifically required a study to 
be done, and my question is, do you have the money or not to 
conduct this study?
    Dr. Sargeant. Currently, Chair Landrieu, we do not have 
funds set aside.
    Chair Landrieu. Then I would say that your budget is not 
adequate to carry out the responsibilities that you have been 
asked to do.
    Dr. Sargeant. Well, we will continue to discuss with you 
and your staff on ways that we can do the study. I strongly--
for small businesses and entrepreneurs to succeed, they need to 
have access to a patent system that works, and so that is why--
--
    Chair Landrieu. Right. And no one is going to know if it 
works or not if your office does not, because there really is 
not any other office that I can think of, and maybe the Ranking 
Member can, that is responsible to report to Congress how new 
rules and regulations are affecting small business in America. 
We are not going to get that from the Agriculture Department. 
We are not going to get that necessarily from the Commerce 
Department. It is your job. And this is a big change in the 
law.
    I want you to know that I am going to stay very focused on 
this. We are hoping that the study will show that all of our 
concerns were for naught, that this new system is absolutely 
helping small businesses, and that their response is 
overwhelmingly positive. But we will not know that unless this 
study is conducted.
    For the 28 million small businesses out there, many of 
them, I will admit, are not filing new patents every day, but 
maybe millions of them are. Maybe not 28. Hundreds of thousands 
of them are. That is something we need to know. So I want to 
follow up with you on that.
    Let me get to the Inspector General. I am concerned, as 
Senator Snowe is, about the subsidy rates. I think our Director 
explained that they were from loans previously made that are 
defaulting and that is what is driving this default rate up. 
But is there something that you want to point out to me that 
are your top one or two concerns with the operations of the 
SBA? I believe we have good leadership. Just like Senator 
Snowe, I do believe the agency is making a lot of progress in 
cleaning up some things, streamlining programs.
    But what would be the one or two things that you would like 
to highlight to me in our short time in terms of quality and 
effectiveness of the programming that we should really look at 
that we might be able, with the right kind of twist or new 
tools, to make significant improvement?
    Ms. Gustafson. Thank you, Senator Landrieu. I think the--
and I will narrow it even to one, in the interest of time. I 
think the one area I would like to highlight right now would be 
the area of improper payments, for several reasons.
    One, the area of improper payments in these programs has 
been a concern in our office for some time, and our office just 
issued, pursuant to the Improper Payments Act, the latest 
review of how the agency is doing on improper payments.
    As you know, Senators, an improper payment is not 
necessarily always a payment that should not have been made. 
Sometimes it is an internal control issue or a documentation 
issue. But there is an aspect to improper payments that does 
deal with, for example in SBA programs, loan guarantees that 
perhaps should not have been made or there should be a repair 
made.
    And so, you will recall that three years ago or so I was 
here talking about an improper payment rate that we had 
classified in the double digits on guarantees, on loan 
guarantees that are paid. Our latest audit followed the 
Improper Payments Improvement Act, so it actually covered more 
areas as well.
    We continue to have some kind of fundamental disagreements 
with the agency on whether they are doing enough in improper 
payments, capturing those improper payments, doing them--
having--reporting the correct improper payment rate, and 
whether they have a plan in place, both to reduce improper 
payments and to perhaps seek through recovery.
    And so, that is something. This report is very recent. It 
is, I think, two weeks old. This is something that I think the 
agency--that I would say I think the agency does need to focus 
on.
    Chair Landrieu. Okay. Well, I want to hone down here just a 
little bit because one of the serious issues right now getting 
capital into the hands of small business is the tension between 
the regulators of banks coming down so hard on banks, making 
them stay in their box, stay in their lanes. You know, if the 
law says two cents and they say 2.1, it is a violation.
    And the banks, I am reported, across the board, are having 
a very difficult time doing the lending that they would like to 
do because their regulators are breathing down their necks. 
Now, you are not technically a regulator, but you are an 
overseer. So I need to really understand what you are 
attempting to oversee.
    And anything that we want to identify as fraud or 
recklessness is one thing we have to get rid of. But if it is 
because the agency did not dot an I or cross a T on a loan 
form, I am not interested in that and I do not want that 
recorded as improper payments.
    So I need you to be a little bit clearer with me, if you 
can on the record, about what your problems really are. Because 
the last thing that I am going to do is sit here as the Chair 
of this Committee and allow the sort of overseer and regulator 
