[Senate Hearing 112-891]
[From the U.S. Government Publishing Office]
S. Hrg. 112-891
CLOSING THE GAP: EXPLORING MINORITY ACCESS TO CAPITAL AND CONTRACTING
OPPORTUNITIES
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ROUNDTABLE
BEFORE THE
COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
MARCH 3, 2011
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Printed for the Committee on Small Business and Entrepreneurship
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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED TWELFTH CONGRESS
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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 GERALD W. MORAN, Kansas
KAY R. HAGAN, North Carolina
Donald Cravins, Jr., Democratic Staff Director and Chief Counsel
Wallace K. Hsueh, Republican Staff Director
C O N T E N T S
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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.......................................................... 4
Hagan, Hon. Kay, a U.S. Senator from North Carolina.............. 18
Witness Testimony
Panel I
Johns, Marie, Deputy Administrator, U.S. Small Business
Administration................................................. 6
Panel II
Fairlie, Robert W. Ph.D., Professor of Economics, University of
California, Santa Cruz......................................... 21
Morial, Marc, President and Chief Executive Officer, National
Urban League................................................... 32
Allen, Susan, President and Chief Executive Officer, U.S. Pan
Asian American Chamber of Commerce............................. 53
Mitchell, B. Doyle, Chairman, National Bankers Association....... 64
Montoya, Martha, Procurement Chair and Board Member, U.S.
Hispanic Chamber of Commerce................................... 68
Panel III
Gustafson, Peggy, Inspector General, U.S. Small Business
Administration................................................. 82
Kutz, Greg, Managing Director of Forensic Audits and Special
Investigations, U.S. Government Accounting Office.............. 91
Alphabetical Listing and Appendix Material Submitted
Allen, Susan
Testimony.................................................... 53
Prepared statement........................................... 55
Summary of testimony......................................... 113
Fairlie, Robert W.
Testimony.................................................... 21
Prepared statement........................................... 24
Summary of testimony......................................... 111
Gustafson, Peggy
Testimony.................................................... 82
Prepared statement........................................... 85
Summary of testimony......................................... 115
Hagan, Hon. Kay
Opening statement............................................ 18
Johns, Marie
Testimony.................................................... 6
Prepared statement........................................... 9
Summary of testimony......................................... 110
Kutz, Greg
Testimony.................................................... 91
Prepared statement........................................... 93
Summary of testimony......................................... 116
Landrieu, Hon. Mary L.
Opening statement............................................ 1
Mitchell, B. Doyle
Testimony.................................................... 64
Biography.................................................... 67
Montoya, Martha
Testimony.................................................... 68
Prepared statement........................................... 70
Summary of testimony......................................... 114
Morial, Marc
Testimony.................................................... 32
Prepared statement........................................... 34
Summary of testimony......................................... 112
Snowe, Hon. Olympia J.
Opening statement............................................ 4
U.S. Census Bureau
Report titled ``Survey of Business Owners: Black-Owned
Businesses: 2007''......................................... 117
Report titled ``The Compelling Interest for Race--and Gender
Conscious Federal Contracting Programs: An Update to the May
23, 1996 Review of Barriers for Minority and Women-Owned
Businesses''................................................... 157
CLOSING THE GAP: EXPLORING MINORITY
ACCESS TO CAPITAL AND CONTRACTING OPPORTUNITIES
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THURSDAY, MARCH 3, 2011
United States Senate,
Committee on Small Business
and Entrepreneurship,
Washington, DC.
The committee met, pursuant to notice, at 10:12 a.m., in
Room 428-A, Russell Senate Office Building, Hon. Mary L.
Landrieu (Chair of the Committee) presiding.
Present: Senators Landrieu, Hagan, and Snowe.
OPENING STATEMENT OF HON. MARY L. LANDRIEU, CHAIR, AND A U.S.
SENATOR FROM LOUISIANA
Chair Landrieu. Good morning. Thank you all for joining us
this morning for a meeting of the Small Business Committee
about Closing the Gap: Exploring Minority Access to Capital and
Contracting Opportunities, specifically focused on closing the
wealth gap in America and what our committee and the Small
Business Administration can contribute to that effort.
Since becoming Chair of this committee, I, along with other
members, have made it a top priority to make sure the nation's
small businesses, and that is 27 million small businesses, have
access to capital and ready access to government contracting,
particularly Federal Government contracting. I have asked my
staff to update me regularly on the number of banks,
particularly community banks, as you know, Ms. Johns, who are
participating in the small business lending programs, and we
have seen a significant increase of banks in America stepping
up to be partners with the SBA trying to streamline those
processes and get capital to Main Streets throughout our
country.
In addition, this committee is on constant lookout for new
and better ways to improve those programs to streamline them,
eliminate regulation, and to try to open up capital markets and
increase contracting opportunities for small business when
those opportunities present themselves through Federal
contracting. It is clear to me that small businesses need
reliable and non-predatory financing opportunities in both the
debt and equity market in order to start, to grow, and to
succeed. They want to know that when the Federal Government
does contract for goods and services and it is in the billions
of dollars--and we are going to try to have that figure before
the end of the meeting today--that small businesses can compete
on a level and fair playing field with large businesses that
also compete for contracting.
As Chair, I will continue to focus on removing any
arbitrary barriers that are identified as blocking this goal.
In some cases, those barriers are not unlike the challenges all
businesses face that are trying to work with the Federal
Government--red tape, regulations, slow time frames. But in
some cases, the obstacles that minority business owners face,
whether it is African American or Hispanic or Asian or women,
are quite unique. Since 2009, I have convened at least three
meetings to address ways that this committee and the SBA
through many of its programs can address and provide remedy to
these issues.
The purpose of today's hearing is clear. We are here to
discuss solutions, initiatives and solutions on how this
committee, this Congress, and the SBA administration can close
and eventually, if possible, try to erase the wealth gaps in
this nation that were so clearly identified by Dr. Robert
Fairlie, a professor of economics at the University of
California at Santa Cruz, who is again with us today and will
be testifying on our second panel.
I know, and I have known through many years of experience
that the only way to close these disparities in wealth gaps in
our nation is through a holistic approach, obviously, improved
access to education, improved access to home ownership using
traditional and safe models of lending and equity building.
These issues, however, are not within the jurisdiction of this
committee. But improving access to capital for small
businesses, expanding opportunities for contracting with the
Federal Government, expanding opportunities for export, the
broadband initiative, part of that is under the jurisdiction of
this committee, and we are going to remain focused on these
areas and closing this gap.
Last year at a hearing on this subject, Dr. Fairlie, who
will be testifying today again, testified that many factors are
responsible for the disparity in business performance between
minority and non-minority-owned businesses. Access to financial
capital is one. He pointed out that one of the major roots of
the problem is the extremely high level of wealth inequity, or
I would say it as an extremely low wealth accumulation by
African American families.
I was astonished to learn, and I have been in public office
now for over 30 years, that the median wealth for African
American families in America in the year 2000--and this was the
Census, I think, of 2000, now we have some updated figures
today--was only $5,000, compared to $87,000 for a majority of
white families. And for Latino families, it was less than
$8,000. These levels of wealth are one-eleventh to one-
sixteenth the levels of wealth held by non-minorities.
I want to show this graph which is up here. I am sorry that
all of you cannot see it. I do not know if there is anything
the staff can do to hand this out, but for those of you that
can see the video, it is really startling. The disparities in
wealth are substantially larger than disparities of income, and
I think that sometimes in America, we focus on closing the
income gap. And you can see the income gap for non-minority
families at $55,000. For African American families, it is
$34,000. And for Latino families, it is $37,000. There is a
gap. It is troubling. It has been improving, I think,
substantially, but we are going to hear some testimony as to
whether that is improving.
But when you look at the wealth gap, the net worth, the gap
of net worth between white families in America at $87,000 and
African American families at $5,400 and Hispanic families at
$7,900, it is absolutely startling, jaw dropping, and if it
does not make more than just this committee focus, I am not
sure what data or testimony would.
And that is why we are here today, to talk about solutions
to closing this gap. I have shared this with my family, who was
in disbelief. I have shared it with people that do not believe
it when I say it, and so we are going to have a second hearing
today. And I have shared it in speeches all over this country.
I have made it one of my priorities as Chair of this committee
to do what I can, which is limited under the jurisdiction of
this committee, but this committee is one of the standing
committees of the Senate and we are going to take this issue
on.
Despite the sobering impact of Dr. Fairlie's testimony,
which we will hear on the second panel, there is some good news
for minority business owners that we will hear today. The good
news is the number of businesses in our minority communities
continues to grow. According to the most recent data available
from the SBA Office of Advocacy, minority-owned small
businesses are among the fastest growing segment of the small
business community. From 1997 until 2002, firms owned by
African Americans grew almost by 45 percent, Hispanics by 31
percent, Asian Americans by 24 percent, and Hawaiian and
Pacific Islanders by 49 percent.