of the SBA do the same thing that some of the regulators are 
doing to small business banks, and you will absolutely shut 
down all lending in the country, which just about happened.
    Ms. Gustafson. Right.
    Chair Landrieu. And we have got to find a way through this, 
because the fact is there is great need and thirst for capital 
and for loans out there. Contrary to what the Chamber of 
Commerce continues to say, there are wonderful businesses out 
there that need these loans and need these guarantees.
    Their mayors are running economic development that are 
desperate to build their cities back up in Michigan, Ohio, 
Louisiana, and I am sure in Maine. There are governors, 
Democrats and Republicans, looking for creative ways to get 
capital out to businesses that are trying to expand. So let us 
be a little bit clearer. Give me an example of an improper 
payment.
    Ms. Gustafson. Thank you for your question, Senator 
Landrieu, because I do think that sometimes there is a strong 
misapprehension and an undue fear over what the improper 
payment rate means, what we are talking about, and what the 
practical effect is. And again, this is something that I 
experienced even the first year that I was here when we had 
done an improper payment review.
    Basically, nobody--neither the agency nor the IG ever goes 
back and faults a lender, and we certainly never seek recovery 
for a dotting of the I or a crossing of the T. I think that is 
just really a fundamental misapprehension. Basically, as you 
know, all that we are talking about is making sure that the 
programs are working as they are intended to do, which is to 
say that there is a guarantee that will be paid, except in 
extraordinary circumstances where something that was supposed 
to have been done just truly was not done and it was so 
material that the guarantee should not have been----
    Chair Landrieu. So you are talking about material things 
that you are concerned about----
    Ms. Gustafson. Absolutely.
    Chair Landrieu [continuing]. In terms of improperly--and is 
that rate, in your mind--now, you have only been there, what, a 
year?
    Ms. Gustafson. Two and a half years.
    Chair Landrieu. Two and a half years. So is that rate going 
up, is it staying flat, is it going down?
    Ms. Gustafson. I actually think that there has been--and we 
are--we remain working with the agency to reach the final rate. 
As you may recall, we agreed to go back and do another deep 
dive this year as we did improper payments on 7(a) and on 
disaster.
    We are closer this year than we were before. I would say, 
even though it is not completely final, it has gone down. In 
2008 when I came in, I want to say the improper payment rate 
was double digit and now it is, at least the preliminary rate 
that we have reported, is less. So it is going down.
    Chair Landrieu. So it is moving in the right direction?
    Ms. Gustafson. Yes.
    Chair Landrieu. So when you basically showed up, which was 
two and a half years ago, and you were looking back at things 
that had been done, it was alarming. And it is moving in the 
right direction, but it is still concerning. Is that a fair----
    Ms. Gustafson. That--that is fair. But yeah, and there is 
no question that the agency and the IG are closer than--closer, 
not in a friend way, but closer in where we are seeing it than 
we were before which is definitely progress.
    Chair Landrieu. Okay. I know that Senator Snowe has other 
questions to you all, but in light of time, I am wondering if 
we could allow the next panel to come forward so they can give 
their testimony? Can you all stay because when Senator Snowe 
comes back, we are going to extend this hearing to 12:10, and I 
know she is going to have some questions for you all. Okay?
    Ms. Gustafson. Thank you.
    Dr. Sargeant. Thank you, yes.
    Chair Landrieu. Okay, thank you. Our first witness on the 
third panel--and thank you all for being flexible--we have Tony 
Wilkinson, President and CEO of the National Association of 
Government Guaranteed Lenders. It is the only national trade 
association that represents the 7(a) lending industry. We are 
looking forward to hearing your testimony this morning.
    Next, Bill Shear, Director of Financial Markets and 
Community Investments at the GAO. As we all know, GAO is an 
independent, non-partisan agency that ensures Government 
programs are running efficiently and meeting their objectives.
    Christopher Hurn is joining us today from Mercantile 
Capital Corporation where he serves as CEO and Cofounder. They 
specialize in SBA 504 loans.
    And then Ridgely Evers, Managing Partner of Tapit Partners 
and a Member of the Board of SCORE, one of my favorite 
organizations. It is a non-profit association authorized by 
Congress that provides one-on-one small business counseling, 
and in my view, has done a remarkable job over a long period in 
many parts of our country.
    Before I start, I want to put in a letter to the record 
from the Chamber of Commerce. I just had that. I would like my 
staff to find it. I had it before I left. It was a letter from 
the Chamber--here it is. Bruce Josten supporting the subsidy 
rate for these programs. And the Chamber is a strong advocate 
for the kind of new partnerships that we are strengthening 
between the SBA. Without objection, I will have that put into 
the record.
    [The letter follows:]





    
    Chair Landrieu. Mr. Wilkinson, why do you not begin--and 
please limit your opening statement to less than three minutes 
so we will have time for questions.

STATEMENT OF TONY WILKINSON, PRESIDENT, NATIONAL ASSOCIATION OF 
                 GOVERNMENT GUARANTEED LENDERS

    Mr. Wilkinson. All right. Thank you, Chair Landrieu. 
Appreciate the opportunity to be here today. I would ask that 
my written record be submitted--written testimony be submitted 
for the record.
    The National Association of Development Companies has also 
submitted testimony for the record. They represent more than 95 
percent of all the SBA 504 financings that are done, and as the 
trade association representing the 504 industry, we would 
respectfully request that their statement also be included in 
the hearing record.
    [The prepared statement of the National Association of 
Development Companies follows:]





    NAGGL is supportive, also, of the Administration's overall 
budget request as it relates to the Agency's loan programs. We 
particularly appreciate the fact that it does not propose 
increased costs for loan program participants for either 
borrowers or lenders, and instead provides appropriations to 
offset any cost not covered by current program fee structures.
    This provision is critically important because for the last 
several years, SBA loans have been almost the only source of 
term financing for small businesses. For that reason, continued 
Congressional support of the SBA loan programs is essential.
    Many small business trade groups continue to tell us that 
access to credit remains a top issue for their membership. 
These small business trades have found that while many of their 
members are ready and willing to take on additional risk to 
grow their businesses and create jobs, accessing the capital 
necessary to support those efforts has proven to be a daunting 
task during these tough economic times.
    Fortunately, the SBA and its loan programs have been there 
to fill the capital void for small businesses. The importance 
of SBA lending to small businesses is clearly evidenced by the 
demand for the agency's loan programs. According to SBA 
statistics, between its 7(a) and 504 loan programs in just the 
last two years, SBA has helped to deliver approximately $42 
billion into the hands of small business owners, and when you 
add the dollar value of the private sector first mortgage 
portion of 504 loans, that total exceeds $50 billion.
    There is also data to support the fact that SBA, in 
conjunction with its private sector lenders, is the primary 
source of all long-term small business lending. For FDIC 
statistics accumulated from bank call reports, as of December 
31st, 2011, banks reported approximately $600 billion in 
outstanding small business loans.
    Of this, the vast majority of these loans, or approximately 
76 percent, have maturities of three years or less with a 
significant majority of this tranche having maturities of less 
than one year. The remaining 24 percent, or about $150 billion, 
have maturities of three years or longer.
    As of December 31st, the same date, the outstanding balance 
of SBA 7(a) loans, 504 loans, and the private sector first 
mortgage portion of 504 loans totaled approximately $110 
billion, with the average maturity of an SBA loan in excess of 
ten years.
    So comparing SBA term loans with bank call report term 
loans, you can see why it has been said that SBA loans account 
for as much as 70 percent of all long-term loans made to small 
businesses. And as a point of reference, prior to the recent 
recession, this ratio averaged approximately 40 percent. Given 
the dramatic rise in the importance of SBA lending, it is easy 
to see why many small business trade groups refer to SBA 
lending as the only game in town. And with that, I will 
conclude my verbal testimony.
    [The prepared statement of Mr. Wilkinson follows:]





    Chair Landrieu. Thank you. I am going to take that 
information that you gave and make the appropriate charts and 
give a speech on the Floor of the Senate about this. I think it 
is a really important fact to get out there, that while banks 
are making small business loans and the volume is greater than 
the SBA, their loans are short-term in nature and they are not 
helping small businesses.
    Their rates may be higher, their terms are draconian, in 
some cases, requiring not only the shortness of the term and 
the rate that businesses are paying, but the guarantees that 
the owners have to give, literally their first child has to be 
guaranteed, their house, their automobile, and their wife's 
dowery. It has gotten to be just awful, and I do not think 
people understand this.
    Why we are not expanding our programs exponentially I do 
not know. I mean, we are pushing them out as far as we can. But 
thank you for giving us those numbers.
    Mr. Wilkinson. Yes, ma'am.
    Chair Landrieu. Bill.