Minority-Owned Business Enterprises accounted for more than
50 percent of the two million new businesses over the last ten
years, far outstripping, I think, their make-up of the
population. There are now more than four million minority-owned
companies in the United States with annual sales totaling $700
billion. These businesses cross the entire industrial spectrum,
from financial services and health care to construction and
transportation.
So it is clear there is great potential here. It is clear
that besides access to high levels of education for minority
communities, and I should say quality education, it is besides
just the opportunity for traditional wealth creation through
home ownership, not what we have seen in the last few years,
which has been actually moving in the wrong direction, but in
the traditional sense of equity building. But having the
ability to build a business, to build wealth, to transfer that
wealth to future generations is absolutely essential to close
this startling and shameful gap that we are experiencing right
now in our country.
So that is what this hearing is about. There will be
hearings over the next month or two in the areas of fraud,
abuse, in all programs related to the SBA. That is not the
subject of this hearing. This hearing is about positive
solutions for closing this gap and for acknowledging that this
gap actually exists.
So that is why the Secretary is here this morning, Marie
Johns, to testify about, A, does the SBA recognize this gap? Do
you consider it in your mission an opportunity to try to, or
within some aspect of the mission of the SBA to see what you
can do to close this gap through the programs that the SBA
basically runs and monitors and how we are addressing that.
So I am looking forward to this panel. We have a large
second panel. And then the third panel, because of the
minority's request, will focus on some additional issues.
I am joined by my Ranking Member, Senator Snowe, and then
we will turn to our first panel for their testimony.
OPENING STATEMENT OF HON. OLYMPIA J. SNOWE, A U.S. SENATOR FROM
MAINE
Senator Snowe. Thank you, Chair Landrieu, for holding this
hearing today to discuss the barriers that continue to exist
for our nation's underserved small businesses. I also thank our
distinguished panelists that include the SBA Deputy
Administrator, Marie Johns, SBA Inspector General, Peggy
Gustafson, Greg Kutz from the Government Accountability Office,
and all of our other witnesses to appear in the second panel,
who will offer invaluable insight into the various hurdles
minority-owned small businesses encounter when trying to access
capital to participate in the Federal marketplace.
Regrettably, January marks the 21st consecutive month that
the unemployment rate has been at or above nine percent. Even
more astounding, the Bureau of Labor Statistics reported in
January unemployment of African Americans was 15.7 percent, and
11.9 percent among Hispanics.
According to the U.S. Department of Commerce, minority-
owned firms generate $1 trillion in economic output to the U.S.
economy and create 9.5 million jobs. Just imagine the strides
we could achieve towards an economic recovery if the Federal
Government could better harness minority-owned firms' job
creation potential.
Ensuring that minority-owned businesses have fair access to
Federal contracting opportunities is one way that our
government can help foster minority entrepreneurial success.
Last year, when it was brought to my attention that the HUBZone
program would be given a super-preference for contracts above
the other SBA contracting programs, I was very pleased to
introduce legislation addressing this inequity by leveling the
playing field so that contracts to service-disabled veterans,
8(a), HUBZone, and women-owned firms may be awarded with equal
deference to each program. Particularly during these difficult
economic times, it is imperative that small business
contractors possess an equal opportunity to compete for Federal
contracts, and so I am pleased that this parity legislation
became law last fall.
Furthermore, when it comes to small business goaling
requirements, I am pleased to also note that the Federal
Government exceeded its five percent Small Disadvantaged
Business contracting goal in fiscal year 2009, awarding 7.5
percent of total contracts to these firms. I strongly encourage
the administration to continue to build on these successes.
However, much more needs to be done.
For example, there remains a glaring problem facing
minority-owned small businesses in accessing Federal contracts
and that is the fraud that plagues the SBA's 8(a) Business
Development Program. In March of 2010, the GAO issued a report
detailing the extensive fraud within the 8(a) program. The
report revealed that 14 ineligible firms received $325 million
in sole source and set-aside contracts, even though these firms
were not eligible for the 8(a) program. As we use this hearing
to examine barriers facing the minority community, I look
forward to hearing from the GAO and their recommendations, as
well as the SBA, to remedy the illegitimate firms siphoning
away contracts from the rightful businesses trying to compete
within the 8(a) program.
As Ranking Member of this committee, I take very seriously
our responsibility of vigorous oversight. That is why last
December, Chair Landrieu and I sent a letter to the SBA
highlighting the recent headlines and GAO reports of fraud and
abuse that have plagued the agency's contracting programs. I
want to echo again today, as we did in our letter, our first
priority this Congress is ensuring that all of the SBA's
contracting programs, because we know that fraud and abuse are
not unique to the 8(a) program, are running efficiently,
effectively, and free of exploitation.
Shifting to access to capital, in April of last year, this
committee held a hearing on the obstacles and opportunities for
minority small business owners in capital markets. At that
hearing, the committee investigated Dr. Robert Fairlie's, who
we are fortunate to have with us again today, report,
Disparities in Capital Access Between Minority and Non-
Minority-Owned Businesses. This report highlights a wide
disparity in capital access between minority and non-minority
firms.
For example, the study concludes that minority-owned firms
are, one, less likely to receive loans than non-minority firms;
two, receive lower loan amounts than non-minority firms; and
three, are more likely to be denied loans; and four, pay higher
interest rates on business loans. These conclusions are
certainly alarming, and clearly, as I have said repeatedly to
the SBA, more must be done to address these problems.
But I am pleased to say that, overall, the SBA has broken
the mold in regard to minority lending. In fact, SBA-backed
loans are about three times more likely than conventional loans
to go to minority-owned firms, and micro loans have a
particularly high success rate in fiscal year 2010. Forty-six
percent of the SBA's micro loans, a five percent increase over
the previous fiscal year, went to minorities.
I am pleased to also say that the increased micro loan
limits and the heightened 7(a) and 504 loan limits, which I had
initially called for in my legislation, the Next Step For Main
Street Credit Availability Act, were recently enacted into law,
and I thank the Chair for her role in helping to secure those
changes. It is my hope that this initiative, combined with
other measures that we will be able to provide, like the $24
million in the Recovery Act for micro loan intermediaries who
were encouraged to carry over the funds into future fiscal
years, will help provide even greater capital access to
minorities.
I also expect the micro loan program to continue to be a
powerful tool for minority entrepreneurs moving forward and
hope that Deputy Administrator Johns can speak to this issue
today.
Additionally, the SBA has initiated two new lending
programs, the Small Loan Advantage and Community Advantage
Programs, which have the potential to provide additional
sources of capital to underserved communities. So today's
hearing does provide an opportunity for the Administration to
explain to key stakeholders how these new lending programs will
increase access to capital for minority entrepreneurs.
Again, thank you, Chair Landrieu, for your leadership in
these critical issues and I am looking forward to working with
you and to hearing from our witnesses.
Chair Landrieu. Thank you, Senator Snowe.
Let me go right into our introductions to Marie Johns, who
is the Deputy Administrator for the SBA. Since being confirmed
by the Senate, Ms. Johns has been focused on the management of
the agency, the development of SBA policies. Recently, she has
focused much of her efforts on the development and
implementation of the policies enacted by the Small Business
Jobs Act, which was signed into law, which this committee led,
and we are very, very proud of that particular Act. Prior to
becoming SBA Deputy Director, Ms. Johns served as President of
Verizon Washington, where she was responsible for over 2,000
employees and 800,000 customers. We thank you, Ms. Johns, for
being here today.
We are joined by Senator Hagan and we will go through a
round of questioning after your presentation. Please begin.
Thank you.
STATEMENT OF MARIE JOHNS, DEPUTY ADMINISTRATOR, U.S. SMALL
BUSINESS ADMINISTRATION
Ms. Johns. Thank you, Chair Landrieu, Ranking Member Snowe,
and Senator Hagan. Thank you for inviting me to testify today
on these very important issues. It is an honor to be speaking
before you this morning.
As an African American woman, as a former small business
owner, and most importantly, as an American citizen, I greatly
appreciate this committee's commitment to ensuring that
minority-owned companies have the same opportunities as small
businesses across our country.
Core to our mission at the Small Business Administration is
expanding opportunities for companies in traditionally
underserved areas, including those owned by minorities, women,
veterans, people with disabilities, and people from rural
areas. These businesses typically have a harder time accessing
the tools they need to grow and create jobs in their
communities.
The SBA is well poised to reach these businesses. For
example, our lending programs support companies that struggle
with access to conventional capital. One study by the Urban
Institute, and this was referenced earlier, showed that women-
and minority-owned small businesses are three to five times
more likely to receive an SBA loan than a conventional loan. We
are proud of the work that we have done supporting underserved
communities, but always we know we can do more, and this is
especially true since many of these communities have been
disproportionately hard hit by the recession.