   STATEMENT OF BILL SHEAR, DIRECTOR, FINANCIAL MARKETS AND 
 COMMUNITY INVESTMENT, UNITED STATES GOVERNMENT ACCOUNTABILITY 
                             OFFICE

    Mr. Shear. Thank you. Chair Landrieu, Ranking Member Snowe, 
and members of the Committee, I am pleased to be here this 
morning to discuss our work on overlap, fragmentation, and 
potential duplication in economic development programs.
    Most recently, in February 2012, we reported on the 
existence of overlap and fragmentation among those Federal 
economic development programs that support entrepreneurs. 
Specifically, we have focused our analysis on 53 of the 80 
economic development programs at Agriculture, Commerce, HUD, 
and SBA that fund entrepreneurial assistance because these are 
the 53 programs that appear to overlap the most.
    Specifically, this testimony discusses our work to date on, 
first, the extent of overlap and fragmentation among these 
programs, and second, the availability of meaningful 
performance information on these 53 programs. I will also 
include information on actions taken to improve collaboration 
in response to previous GAO reports. This summer, we plan to 
issue our final report on economic development programs.
    In summary, based on our work to date, we have found that 
programs that support entrepreneurs overlap based not only on 
their shared purpose of serving entrepreneurs, but also on the 
type of assistance they offer. The programs generally can be 
grouped according to at least one of three types of assistance, 
technical assistance, financial assistance, and Government 
contracts.
    Some of the overlap and fragmentation among these 53 
programs is found among programs that assist, for example, 
disadvantaged businesses. In addition, many of these economic 
development programs also operate in both urban and rural 
areas.
    While most of the 53 programs have reasonable performance 
measures and tend to meet their annual performance goals, few 
evaluation studies have been completed and little evaluation 
information exists that assesses the program's effectiveness. 
Studies of SBA's three major counseling and training programs 
are among such studies that do look at effectiveness.
    With respect to collaborative practices, in April 2010, 
USDA and SBA signed a memorandum of understanding. The MOU 
defined and articulated a common outcome focused on improving 
service delivery to small businesses in under-served rural 
areas.
    While we have received information from USDA about 
collaborative actions its field offices have taken, we have not 
received comparable information from SBA indicating progress in 
this area. However, SBA has provided sound evidence indicating 
that it has taken actions to coordinate services provided by 
its Small Business Development Center, Women's Business Center, 
and SCORE resource partners.
    Chair Landrieu and Ranking Member Snowe, this concludes my 
prepared statement. I would be happy to answer any questions.
    [The prepared statement of Mr. Shear follows:]





    Chair Landrieu. Thank you. And, Mr. Shear, to be honest, 
the overlap does not bother me, and even duplication does not 
bother me. What does bother me is ineffectiveness. I know there 
has been a lot made about your report by many people up here 
about overlap, overlap. All overlap means to me is that nobody 
is going to fall through the cracks, which makes me happy, 
because there are a lot of threats out there to small business, 
and I am happy there is overlap.
    What I am not happy about is the lack of data about the 
effectiveness of these programs and that is why I started out 
my testimony saying that one of my goals this year is going to 
be to press the SBA for this effectiveness data because if 
programs are not effective these days. We just have to save the 
money and use that money elsewhere we can stretch that taxpayer 
dollar. So thank you for your testimony.
    Mr. Hurn.

 STATEMENT OF CHRISTOPHER G. HURN, CHIEF EXECUTIVE OFFICER AND 
           COFOUNDER, MERCANTILE CAPITAL CORPORATION

    Mr. Hurn. Good morning, Chairwoman. I would like to share a 
few ideas on how the subsidy for the SBA 504 loan program can 
be reduced and ultimately eliminated. In these challenging 
economic times, when budgets are shrinking and the American 
people are demanding that Washington spend less, I believe that 
efforts to reduce or even eliminate the subsidy for the 504 is 
the best way to ensure its long-term strength and 
effectiveness. And let me be clear, we want 504 to become zero 
subsidy again.
    One of the most effective ways to reduce the subsidy is to 
incentivize CDCs to actively pursue recoveries on their 504s. 
Billions in unnecessary losses on the 504 program are helping 
drive up the subsidy rate. Recent charge-offs, as we have 
already spoken about this morning reported by SBA, reveal that 
during the last three fiscal years, SBA has walked away from 
nearly $2 billion in the 504 program alone, and even more in 
other SBA loan programs.
    We have the ability to make a substantial impact on these 
losses without requiring any additional taxpayer funds. Let 
CDCs aid small businesses while dramatically improving 504 
recoveries. This will reduce the need for a subsidy and 
strengthen the program.
    Given the opportunity to cover costs and share in the 
recovery dollars, this will create a win-win-win scenario. SBA 
will benefit from increased recovery dollars at zero cost to 
taxpayers. CDCs will benefit from minimizing the losses which 
in turn reduces the subsidy requirement. And in the end, 
borrowers continue to benefit from one of the finest small 
business capital access programs available.
    I would also recommend extending the 504 Loan Refinance 
Program and the First Mortgage Lien Pool Program by at least 
one year. Thanks to the efforts of this Committee, as part of 
the Jobs Bill of 2010, they were both unfortunately subjected 
to bureaucratic delays, nearly 14 months in the case of 504 and 
nearly 19 months in the case of FMLP.
    The reason for extending these two programs is that they 
will bring down the subsidy rate, because both charge higher 
fees to borrowers to offset future losses, 16.55 additional 
basis points for refi and 74.4 basis points for FMLP. I believe 
these fees are grossly overstated and will produce excess fees 
to help bring down the subsidies in the future. To let these 
programs expire prematurely as they are gaining momentum would 
be unwise and irresponsible.
    In summary, we need to empower CDCs to maximize recoveries 
and extend two successful 504 loan programs that this Committee 
created less than two years ago, but have yet to get out of the 
starting gate. Thank you and I welcome your questions.
    [The prepared statement of Mr. Hurn follows:]





    Chair Landrieu. Thank you. This will be a very interesting 
debate between the Chamber of Commerce on one side, Mr. 
Wilkinson on another, and you arguing for the opposite 
position. I am going to ask you how Mercantile Capital makes 
its profits and how your company operates.
    Go ahead, Mr. Evers.

    STATEMENT OF RIDGELY C. EVERS, MANAGING PARTNER, TAPIT 
                        PARTNERS, L.L.C.

    Mr. Evers. Chair Landrieu, Senator Snowe, members of the 
Committee, my name is Ridgely Evers. I am a member of the Board 
of SCORE, as well as a serial entrepreneur with a lifelong 
passion for small business. I came here today from Silicone 
Valley because I believe in the power of SCORE. I know you do, 
too, which is great because we need your help.
    I would like to make three points today. First, SCORE is so 
efficient that it makes you money. We are lean. In 2011, we 
served over 400,000 small businesses with just 18 paid 
employees supporting over 10,000 volunteers in over 1,000 
locations, a volunteer-to-staff ratio that would be the envy of 
any non-profit.
    In 2011, we helped over 40,000 new businesses get started 
at a cost of $172 each. And at the cost of just $73 each, we 
created--our clients created 95,000 jobs. What that means is 
that for every one dollar this Committee invests in SCORE, our 
clients returned $57 to the Federal Treasury. We believe that 
is unparalleled by any other program.
    Second, no organization is more effective at mentoring than 
SCORE. Essentially, all SCORE clients are first-time 
entrepreneurs. First-time entrepreneurs are prone to making 
preventable mistakes, mistakes that result in under-performance 
or even outright failure.
    Because our volunteers are experienced business people, not 
paid employees, they have seen this movie before in their 
professional lives and they are uniquely equipped to help our 
clients avoid these mistakes, not just once, but over the life 
of their business.
    We do not teach our counselors about business. They are 
business people. But what we can and do teach them is to be 
effective mentors and give them the tools and infrastructure 
that they need to provide better service, and our results speak 
for themselves.
    Importantly, SCORE itself runs like a business. You talk 
about metrics. We are constantly working to improve. To that 
end, over the last three years, we have been investing in 
powerful new infrastructure that when complete will allow us to 
bring our best resources to every client regardless of where 
they are and regardless of where the resources are. Those same 
systems will enable us to create virtual centers of excellence 
in areas from farming to finance to fabrication.
    Third, SCORE can scale. You have got us in at $11.5 million 
for 2013. Senator Snowe has supported us; we are grateful for 
that support. And we understand that in this climate, you have 
to face tough decisions. We also recognize that the amount that 
any organization can grow year over year is limited, and in 
that spirit, we respectfully increase--we respectfully request 
an increase to $9 million in fiscal year 2013.
    That increase will not go to grow more SCORE. As you can 
see from the chart, the green part is SCORE. Everything above 
it is facing the client. It will flow disproportionately to 
client services. Thus, the increase would significantly and 
immediately grow tax revenues. That is good math. Conversely, 
our data suggests that the proposed $700,000 cut would result 
in a $15 to $20 million decrease in Federal tax revenue. That 
is bad math.
    I have worked with and invested in a lot of businesses over 
my career and SCORE has all the attributes you look for when 
making an investment, efficiency, effectiveness, and the 
ability to scale. With your support, we can do that. Thank you.
    [The prepared statement of Mr. Evers follows:]