As a result of the tight credit market over the last two
years, the overall share of SBA loans going to small businesses
in underserved communities has decreased significantly. From
fiscal year 2008 to fiscal year 2010, overall SBA 7(a) lending
to small businesses in underserved communities dropped nearly
five percent, and that decline has been even greater in some
communities. But that decline equates to a drop of $780 million
in loans to businesses that need them most. This drop in
lending has been a call to action for us at the SBA.
We found that the lower-dollar loans were significantly
important to helping entrepreneurs in underserved communities
start and grow their businesses. Often, a small business does
not need a $1 million or a $5 million loan. Some do, but others
need more in the range of $50,000 to buy new equipment or
$100,000 to renovate a building. We have heard from our lending
partners that the paperwork and the processing time involved
with those loans frequently meant that they were not as cost
effective to make a low-dollar loan through the SBA.
So to address this, we recently announced two new loan
initiatives, part of our 7(a) program, Small Loan Advantage and
Community Advantage, and those programs are designed to get
lower-dollar loans into the hands of small business owners.
These initiatives streamline the application process and cut
down the paperwork while still offering our standard guarantee.
Small Loan Advantage is open to lenders in our Preferred
Lending Program, and I am happy to report that the SBA began
accepting applications for Small Loan Advantage loans on
February 15, a full month ahead of schedule.
Meanwhile, Community Advantage opens our 7(a) lending
program to, quote-unquote, ``mission lenders,'' such as
Certified Development Companies, Community Development
Financial Institutions, or CDFIs, and SBA certified micro
lenders. This is for the first time ever. We are very excited
about bringing these non-bank lenders on as partners because of
the proven track record they have in serving underserved
communities, including providing effective technical assistance
that many of those borrowers need.
The SBA has also begun accepting applications from mission
lenders to become SBA lenders, and once approved, those lenders
will immediately be able to offer Community Advantage Loans.
The SBA also works to help small businesses compete for and
win government contracts, which are an important source of
revenue in many instances. Our 8(a) Business Development
Program has been critical to helping these small businesses win
contracts, grow, and create jobs. To strengthen the 8(a)
program even further, the SBA recently undertook the first
regulatory review process in over a decade. The agency actually
began the process back in 2007. Once we had a draft proposal
for new regulations, SBA officials went on an extensive
listening tour, where we gathered over 1,500 comments from
around the country.
And after much hard work, the new 8(a) regulations were
posted this month. These new rules cover a variety of areas in
the program, from clarifications on determining economic
disadvantage to tightening the requirements on joint venture
contracts. Overall, our goal was to strengthen the program
while eliminating opportunities for waste, fraud, and abuse,
and ensuring, as was said earlier, that the program benefits
flow to their intended recipients, and I believe these new
regulations go a long way to achieving that goal.
The SBA also recently finalized and released the Women's
Contracting Rule. The rule is a critical step toward giving
women-owned small businesses better opportunities to compete
for Federal Government contracts.
Our steps to strengthen the 8(a) program and the structure
behind the Women's Contracting Rule are also examples of the
three-prong oversight strategy that we are implementing across
all of our programs. That strategy focuses on, one, effective
up-front certification. Two, ongoing surveillance and
monitoring. And three, timely and robust enforcement. These
steps are aimed directly at ensuring that only eligible small
businesses benefit from our programs and that when we suspect
that bad actors are present, we go after them appropriately and
aggressively.
While I am proud of what the SBA has accomplished under the
leadership of Administrator Mills, alongside this committee, I
believe we must continue to be diligent in our work with
underserved communities. We know that with the right tools in
hand, entrepreneurs and small businesses in these communities
can have significant impact in driving economic growth and
creating jobs where they are needed most.
Thank you very much. I look forward to your questions.
[The prepared statement of Ms. Johns follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Landrieu. Thank you very much. I really appreciate
particularly the comments about the Small Loan Advantage and
the Community Advantage Programs.
One of the goals that I share with Senator Snowe is to
really get our community banks in America partnered with the
SBA in a much stronger partnership to make sure that the
capital that is available and that the Federal Government is
guaranteeing, particularly in our new lending program, actually
hits the streets on Main Street. And making the SBA programs
more user-friendly is something that the two of us and all of
us, I think, hear a great deal about. So I appreciate those
efforts and will look forward to monitoring the success of
those programs.
Let me ask you, though, about loan size for African
American businesses, minority businesses. The data that is
coming in to us shows that from 2001 to 2006, the average loan
size for African American business owners dropped from $181,000
to $84,000. That is a 53 percent drop in the size of loan. By
contrast, the average loan to non-minorities dropped only 19
percent, to around $2,013. Is the SBA aware of this? What do
you think is pushing that trend? Do you think it is something
that should be cause for concern, and are you aware of those
numbers?
Ms. Johns. Senator Landrieu, this recession has been very
difficult on all businesses, but it has been incredibly hard on
small businesses and particularly minority businesses,
businesses operating in underserved communities. And we are
very focused on that as an agency and that is exactly why we
have developed a new initiative that is strictly focused on
underserved communities.
The Advantage Loans that I described earlier are a key part
of that underserved strategy because access to capital is
absolutely critical. But as you know, the SBA takes a very
holistic approach to how we serve small business growth and
development. Capital is a critical part of that approach, but
we also focus on government contracting as well as our
counseling programs. And taken together, that is the best
recipe for ensuring that small businesses have the support that
they need to grow and create jobs.
We also are in the process of establishing a council on
underserved communities, an advisory council. I am delighted to
share with you that we are honored that Catherine L. Hughes, a
founder of Radio One and TV One and a true leader in media
industry, and as an African American woman quite a ceiling-
breaker, is chairing the council. Ms. Hughes also was an SBA
borrower early in her business formation. So she knows our
programs. She knows our agency. And we are going to have under
her leadership 20 of the most--the best minds that we can find
around this country to help us focus on these kinds of
statistics and to give us the advice that we need to determine,
where do we need to replicate programs that are working well
and where do we need to focus on addressing the gaps.
You talked earlier very eloquently about the effects of the
recession and the effects of--for example, housing values that
have dropped. Using equity in a home has been, forever has been
a primary source of capital for small business owners to use in
order to capitalize their business. So when we have seen the
drop in housing values, that has had an impact on businesses'
ability to get loans and to grow their businesses.
But we are confident that with the Advantage Loans as well
as the improved counseling, the more robust counseling that we
are going to be able to provide out in the field, because of--
and thank you for your support on the Small Business Jobs Act--
$50 million was appropriated for our Small Business Development
Centers so that we can have more robust facility--counseling
capacity available for small businesses around the country. We
touch over a million entrepreneurs a year and we are hoping to
grow that number because of the additional capacity that was
available through the Small Business Jobs Act. So that is an
example of some of the things that we are doing to address the
issue that you raise.
Chair Landrieu. Well, I know this committee is going to
stay very focused as we address the challenge of budgets and
closing the deficit gap to recognize that this particular
agency has a very special and important mission. If this
recovery is going to be evenly felt across the country, it is
going to take a well-resourced and well-structured and well-
managed SBA, working with partners in the private sector and
State governments, to make sure that these programs are
reaching to areas that are obviously, by the data that has been
presented to this committee, sometimes left out and
underserved. And so I think we have to be very careful, I would
caution my colleagues, about cutting back on these areas when
we are really trying to turn the corner.
Let me turn it over now to Senator Snowe and then to
Senator Hagan, and then we will go maybe through a second round
of questioning, as well.
Senator Snowe. Thank you, Chair Landrieu.
Ms. Johns, I want to get to the issues that I raised
earlier in my testimony regarding the GAO report to get a
better understanding of exactly how the SBA is responding to
that report, because in the final analysis, given the fact that
we are grappling with enormous deficits and trying to ensure
that we maximize the efficiency and effectiveness of all of our
programs and obviously root out any fraud and corruption, the
fact is that there were 14 ineligible firms that were
determined by the GAO to be fraudulent and designated as 8(a)
contractors ineligible for the contracting program.
As I understand it, between 2009 to today, the SBA Office
of Inspector General has referred 26 contractors for suspension
or debarment, meaning permanent removal from Federal
procurement. From those 26 referred, the SBA has suspended a
grand total of three contractors. What happened to the other 23
contractors that were referred by the Inspector General's
Office?
Ms. Johns. Let me begin, Ranking Member Snowe, by talking
about our approach to fraud, waste, and abuse. First of all,
there is zero tolerance for fraud, waste, and abuse. I spoke in
my opening statement about our process for how we address
fraud, waste, and abuse through effective certification on the
front end, effective monitoring and surveillance during a
business's time with us in a particular program, and then
timely and robust enforcement. If there is a bad actor, that is
how we address that company.
Any business that comes to our attention as a potential
case for fraud, we investigate every single one, and there are
three basic paths that one of those complaints can take. There
is a criminal path, which involves the Department of Justice
and the Inspector General. There is the civil penalty path,
which again involves the DOJ and the IG. And then there is the
administrative path, where the agency has the most latitude to
act. We are in regular touch with our IG's office about matters
of this type and we are--as I said, we take any case of
potential fraud very seriously.