    
    Chair Landrieu. Thank you very much. My first question is 
to you, Mr. Shear. Have you reviewed the SCORE program in your 
analysis of overlap and fragmentation specifically, and if you 
have, do you have any comments about it? I realize it is not a 
Government run program; it is a non-profit, but the Government 
is one of its largest contributors. It has private sector 
contributors as well.
    Mr. Shear. What our focus has been is on SBA's oversight of 
its entrepreneurial development programs, and as part of that, 
as I noted in my statement, is that SBA has conducted 
evaluations of these programs. So our primary evidence on the 
SCORE program comes from those evaluations.
    The reports from those who participate in the program tend 
to be positive. As you know, the three different programs serve 
slightly different populations, but I think those evaluations 
speak for themselves.
    The other area where we are still conducting work is in 
many rural areas and especially depressed economies, including 
the Delta Region where we look at the resource partners and how 
they interact with other players in the economic development 
process. So from that, we have a certain lens on all the 
resource partners, but again, we are relying heavily on SBA 
information.
    Chair Landrieu. Well, I think this is--I do not know how 
to--I mean, your report has gained a lot of notoriety, good and 
bad. We are going to have to, at some point as a member of 
Congress, stop talking about overlap, fracturing, duplication 
and start getting into the meat of the question for 
policymakers like myself, which the bottom line is, just tell 
me what is working and what does not and how you measured it.
    Or just tell me what is working the best for the least 
amount of investment. So I want to ask you again. Do you have 
an independent evaluation of SCORE, yes or no? You are just 
taking the information that the SBA has given you? And I could 
also ask, do you think the evaluation that SBA has done is 
sufficient to get at what I am asking?
    In other words, for every dollar that we are investing, 
which is a very small amount of money, are we getting the 
results that Mr. Evers has claimed we are? Do you think that is 
true or not?
    Mr. Shear. We do not have a basis to answer your direct 
question. Where I would completely agree with you, and 
especially in that our major story here is it is overlap, but 
it is really about fragmentation. It is, how well do these 
various programs all work together.
    Chair Landrieu. I do not even think it is about 
fragmentation or overlap, to be honest. It is just about 
effectiveness. And I need you to do a different kind of job to 
tell me what programs are really working and what programs are 
not first. And then the second thing is, we have the good news.
    Like, for instance, Senator, would be this program is 
really working well. You only gave it $5 million and it 
produces a gazillion dollars. This program you give $10 million 
to, it produces only half. So you could decide. You want to 
stay with this one or go with that one? Now, they do overlap so 
you do not really need both of them.
    That is the way I need this information presented to me, 
and you have not so far. So what you have done, and I know you 
are well-intentioned, but what you have done is provided enough 
fodder for people to run around, which they have been running 
around, claiming that our programs are dysfunctional because 
they overlap. Our programs are dysfunctional because one works 
in a rural area or two work in a rural area and maybe we should 
just have one.
    It is not helping. I want to be honest with you. I know 
your intention is to help, but it is not helping because a 
helpful report gives you an actionable path forward. Just 
continuing to talk about overlap is not. So I am not going to 
let you keep talking about it when you are in front of my 
Committee.
    I am going to ask you, when you report here, to talk about 
a program's effectiveness, and if you have information, any 
information that says that this program is not what Mr. Evers 
says, you need to tell me, or whatever other program. Okay?
    Mr. Wilkinson, I am going to ask you to respond to Mr. 
Hurn, and why do you think he is wrong because you testified 
completely opposite. You support the subsidies. He wants to get 
rid of them. And he thinks the program can work without the 
subsidies. So what do you want to say about that?
    Mr. Hurn. First I would say he was commenting on the 504 
program from his perspective, and I think he was looking for a 
path to get to a zero. In the past, we have had a zero subsidy 
in the 7(a) program as well.
    Chair Landrieu. So you agree with him, that we could get to 
a zero subsidy in 504?
    Mr. Hurn. At an appropriate time. And as we had in our 
written testimony, when we had the funding from the Jobs Act 
and the Recovery Act and we reduced the cost to borrowers in 
the program and increased the guarantees, we saw our loan 
volume go up dramatically. When we ran out of those fundings, 
we saw our loan volume drop dramatically. And in fact, our 
current fiscal year volume is already below--about 10 percent 
below fiscal year 2010.
    Chair Landrieu. So how precipitously did it drop without 
the reduction in fees? I think this chart--I do not know if you 
have----
    [The chart follows:]