You mentioned some numbers. What I would like to share with
you, under our suspension and debarment process, in the last
two fiscal years--now, this covers our lending as well as our
procurement programs--we have had seven suspensions, 54
proposed debarments, and 44 actual debarments under the
administrative track. I would be happy to provide additional--
--
Senator Snowe. Well, can I get to these specifically----
Ms. Johns. Mm-hmm.
Senator Snowe. And to this program and what the GAO cited?
Ms. Johns. Well, the GAO----
Senator Snowe. On the 14 ineligible----
Ms. Johns. On the 14----
Senator Snowe. Yes, and then----
Ms. Johns. Every one of the 14 firms that were cited by the
GAO had been investigated and----
Senator Snowe. So what is the disposition, then?
Ms. Johns. There were a variety of dispositions. First of
all, of the 14 that the GAO cited, by the time we received the
report, I believe about six or seven of those companies were no
longer in the program for a variety of reasons. Of the
remaining eight, others were removed from the program or left
the program voluntarily. There were a variety of dispositions,
and again, I can provide that detail for you.
Senator Snowe. Well, I think the committee needs to have a
response from the SBA on these issues. I mean, it is this
program and every other program. We need exact responses on
these questions so that we have a full appreciation and
understanding. We have an obligation here in the oversight
capacity of this committee, but in every committee on every
program, frankly. I mean, that is where we stand today and
always with respect to how taxpayers' dollars are being used.
So I think we need to have an accounting for each and every one
of those.
Ms. Johns. We will be happy to provide that.
Senator Snowe. Okay. And so on the 26 contractors that were
recommended, was that part of that 14? Only three contractors
were suspended out of the 26 that were referred to the SBA.
Ms. Johns. I have to say, I am not familiar with the data
that you are quoting from, but I will be happy to--if we can
get that information in writing, we will be happy to provide a
detailed answer.
Senator Snowe. Well, who is responsible in the SBA for
addressing these issues? Who is singularly responsible? What
level of priority is this accorded within the SBA?
Ms. Johns. Responsibility for----
Senator Snowe. For addressing these issues. Correct.
Ms. Johns. Well, Administrator Mills and myself are
ultimately responsible. But the responsibility is not
singularly focused. It is a responsibility across the agency,
and that gets to a new process that we put in place, the
Suspension and Debarment Task Force, which is chaired by our
General Counsel. That task force is looking at how we can
ensure that, across the agency, employees are trained, better
trained, to identify instances of possible fraud at every
possible point throughout the process, either the certification
process, time in the program, et cetera. And so we are--that
task force is doing its work and we intend to have an even
stronger view--process, rather, on fraud, waste, and abuse
later this spring.
But what I assure you again, Ranking Member Snowe, is that
every instance of fraud that comes to our attention is fully
investigated and we are working in concert with the Inspector
General, and the process that I described earlier as far as
certification, monitoring, and enforcement, is modeled directly
after the recommendations that were in the GAO report.
Senator Snowe. Okay. Then I would like to see the final
results of all that.
Ms. Johns. Sure.
Senator Snowe. I think the committee deserves a response to
the report, to the specific disposition of each and every firm
or individual that was cited in the GAO report or any
individual or firm that has been reported to SBA. I think at
the end of the day, we have to go after those people, even if
they have been removed from the program or left in the program,
whatever they did, we have to go after them with a vengeance,
as well. If you inappropriately use Federal dollars or access
Federal programs illegally, then we obviously have to make sure
that we take appropriate action.
Ms. Johns. And we are as serious about that as----
Senator Snowe. We cannot relent on that.
Ms. Johns. Absolutely. We are relentless, as well, because
we know that the integrity of the program is to make sure that
they are available for those business owners for whom they are
intended, rest on the fact that we run good programs and that
we ferret out fraud, waste, and abuse at every turn.
And so I also want to thank the committee for the support
of the Small Business Jobs Act because you gave us another very
important tool in that regard. The presumption of loss
provision in the Small Business Jobs Act says that even if a
company has provided a service to the government and has
misrepresented itself, that we can, once that is determined, we
can go back and collect treble damages from that company. That
is a new tool that our agency did not have before and that is
available now to us through the Small Business Jobs Act.
Senator Snowe. I would just mention that those 26 that I
cited were in the IG's testimony. So that was from their report
specifically. Thank you.
Chair Landrieu. I thank Senator Snowe. And as I have shared
with her and with the staff, we are going to have a--we feel so
strongly about the issue of waste, fraud, and abuse throughout
the entire agency, obviously not just with the minority and
African American programs but with the entire agency,
particularly the IG's scathing report relative to HUBZones, we
are going to have a very specific hearing on fraud, waste, and
abuse, particularly with the HUBZone program and with other
programs in the SBA. But the subject of this hearing is about
closing the wealth gap.
Senator Hagan.
Senator Snowe. Madam Chair, can I just raise an issue in
that regard?
Chair Landrieu. Yes.
Senator Snowe. I think that any time we have the
opportunity to have witnesses in front of the committee from
the agencies that are responsible for these programs and these
issues should be raised. I am not suggesting that it is just
unique to these programs. I would ask these questions of any
program. And so we are starting today. You happen to be the
witness. We happen to have the Inspector General's report. We
want a response to those issues and I think we deserve, but
more importantly, not just us, but the taxpayers. So that is
the issue. I would hope we would do this with every program. If
it warrants it, then we should be raising those questions.
Chair Landrieu. We will have ample opportunity to do that.
Senator Hagan.
OPENING STATEMENT OF HON. KAY HAGAN, A U.S. SENATOR FROM NORTH
CAROLINA
Senator Hagan. Thank you, Chairman Landrieu, and it is an
honor to be here and thank you for convening this important
hearing. I do think there is obviously a disparity, and through
the SBA and through the lending practices, we certainly do need
to step up and see what we can do to proactively help change
that.
And obviously, it is all about jobs. We need to see what we
can do at the Federal level to make a better business climate
so that private industries can grow and hire more people.
But I also know that creating that better business climate
is central to our economic recovery. I have been holding
hearings around the State in North Carolina, and I do hear all
the time that small businesses are having trouble accessing
capital. And that is why I was very pleased with the bill that
we passed, the Small Business Jobs bill with the Small Business
Lending Fund. I think it is one of the most important pieces of
that legislation was the Small Business Lending Fund, and by
providing resources to community banks and independent banks,
that Small Business Lending Fund is certainly encouraging those
banks to increase their lending to small businesses throughout
the country and in North Carolina. And I think it is important
because it is targeted to the community lenders that serve
businesses that otherwise struggle to secure financing.
And encouraging entrepreneurship, I believe, is critically
important to the sustained economic development and self-
sufficiency in our underserved communities. While the SBA
currently administers a number of well-meaning programs
designed to make it easier for entrepreneurs in these
communities to start a business and ultimately to grow that
business, we have obviously got to be sure that those programs
are working effectively, and to do so, the SBA programs must
effectively encourage lenders to make those small-dollar loans
that are needed most in our underserved communities.
But we have also got to ensure that Federal contracting
preferences designed to assist disadvantaged businesses are not
subject to fraud and abuse, and I think this hearing is a good
opportunity to learn more about the state of these programs.
I just want to compliment the Deputy Secretary, Ms. Johns.
I have read your bio and we are mighty fortunate to have you
come in to the public service work and I appreciate your
efforts and your leadership.
In your comments, you mentioned the Small Loan and
Community Advantage Programs, which are intended to make it
easier for the SBA lenders to make these smaller loans, in
particular, to the underserved small business owners. The SBA
Small Business Investment Company Program is designed to
leverage private venture capital funds to encourage equity
investments, which we know we need in these qualifying small
businesses.
Can you explain to me how the proposed would work in
practice, having to do with--in President Obama's 2012 budget,
he proposes to leverage the SBIC program to support $200
million annually over the next five years in so-called impact
investments that are targeted to economically and socially
disadvantaged businesses. Can you explain how they would
actually work and how it is intended to help minority- and
women-owned small businesses expand more rapidly?
Ms. Johns. Yes, Senator. Thank you for the question. We are
in the process of developing the contours of that program. What
I view as my key role at this stage in the process is to build
awareness, because we want to make sure that we have a pool of
firms, money managers and investment firms, that reflect our
country, that reflect our business sector. And so I am taking a
lot of my time to talk to individuals at every opportunity to
say we have created this impact fund and now we want to make
sure that you are aware of this resource and that you stay
connected to the SBA so that we can hopefully get you involved
with this opportunity.
Businesses are--the minority business community as well as
the small business community is not monolithic, and at the
agency, we have got to make sure that we have capital programs,
capital resources available for businesses wherever they are.
Another advantage for your support of the Small Business Jobs
Act was the ceiling for our 7(a) program was raised to $5
million and there are firms, if they are manufacturing
companies, for example, or franchisers, they need those higher-
dollar loans. But as I have spoken about earlier, we have a
large segment of our business community that needs the smaller
dollar loans. Then there are businesses that are looking for an
equity infusion and that is where the Impact Fund comes in.
I would be happy to come back and talk to the committee at
a later date when we have more of the structure of the Impact
Fund in place, but in the meantime, I am talking everywhere I
go about the Impact Fund to encourage a very diverse set of
interests in the fund so that we can, at the end of the day,
have a strong and a diverse portfolio of managers who are ready
and capable of serving businesses in underserved communities
and across the board.
Senator Hagan. Well, in many instances, those smaller loans
are the hardest ones for small business owners to actually have
access to, and so I do think it is important that you continue
focusing in that area----
Ms. Johns. Yes, Senator----
Senator Hagan [continuing]. Which is what this is.
Ms. Johns. Yes. And if I may, Senator, I mentioned in my
opening statement that we are a month ahead of schedule in
getting the Small Loan Advantage Program up and running, and in
fact, just yesterday, I learned of one of the first Small Loan
Advantage loans was taken on by, as it turns out, an African
American pharmacist in rural Georgia who took out an $80,000-
plus Small Loan Advantage loan in order to expand her--it is a
working capital loan in order to expand her footprint of
pharmacies in rural Georgia. So I was very excited to get that
news because that is exactly the kind of thing that we were
hoping to see with the Small Loan Advantage and we just look
forward to that continuing.
Senator Hagan. Thank you.
Chair Landrieu. Thank you.
We really appreciate your testimony this morning. We are
going to move to the second panel. Any additional questions can
be submitted to Ms. Johns.
And I just want to submit for the record, following Senator
Snowe's comments about the highlights of the GAO study on the
substantial abuses in the HUBZone program, and this is going to
be the subject of our hearing the week of April 14, just to
give everyone notice. We are going to have a two- or three-hour
hearing on streamlining fraud and abuse in the SBA. Of course,
those questions are always relevant in any meeting that we
have, but this Chair feels very strongly about some of those
same issues and we will be going into some detail about the
fictitious firms that filed addresses for HUBZones using The
Alamo in Texas, a public storage facility in Florida, and a
city hall in Texas as their principal office locations that
should have easily been identified as fraud when they applied
and self-certification.
Thank you, Ms. Johns.
The second panel, if you all would come forward and I will
introduce you as you are seated.
To keep us moving, Dr. Robert Fairlie will be testifying
first. He is a Professor of Economics at the University of
California. He has done extensive research on entrepreneurship,
technology, inequality, labor economics, and education. He
testified before the committee last year and we are looking
forward to having him testify this morning.
Our second witness is Marc Morial, former Mayor of New
Orleans and outstanding leader for the city, region, and
nation. He is an entrepreneur, lawyer, professor, President of
the U.S. Conference of Mayors, and is currently serving as CEO
of the National Urban League. We welcome Mayor Morial to be
with us today. He is leading a national effort in this regard
and we are very pleased to hear his strategies this morning.
Our next witness is Susan Allen. Ms. Allen founded U.S. Pan
Asian American Chamber of Commerce. She became the National
President and CEO in 2001 after a 17-year career in law.
President Bush appointed her to the Council of Administrative
Conference of the United States. She is a recipient of numerous
awards and we are looking forward to her testimony,
particularly in regards to the Asian American community.
Doyle Mitchell is our next witness. Doyle is President and
CEO of Industrial Bank, headquartered here in D.C. He also
serves as Chairman of the National Bankers Association, which
was founded in 1927 as the trade association for the 103
minority- and women-owned banks in America. We look forward to
his testimony this morning.
And Martha Montoya is the owner and partner of three
companies, Los Kitos and several others, including a newspaper.
She serves as Procurement Chair and Board member of the
Hispanic Chamber. We are looking forward to hearing her
testimony, as well.
But why do we not start with Dr. Fairlie to sort of lay the
data out, and then we will be hearing comments from men and
women who work in this area to close this gap every day and to
hear from them the kind of strategies that may be working, the
things that they see that are not working, or any ideas that
they would have to share with the committee about how we can
continue to expand opportunities in the development of
minority-owned businesses in our country to help close this
wealth gap that is quite startling.
Dr. Fairlie.
STATEMENT OF ROBERT W. FAIRLIE, PH.D., PROFESSOR OF ECONOMICS,
UNIVERSITY OF CALIFORNIA, SANTA CRUZ
Mr. Fairlie. Thank you, Chair Landrieu, Ranking Member
Snowe, and members of the committee.
Chair Landrieu. Could you pull the microphone a little bit
closer to you, please, and when all of you speak--yes, and pull
the seat in. Thank you.
Mr. Fairlie. Thank you, Chair Landrieu, Ranking Member
Snowe, and Senator Hagan. It is an honor to testify in front of
you on the important topic of wealth and equality and access to
capital for minority businesses.
I am a Professor of Economics at the University of
California at Santa Cruz and have studied small business and
entrepreneurship issues for almost 20 years. I am here to talk
briefly about the findings from my research on the topic.
The great recession ended in December 2009, more than a
year ago, but the national unemployment rate remains above nine
percent. Fourteen million people are still looking for jobs and
a record number have been jobless for more than a year.
Although many people have turned to self-employment in the face
of limited employment opportunities, it is not an easy time to
start businesses.
Small businesses are continuing to be hit hard by the
sluggish economy. The rate of businesses filing for
bankruptcies in the United States is more than twice as high as
it was in mid-2007. Contributing to the high rate of business
closings are the lingering tight credit conditions faced by
small businesses. Housing prices have also not rebounded from
the beginning of the recession, which is important because home
equity is often used to finance business starts.
Minority-owned businesses are being hit especially hard in
the current economy. Research that I and others have conducted
indicates that minority businesses face significant barriers to
entry, growth, and survival, even in more favorable economic
conditions. Minority firms are more vulnerable because they are
generally smaller and have fewer resources to draw on in
difficult economic times. The average minority-owned business
has revenues of $178,000 per year, which is less than 40
percent of the non-minority level. Minority-owned firms also
hire fewer employees and have lower profit levels.
One of the most important factors responsible for these
disparities in business performance is access to financial
capital. A large body of research shows that limited access to
financial capital hinders the formation and growth of minority
businesses. Minority-owned businesses have substantially lower
levels of financial capital invested in their businesses.
The first figure I wanted to show is estimates from the
Federal Reserve, the latest estimates available showing the
amount of equity and loan investments in minority firms. And
what you see is startling low levels of investments, on
average. What we find is that minority firms have about $3,400
of equity investments in their firms, on average, and $46,500
of loan amounts. The levels for non-minorities are more than
twice that level, okay. What I also found doing research on
this is these disparities do not go away when I control for
owner and firm characteristics, and others and I have also
found this in other data sources.
One of the major causes of this lack of access to capital
is the shockingly high level of wealth inequality found in the
United States. The disparity in wealth between minorities and
non-minorities is an order of magnitude larger than income
inequality. So estimates of median net worth are displayed in
the next figure. What we find here is the latest data available
are from 2004 from the Census Bureau, and what we find is that
African American families have $8,700 in median wealth. Latino
families have $13,400 in medial wealth. White levels are over
$100,000 higher and they are nine to 13 times higher than these
levels.
These low levels of wealth are a problem. They translate
into fewer start-ups and undercapitalized businesses because an
entrepreneur's wealth is often used to finance a business.
Entrepreneurs are also frequently required by investors to
invest their own money in the business as an incentive.
Contributing to the patterns in wealth inequality are low
rates of minority home ownership and lower levels of home
equity. The next figure shows the latest data available for
2010 on home ownership rates. What I found is that less than
half of minority families have a home, or own a home, whereas
three-quarters of non-minority families own a home. So there
are major differences in home ownership.
But some new data that I wanted to present shows banking
rates from a new study by the FDIC and the Census Bureau, and
what it shows is a striking number of minority families do not
have a banking account, either through a savings or checking
account. More than 20 percent of Latino and 20 percent of
African American families do not have a bank account, whereas
the level for whites is around three percent. The same data
from the FDIC and Census Bureau show that minorities are more
likely to use higher-cost financing services, such as payday
loans.
Further limiting the ability of minority entrepreneurs to
obtain financial capital is lending discrimination, which I
show in the next figure. What I find here is that minority
firms are more likely to experience loan denials, pay higher
interest rates, and are less likely to apply for loans because
of a fear of rejection in those loans. The minority levels of
applying for loans and getting loan acceptances are more than
twice as high, and minority firms that do get loans pay one-
and-a-half percentage point higher interest rates on those
loans.
The minority-owned businesses make enormous contributions
to the U.S. economy. Businesses owned by minorities produce
more than $1 trillion in total sales, they employ six million
workers, and have an annual payroll of $168 billion. They also
create another six million jobs for themselves as the owners of
those businesses.