    
    Mr. Wilkinson. I am sorry. I cannot----
    Chair Landrieu. Yeah, I am sorry. You do not have access to 
these charts. But go ahead. I am sorry. Go ahead and just 
repeat what you said, that the loan volume----
    Mr. Wilkinson. The loan volume in fiscal year 2012 that has 
the same fee structure today that we had in 2010, we are 
running about 10 percent behind fiscal year 2010. So any 
further increase in fees today would likely cause that loan 
volume to drop even further, which is not something we want to 
do given this really is small businesses' only access to long-
term capital.
    Chair Landrieu. And so, Mr. Hurn, tell me again why you 
want to increase the fees.
    Mr. Hurn. I think it is not sustainable long-term for these 
programs to operate with a subsidy. And the fact is, in the 
recent history, we have operated at zero subsidy and you have 
two programs, specifically the 504 refi and the FMLP program 
that are set to expire this September, both of which are 
meeting tremendous demand in the marketplace.
    Chair Landrieu. Well, if Senator Snowe were here, she could 
put back up her chart that when the rate of no subsidy, when it 
was zero, the default rate was the highest. And I am not sure 
we want to have a high default rate. I do not know if it was 
related, because it was a default rate that is what is part of 
the subsidy is taking--is including the default rate made in 
the years where the program was operating with fees that paid 
for it. I do not know if there is a cause and effect.
    Mr. Hurn. Can we put----
    Chair Landrieu. But getting back to it, you think that we 
should just charge the small businesses the fees? You think 
that the loan volume will stay up? And does your company make 
more or less money or the same when the fees are low or high?
    Mr. Hurn. It makes the same.
    Chair Landrieu. Same amount.
    Mr. Hurn. It does not matter.
    Chair Landrieu. So it does not matter?
    Mr. Hurn. And the fact of the matter is, we have data that 
shows that refis and FMLP are both meeting demands in the 
marketplace, even though they have additional fees above the 
statutory limit of the 93/75 basis points.
    And then to the default point, 504s have had, of average 
historically, just under 2 percent default rate before the 
great recession hit about three years ago. So I am not really 
sure what the data was that we were referring to a few moments 
ago. But I do not see it as a--I think it is easy at one point 
see it as a tax on----
    Chair Landrieu. So the default rate of the program----
    Mr. Hurn [continuing]. Small business.
    Chair Landrieu [continuing]. Is very low.
    Mr. Hurn. Yes.
    Chair Landrieu. The default rate is very low.
    Mr. Hurn. Yes.
    Chair Landrieu. But you just object to the low fees. You 
want the fees to be higher and the guarantee rate to be lower?
    Mr. Hurn. I would love to have no fees, but the reality is, 
in the world we live in, we have to be responsible, and I think 
this is such a tremendous loan program that is meeting the 
needs and is so far superior to ordinary commercial financing 
out there right now, that I have seen it with my own eyes. I 
have the data that backs it up. It is in my written testimony.
    These are two programs that need to be extended, and the 
504 is really carrying a lot of the commercial banking loans 
out there right now. So yeah, I do not see it as something that 
is going to turn people away.
    Chair Landrieu. Okay.
    Mr. Wilkinson.
    Mr. Wilkinson. Can we spend just a minute on the subsidy 
calculation, the chart that Senator Snowe had up there?
    Chair Landrieu. Yes.
    Mr. Wilkinson. If you look, let us just take the 2008 
subsidy rate, which was zero. That subsidy rate was submitted 
in the President's budget request in February of 2007 and most 
of the work on that number was completed by the end of calendar 
year 2006. So at the end of 2006, you are estimating what you 
think the subsidy rate is going to be for the cohort of loans 
made during that fiscal year time period.
    So first of all, the subsidy rate will never, ever be 
exactly correct. It is a guess. And so as we see in fiscal 
years 2005, 2006, 2007, and 2008, I believe, the original 
estimate was a zero subsidy rate.
    Now, what the Credit Reform Act requires is that SBA go 
back in and look every year and say, Okay, this is what we 
estimated was going to happen. What actually happened? And we 
know that in fiscal year 2008, as we got into the recession, we 
were not at a zero subsidy rate. That number was incorrect. Our 
losses, because of the recession, because of its depth and its 
breadth were higher.
    Chair Landrieu. So you are saying that this chart is 
incorrect?
    Mr. Wilkinson. Those are original estimated subsidy rates. 
That is right out of the President's budget request every year.
    Chair Landrieu. Original, but the actual would be 
different?
    Mr. Wilkinson. Yes, ma'am.
    Chair Landrieu. And do we know what the actual is?
    Mr. Wilkinson. So what they do with the subsidy model, and 
I am no subsidy model expert, but what they do is they learn 
from all the cohorts in the past. And so we know that we under-
estimated the cost of the program in 2008 and we factor that 
into the calculation going forward.
    So that now we have, as part of the subsidy estimate for 
2013, I am sure there is some number for the recession losses 
that occurred. So is it quite possible that the $351.4 million 
is too high? Yes, it is quite possible. We will not know that 