In closing, although minority-owned firms contribute
greatly to the economy, there remains a lot of untapped
potential among these firms. As I have discussed minority
entrepreneurs face substantial barriers to obtaining financial
capital. These barriers include low levels of wealth, low rates
of home ownership, low rates of banking, and lending
discrimination. Restricting minority businesses in their growth
ultimately limits total U.S. productivity, job creation, and
innovation, which are all essential for getting our economy
back on track.
Thank you for the opportunity to present the findings from
my research. I look forward to hearing your comments.
[The prepared statement of Mr. Fairlie follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Landrieu. Thank you, Dr. Fairlie.
Before we move to Mayor Morial, could you present to this
committee the Asian American population, because it is helpful
to have African American, Hispanic, and Asian, and if you can
do it today, that is great, and if not, if you would just
submit it, that would be helpful.
Mayor Morial.
STATEMENT OF MARC MORIAL, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NATIONAL URBAN LEAGUE
Mr. Morial. Thank you very much, Senator Landrieu. Let me,
first of all, thank you for calling this hearing and also
Ranking----
Chair Landrieu. Can you speak a little bit closer into the
microphone? I am sorry.
Mr. Morial. Thank you. Is that better?
Chair Landrieu. It is better.
Mr. Morial. Let me thank you for calling this hearing and
for inviting me here today. Also, to Ranking Member Snowe, let
me thank you also for being here today, and both of you for
your leadership.
I want to cover a few areas, and on behalf of the National
Urban League, we are absolutely committed to the growth and the
strength of small businesses with a particular focus on the
nation's businesses owned by people of color.
One, I want to outline four key challenges that confront
minority-owned businesses in the United States. One is the need
for effective communication of programs that are intended to
benefit and assist Minority Business Enterprises.
Two, and Dr. Fairlie has talked about this, access to
reasonably-priced capital through private sector commercial
sources.
Number three, access to Federal, State, and local
contracting opportunities, either prime or subcontracting
opportunities.
And number four, lack of adequately designed measures of
assistance, whether they are poorly designed lending
initiatives or inadequate forms of technical assistance.
Let me say this, because this point should not be lost.
There is tremendous job creating potential in the nation's
black-owned small businesses and other MBEs. Why? If one in
three of this nation's micro enterprises--just one in three--
those are those with fewer than five employees--were to add one
additional employee, we would be at full employment. If one of
three of the nation's micro enterprises added one employee, we
would be at full employment.
Number two, self-employed business owners earn more on
average than wage and salary workers. And there is evidence
that disadvantaged workers have more upward income mobility and
faster earnings growth than disadvantaged wage and salary
workers.
Number three, black-owned firms outpaced the growth of non-
minority firms based on the Census report that just came out,
which studied the period from 2002 to 2007. These are
interesting numbers. The gross receipts of African American
firms increased by 55 percent. Their employment increased by 22
percent. And the number of firms increased by 61 percent. And
while most of the firms in the black community are very small,
African American firms with receipts of $1 million or more
generate a large percentage of all the revenues generated by
all African American businesses. The fact of the matter is that
black-owned businesses in this country remain very small.
Now, if black-owned small businesses reach representative
parity, that is, 13 percent of the U.S. adult population,
meaning if black-owned small businesses were proportionate in
size, there would have been 3.3 million firms generating $1.4
trillion in gross receipts and creating seven million jobs
instead of less than a million jobs.
My point is very simple. Investing in the nation's
minority-owned small businesses is a way to create jobs for
all. It is a way to build the economy of the United States. If
minority-owned businesses, particularly African American-owned
businesses, could grow that fast--notwithstanding all of the
barriers that have been documented and that will be documented
on this panel--it goes without saying that if these barriers
were lessened, if some of these restrictions were loosened,
then these businesses would grow at an even more rapid pace,
which would be good not only for the African American community
and the minority business community, but good for the nation at
large.
A couple of recommendations that we make as the National
Urban League to promote the growth of MBEs. One, raising the
cap for set-aside small business contracts from $100,000 to
$500,000.
Unbundling contracts, that would be helpful in assisting
small and minority-owned businesses to have the opportunity to
bid on Federal contracts.
Number three, increasing Federal procurement goals and the
development of subcontracting plans as well as a more effective
way to monitor, create transparency, and push the agencies in
the Federal Government towards greater performance in meeting
the goals that are already on the books.
And number four, a technical assistance fund, perhaps run
through the MBDA, that could assist minority and other women-
owned businesses.
And finally, the elimination of SBA guarantee fees, and we
suggest the elimination of the guarantee fee on the SBA's new
Advantage Loan initiative. This fee can run from two to 3.8
percent of a loan amount, which adds to the cost of borrowing
and makes it expensive. We applaud the efforts to create new
loan products, but we urge diligence and vigilance on the cost
of these products so that on one hand we are not taking a
powerful step forward and then taking two steps back by simply
making capital so expensive and so burdensome that it affects
growth.
My final point is to share with you the successes we have
had at the National Urban League. We operate today nine
Entrepreneurship Centers. These are small business assistance
centers funded with private dollars. We serve approximately
6,000 businesses a year. We have learned through that
experience sometimes that partnership efforts between the
government and the private sector can yield more benefits.
So let me thank you for your time. Thank you for giving me
this time, and I will be happy to answer any questions.
[The prepared statement of Mr. Morial follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Landrieu. Thank you so much for that excellent
testimony.
Ms. Allen.
STATEMENT OF SUSAN ALLEN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, U.S. PAN ASIAN AMERICAN CHAMBER OF COMMERCE
Ms. Allen. Thank you, Madam Chair Landrieu, Ranking Member
Snowe, for the opportunity to testify before you today.
Chair Landrieu. Turn the microphone on.
Ms. Allen. Thank you, Marc. I need a man in my life.
[Laughter.]
Thank you, Chair Landrieu and Ranking Member Snowe, for
inviting me here to speak to you today. I would like to answer
your first question to Dr. Fairlie. For the Asian American
part, we are about 15.1 million of the population and Asian
American-owned businesses, according to the last Census figure,
that was in 2007, was 1.3 million around the country.
I am Susan Au Allen, National President and CEO of the U.S.
Pan Asian American Chamber of Commerce Foundation. Formed in
1984, we are the only national organization that represents all
Asian Americans in various industries, very broad industries.
We open doors to business opportunities for small and medium-
sized enterprises, working with the government and
corporations.
For the last 25 years, we have established a very strong
record of helping our constituents to plan, develop, promote
the businesses, and business owners, Federal and State
agencies, corporations, the media, academic and research
institutions come to us for our ability to bring people
together from across the country, across ethnic lines, and
because of the quality of our business development programs. We
work in key market areas across the country and reach over
15,000 SMEs, small and medium enterprises, through our six
regional chapters.
I speak today to the salient points that our 8(a) members
experience, and all of my comments are based upon all the
things they have been telling me throughout the years and
especially the last two days.
First, access to capital. The financial crisis has led to
the inability and unwillingness of many financial institutions
to extend credit. This is a catch-22 situation. To grow a
business, you need money--capital to expand, to hire staff, or
pay for marketing, R&D, and to pay your staff and keep the good
ones around, especially, and your wage. While some companies
find small business loans attractive, many banks will not lend
because of perceived risks. Unlike manufacturing companies that
have collateral for a loan, small companies in the service area
do not, so securing a loan is a very difficult proposition for
them.
Although the SBA guarantees 90 percent of the loan, a large
portion of it must be guaranteed through collateral. The
current trend is that banks want to avoid exposure. When a
business defaults, the government may take that bank out of the
preferred lenders list. They do not want that. They also look
at business performance through a much stricter asset-liability
model, that is, high profit, high assets versus liability, net
worth versus debt.
Controlling contract bundling. The Small Business Jobs Act
contains language from S. 2989, called the Small Business
Contract Revitalization Act of 2010, introduced by Senator
Landrieu, you, and Senator Snowe, that addressed the contract
bundling issue. However--however--we need strong oversight to
ensure accountability and give teeth to this regulation so your
intention will be truly carried out, Senator.
In addition, the mindset of some of the Federal key
contract evaluators is an issue. In their mind, they think, if
I select a prominent company, like IBM, I cannot be blamed if
the project fails. But if I pick some unknown company and the
project fails, I could lose my job. These evaluators will
select prominent or what we call dominant companies over
successful mid-sized companies. That is a very harsh reality
that our members face.
Business development--the SBA now has 8,000 8(a) firms in
its portfolio and they provide good basic business services to
the start-ups. However, we need to provide a higher level of
service that links mid-size companies to potential
opportunities and help to transition soon-to-graduate 8(a)
firms into the open market where they could not benefit from
the set-aside programs.
To give effective business development assistance, SBA's
Business Development Specialists should have a manageable
number of companies to help them individually over the nine-
year life of the 8(a) status. In the Washington, D.C. office,
there are supposedly 1,800 8(a) firms assigned to eight or nine
specialists. They also have to monitor compliance by the 8(a)
firms. They multi-task. And today, in these days, compliance is
priority at the expense of business services. So, therefore,
special business services fall short.
If the SBA focuses on compliance, which is required, which
we ask for, and leverage community resources, they could work
with organizations like us, the U.S. Pan Asian American Chamber
of Commerce, on business development. We provide business
development services to the Asian American and other small
business community nationwide. We are on the ground every day--
--
Chair Landrieu. Thirty seconds more.
Ms. Allen [continuing]. Every day, reaching out to small
businesses. We have built a platform conducive to teaming
between small and mid-sized companies.
Finally, past performance is a difficult task for those who
have never gone into Federal contracting but have equally valid
commercial experiences. This is another roadblock for small
businesses who would otherwise be performing very well and
create jobs and benefit the community.
Finally, Senator, we know that small businesses also have
our own role to play. Many got into the 8(a) program and
wrongly think that they are automatically entitled to a
contract. That is wrong. We have been talking to our members
and other members in the small business community that they
need to do their own due diligence, they need to do their
homework, they need to provide good services. They cannot cross
the law. Then they will succeed.
Thank you for the opportunity to testify before you. I have
submitted a detailed statement. I hope that it will be included
in the record.
[The prepared statement of Ms. Allen follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Landrieu. Thank you very much, Ms. Allen, for that
very powerful testimony, and this committee looks forward to
working with you more closely in the future. We thank you so
much.
Ms. Allen. I do, too.
Chair Landrieu. Mr. Mitchell.
STATEMENT OF B. DOYLE MITCHELL, CHAIRMAN, NATIONAL BANKERS
ASSOCIATION
Mr. Mitchell. Good morning, Madam Chair and members of the
committee. I am honored to testify before you this morning on
closing the gap on minority access to capital. I am B. Doyle
Mitchell. I am President and CEO of Industrial Bank, a
minority-owned commercial community bank operating in the
nation's capital and in Prince George's County, Maryland. The
issues that I mention today are vital to each of the States of
the members of this committee, that they represent, and they
are vital to the nation as a whole. Without decisive action and
cohesive leadership from this committee, the Senate, House,
administration focusing in a cost effective manner in the right
place, the economy will continue to stagnate.
Industrial Bank was formed in 1934 by my grandfather to
fill the gap in lending, which at the time was primarily to
African Americans. I am third generation, and we have been
successful in achieving our part of bridging that gap, evident
by the assets of over $380 million, a loan portfolio of $210
million to faith-based organizations, home mortgages, small
real estate investors, and small businesses. The bank is well
capitalized and we have been profitable throughout the
recession in 2008, 2009, 2010--not by much, though.
Ladies and gentlemen, I also represent another very
important organization. In January, I assumed the Chairmanship
of the National Bankers Association, or the other NBA, as we
call it. This entity, as you heard, is over 80 years old and
consists of nearly 50 minority-owned, managed, or focused
insured financial institutions from all over the country,
places like Washington, D.C., Maryland, Pennsylvania, North and
South Carolina, Illinois, Louisiana, and the list goes on.
Our association represents African American banks, Asian
banks, Hispanic banks, Native American banks, and one American
Indian bank, and at one point there was even a woman-owned
financial institution that was part of our membership until
they were acquired by another institution.
Our members and all minority banks focus their lending
efforts in mostly minority communities where evidence of
joblessness is way more pronounced than in other communities,
even in good times. So just imagine what they are going through
now. The unemployment rate in many of these communities is at
least twice the national average. That is everybody's problem.
The effect of unemployment in these neighborhoods impacts us
all via crime, health care concerns, and benefit programs that
provide the necessary safety net for millions of Americans.
People would actually rather work than draw on government-
provided programs.
State and local governments are paying dearly and will
continue to pay if the economy stalls. In Prince George's
County, the foreclosure rate has hit African American families
disproportionately to other ethnic groups.
We know that 80 percent of all jobs in this country are
created by small businesses and the only pathway back to an
economy that allows private industry to work is to employ them
from small businesses.
As the testimony of Ms. Johns reflects, the SBA provides a
very important vehicle for small businesses through the banking
system. Their programs can and have filled the gap that exists
in funding small businesses. Many of these companies have
already tapped the equity in their homes, their credit cards,
and their savings to pursue their dream of entrepreneurship.
The SBA, through its programs, leverages the funding tenfold.
The returns to the economy are tremendous. They should be fully
funded. The 90 percent guarantee program should be extended or
even reinstituted, if necessary, for another two years, if not
made permanent. Also, the elimination of the fees or at least
the reduction of the fees from the traditionally high levels
should be instituted.
Last year, the Industrial Bank provided an SBA loan to an
entrepreneur that opened an International House of Pancakes,
IHOP store. That store created 120 full-time jobs. It is
running around the clock, 24 hours a day. They even deliver
nearby. And many of these jobs were young people looking for
employment, but many were also individuals that had been laid
off and been looking for a job for a long time. Some had
significantly higher-paying jobs, but accepted employment there
just to make it through these tough times, and the store is
doing very, very well.
More money, not less, should be invested in the SBA and its
loan programs. It is a good government solution that provides
returns to the economy and taxpayers.
The Department of Transportation has a short-term lending
program, basically for a line of credit, for companies, DBEs,
that have Department of Transportation contracts. This program
should be applauded, as well, and financially supported. The
committee should consider encouraging other agencies that do
not have such a lending program----
Chair Landrieu. Thirty seconds, please.
Mr. Mitchell [continuing]. To develop similar types of
programs.
Finally, the Small Business Lending Fund that is currently
being administered by the Treasury Department is an excellent
example of how government can incent community banks to lend
more by providing them short-term capital. If I had one
suggestion on this program, it would be this. The rate resets
to nine percent in four-and-a-half years, which is a very high
rate and due in a very short period of time. I understand the
reason for resetting to the higher rate to encourage quick
repayment to the Treasury. Most small businesses have loan
repayment terms of five to ten years, the average being about
seven. The Small Business Lending Fund would be more effective
and attractive if the interest rate reset period to nine
percent were amended to seven percent, and we just ask that the
committee consider making that minor adjustment in such an
important program.
Thank you.
[The biography of Mr. Mitchell follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Landrieu. Thank you, Mr. Mitchell, and we appreciate
that and that is very timely as we try to implement the
concepts of that program. Some adjustments may need to be made.
Ms. Montoya.
STATEMENT OF MARTHA MONTOYA, PROCUREMENT CHAIR AND BOARD
MEMBER, U.S. HISPANIC CHAMBER OF COMMERCE
Ms. Montoya. Madam Chair, it is an honor to testify before
the Senate Committee on Small Business and Entrepreneurship. My
name is Martha Montoya. I am the President of several
enterprises, Los Kitos Produce, in the business of growing and
getting fruit from the field to the supermarkets and
restaurants and commissaries. In fact, we have farms in North
Carolina, converting them from tobacco to strawberry growers.
Currently, 95 percent of our Hispanic businesses do not fit
the lending profile of banks. We are too small for private
equity funds, receive minimal attention from venture capital
firms, yet we are the fastest-growing segment of the entire
country. Even the landscape and alarming lack of capital
available for Hispanics and entrepreneurs, we are coming up
with capital solutions for you on behalf of the United States
Hispanic Chamber of Commerce.
With regards to the public sector, the biggest solution we
see is the CRA, the Community Reinvestment Act, funding into
our communities. Let me give you an example. Under the CRA
program, Rabobank retained us to bring financial management
training to Hispanic and minority growers at the local level
throughout California. They needed this training because they
grow things well, but they are not good in financial management
and do not manage their banking relationships well. This is a
key reason why they are unable to get banking financing.
I have very capable growers who are struggling to even get
the crops into the ground without adequate financing. In fact,
I have one grower for Washington State present today. I have
seen good growers unable to get their products to markets
because they could not afford to pay the packing house fees as
a result of their not being able to get a line of credit from
the bank.
This story of lack of access of capital is repeated
everywhere across the U.S. for Hispanic growers. It is a crying
shame, because there are over 80,000 Hispanic growers in the
United States and they are doubling per year. With proper
access to capital and bank financing, Hispanic growers can make
a significant contribution to the food supply of the country.
Needless to say, farmers were the original entrepreneurs of
this country.
It is clear that CRA funding could serve as a vehicle for
the following reasons and actions. One, equity funds for local
banks, investment funds, and others with more flexibility to
deploy funds and with a higher level of patience for returns.
Second, large-scale banks to deploy the CRA funding
themselves and work the ground while training the next
generation of minority bankers.
Third, request a minimum of 25 percent of CRA funding to go
to rural areas. Why? It will motivate and unlock the creativity
in our rural areas and growth.
Fourth, match CRA funding with local financial tools from
SBA and others. That way, the burden of infrastructure capital
will create sustainable jobs for the next two to five years.
In terms of private sector, we need more companies to
demonstrate the leadership that we see from Goldman Sachs in
the creation of Goldman Sachs 10,000 Businesses Program.