until we get a few years down the road.
    But as you heard the Administrator testify, the quality of 
the credits going into SBA today is much higher than it was. 
They use what they call a Small Business Predictability Score. 
So the credit scores of the borrower going in today are much 
higher than they were in years past. I would not be surprised 
that five or six years from now we sit back and look and say, 
Gee, we over-estimated the cost of the program today.
    Chair Landrieu. And we do have the actuals here, and just 
for the record, in 2005, they were 1.5; in 2006, 1.3 instead of 
zero; in 2007, 1.3; 2008, 2.0; and 2009, 2.5 and 83/82. Okay. 
Is Senator Snowe coming?
    Mr. Walker. She is not. She is at the vote.
    Chair Landrieu. She is not? Okay. All right. I am going to 
give you all one minute each to wrap up, starting with you, 
Ridgely, or 30 seconds to wrap up. I am sorry for the delay and 
the tight time frame, but I have got something and Senator 
Snowe is not coming back. Go ahead.
    Mr. Evers. I think that the net of it is that SCORE 
actually makes sense as an investment in a tough time, and the 
numbers that we are presenting to you are not numbers that we 
have come up with ourselves. They are the result of research 
that we have been the beneficiary of through Gallop. We can get 
you the hard data on that. These are real numbers.
    As I look at this as a taxpayer, I love this. If I can put 
a dollar into something, get $57 back, and at the same time 
help strengthen the fabric of the local communities through a 
program like SCORE, great. And the only reason that is 
possible, and the thing that makes SCORE entirely different 
from everybody else, is the fact that all of our staff, other 
than 18 people in Herndon, are volunteers.
    Our field staff, our field management staff are all 
volunteers. We have a regional vice president in the Southwest 
now who is a volunteer. That is a huge gift to the Government 
and to small business on the part of business people. And I 
think, to be perfectly candid, I think that we owe it to them 
to honor them with a budget that supports them, that allows us 
to underpin them so they can be as effective as possible. The 
bang for the buck is clear.
    Chair Landrieu. Thank you.
    Mr. Hurn.
    Mr. Hurn. Well, I would just say again, if subsidies are a 
concern, there are at least three things that we can do to 
bring the subsidy rates down. I think it is just responsible 
for the SBA to empower CDCs who our local experts for the SBA 
and who are involved and can be involved early in the process, 
as opposed to waiting until the end when Treasury gets involved 
far too late in the process.
    That is a very simple thing, and I would urge the Committee 
to consider a pilot program to let CDCs participate in that.
    The second thing I would say is, I really feel we need to 
extend the 504 refinance program. These are better performing 
loans than even regular 504s, in many cases, and if you review 
my written testimony, you will see why I make that argument. 
The FMLP is basically the--SBA has assumed a preferential risk 
in this situation while creating a secondary market in this 
program.
    It is the only market that is actually meeting the needs of 
special purpose commercial properties out there, and has really 
shown great strides since both of these programs have gotten 
away from some of the delays that they had when they first were 
launched. So I would urge the Committee to consider both of 
these programs. Thank you.
    Chair Landrieu. Thank you.
    Mr. Shear.
    Mr. Shear. I would like to thank you for inviting me. I 
fully agree with you that evaluation of these programs is just 
integral to looking at the cross-cutting issue of serving small 
businesses. We are collecting every piece of information we can 
that is available to try to inform those decisions in our July 
report.
    We are also looking upon the agencies, including SBA, to 
collect information as part of managing their programs so they 
can better determine which programs are working the best and 
how strategically SBA, and SBA in partnership with other 
agencies, can better serve the small business community. So 
again, thank you.
    Chair Landrieu. Mr. Wilkinson.
    Mr. Wilkinson. I would just like to add, thanks for having 
me again today. Would close with, I am glad to hear that the 
U.S. Chamber has submitted a letter in support of the continued 
appropriation for this program. I know that the International 
Franchise Association has also sent in their letter of support.
    And then from the NADCO testimony, their statement is, Due 
to the low cost of job creation under 504 and the high impact 
on the economy, NADCO supports the Administration's budget 
request for continued borrower fee relief through an 
appropriation. And, of course, from our testimony, NAGGL, also 
supports the continued appropriation. Thank you.
    Chair Landrieu. Great. And I just want to recognize the 
head of the 504 trade association, Chris Crawford. Chris is in 
the audience, and we could have had you up on this panel. I am 
sorry, but thank you for your support of the program.
    I think we will adjourn. The record will stay open for two 
weeks. We thank you all very much. It has been a very, very 
informative hearing. Meeting adjourned.
    [Whereupon, at 12:15 p.m., the Committee was adjourned.]

                      APPENDIX MATERIAL SUBMITTED






                                  
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