Visionary corporate leaders like Lloyd Blankfein and Warren
Buffett understand that America's small businesses are the
backbone.
I would say, also, the third is the access to contracts and
access to capital are a symbiotic relationship. You need both
simultaneously in order to give and survive business. However,
they seldom arrive at the same time, and because of this, only
companies that become completely creative can adapt to the
environment. A business is required to demonstrate financial
stability and growth in order to become a supplier, yet the
bank will not talk to you unless you already have a significant
track record.
We need more training through the small business or the
financial. I, for example, received through Walmart Corporation
a Dartmouth Tuck University program called Building a High-
Performance Minority Growth in all the financial tools to grow
the business.
I think that more important is the fact after 25 years
traveling around the world and seeing how many of our programs
go to those countries and are so flexible for the business, yet
in this environment, the minorities is less flexible.
I thank you so very much for your time. I trust and hope
that my personal community and business experience allow you to
glimpse of what I see the terms and solutions that are just at
our hand.
[The prepared statement of Ms. Montoya follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Landrieu. Thank you, Ms. Montoya. The Hispanic
community is very fortunate to have you as a leader, and all of
our country is. We really appreciate the passion.
And I am so excited about this testimony and the many
specific recommendations that we have heard about ways that we
can reduce the barriers that I outlined just a few of them, and
you all have really built upon that and I really appreciate it.
I wanted to ask, starting with you, Ms. Montoya----
Ms. Montoya. Yes, ma'am?
Chair Landrieu. I, too, am familiar with this Goldman Sachs
initiative and am very impressed with it. One of the reasons I
happen to be familiar is because one of the cities that they
happened to choose is New Orleans, so much to my joy and
happiness, they have established this initiative in New Orleans
and I think in 20 or 30 other communities around the country.
Could you describe just briefly, and we are going to do
this for another five or ten minutes and then go to our third
panel, but could you describe briefly why you are impressed
with the program, the components of it? And I think, Marc, you
are familiar with it, too, and I would like to ask--you are on
the Advisory Board. I would like to ask you to comment about
it, as well.
Ms. Montoya. Being on the ground, I will talk from the
ground, bottom up. They have been working with the local
community leaders, meaning that they really, instead of using
bankers of their own, they come to the local community leaders
and then they use organizations that have been on the ground
longer with a little bit of track history, understanding that
there is some flexibility that you need, that sometimes your
score is not that great, that sometimes your interest in the
employees, the way you report employees, are not that great,
different angles that you normally, you need to buffer in order
to be able to present to a bank. So it has allowed the
organizations to have that patience to clean them up in order
to bring them into the banking system. So that is number one.
And number two, because they are definitely being patient
with the program, because it is a different type of program
than the regular banking program, and that gives them a little
bit of flexibility for reporting to the institutions here and
their regulators.
Chair Landrieu. Okay.
Mr. Morial.
Mr. Morial. Let me--should raise the profile of the Goldman
Sachs 10,000 Small Business Program, and I would say its
promise and its success is based on, number one, it is a
partnership between Goldman Sachs, people at universities like
Wharton, and community-based organizations, of which the
National Urban League, the U.S. Hispanic Chamber, and other
organizations are part of it.
Secondly, its focus is, in effect, an entrepreneurs' boot
camp where businesses are selected to participate in what is
probably about a four- to six-month highly intensive technical
assistance, hands-on training regimen, the result of which is
to develop for each business that participates in the program a
growth plan, if you will.
A couple of observations. One, the investment in a very
specific curriculum designed primarily by Wharton, which is
designed for the hands-on entrepreneur, it is not overly
academic nor too pedestrian. It was designed to fit the
entrepreneur who wants to grow their business.
Number two, it is not a program for the start-up. It is a
program for the person who has made a commitment to
entrepreneurship and has, in effect, fallen down, gotten up,
has, in effect, some sweat in the game already.
And then I think, number three, with the endorsement of
Goldman and people like Warren Buffett and an advisory board
and partnerships, the hope is that they are going to be able to
connect those businesses with capital opportunities. One focus
area that I know this committee is familiar with is the CDFI
community, the Community Development Financial Institutions, of
which there are many. The National Urban League is just in the
process of creating one. So they try to connect these
businesses at the conclusion of the program, at the successful
completion of the program, with CDFIs.
I would also point out that we at the National Urban
League, in fact, hired a firm that graduated from the program
to provide security at one of our special events. And so this
is a great program and I would emphasize that it is the kind of
thing that demonstrates what the private sector can do in a
very real way, and there is no government money but there is
significant government endorsement and support towards this
program.
Chair Landrieu. Well, I appreciate that.
My last question, and then I will turn it over to Senator
Snowe, is for Dr. Fairlie. This Goldman program, I think, can
serve as a model of the kind of partnership that I am hoping
the SBA and our community banks and other potential partners
can develop. We will be interested to see how it pans out,
because at the end of the program, I think, you actually get
$25,000 or $35,000 or some significant amount of money to
invest in your business.
But, Dr. Fairlie, anything you want to add? You submitted
some wonderful testimony, but is there anything that you think
the panel did not touch on that you would like to add, and then
I am going to turn it over to Senator Snowe.
Mr. Fairlie. Well, I guess one of the things that, you
know, in your kind of opening remarks that I think was really
interesting is this issue about how people are very surprised
by the wealth inequality. One of the things that I found in
preparing for this testimony is that it has actually gone up,
right. The difference before was $80,000, roughly, between non-
minorities and African Americans and Latinos, and now that
wealth disparity has increased to $100,000, at least the latest
data that are available from the Census Bureau.
And home ownership, I looked at those trends and they
really have not changed, either. We really do not see this kind
of improving trend. And I think that, as you mentioned before,
that we want to kind of encourage responsible home ownership, I
think that is actually really important as kind of a long-term
strategy here.
And the new numbers that I found from the FDIC on banking
rates were shocking in the sense that 20 percent of industry
families do not have a bank account. I mean, that just seems
kind of like a basic part of our attachment to being able to
build wealth, to being able to kind of participate in kind of
financial services.
And I also mentioned about the payday loans. A lot of
minority firms also use credit cards to finance their
businesses. These are higher-cost financial services, and there
are a lot of alternatives out there and it seems like that
maybe financial literacy or some kind of programs that could
help that would really be useful.
Chair Landrieu. Thank you so much.
Senator Snowe.
Senator Snowe. Thank you.
I will continue with you, Dr. Fairlie. In your research as
well as in your testimony, you indicated that minority-owned
firms are more likely not to apply for conventional loans from
conventional lenders due to rejection fears, and you said among
firms with gross receipts under $500,000, 33 percent of
minority firms did not apply for loans because of fear of
rejections, compared to 17 percent of non-minority firms.
What would you say with respect to the SBA's track record,
which I think is reasonably good when you look at specifically,
as I mentioned in my testimony, regarding the micro loans, 46
percent of SBA micro loans went to minorities. There were 21
percent 504 loans, 22 percent of the SBA's 7(a) loans. What
would you think about the average minority entrepreneur--and I
would ask others, as well--on behalf of your constituencies,
about how they view the SBA's lending track record and do they
apply, or do they view these loans as obtainable, or do they
fear rejection from the SBA, as well?
Mr. Fairlie. You know, that is a good point. The data do
not have that kind of information in them, unfortunately, so it
is not clear of this 33 percent of minority firms that are not
applying for a bank loan because of fear of rejection, if that
is directly for an SBA-backed loan or if it is kind of a more
sort of traditional loan from a bank account. That would
actually be very useful information to know. I have not really
heard any kind of anecdotal evidence on that, either,
unfortunately.
Mr. Mitchell. The fact of the matter is, you have to go
through a bank to get to the SBA, so----
Senator Snowe. That may be the starting point.
Mr. Mitchell [continuing]. It is not as if they would go
around the bank.
Senator Snowe. Okay. So that may be--the point of entry
still----
Mr. Mitchell. Absolutely.
Ms. Montoya. Still the bank.
Senator Snowe. Yes, Ms. Montoya.
Ms. Montoya. And I think the important point for us in the
Hispanic community, the bankers are not culturally sensitive or
language adaptable, and so in our case, going, it is a waste of
time and it is like talking two different languages and two
different cultures. So that, I think, is the biggest thing.
That is why I insisted on the training through the CRA programs
for the banks, because we need the banks to train more people
on the ground.
Senator Snowe. I see.
Ms. Allen.
Ms. Allen. Yes. This is anecdotal. Two points. Some of our
members who have expressed to us that getting a loan through
the SBA just costs too much money than getting the private
market.
Second, there are some banks who are very aggressive, like
Wells Fargo Bank is, I think, is the number one lender of SBA
loans. I do not know what they did, but they have been very
successful. Maybe there are some best practices there that we
could----
Senator Snowe. Who was that?
Ms. Allen. The Wells Fargo Bank.
Senator Snowe. Oh, Wells Fargo. Okay.
Ms. Allen. They might have some best practices that we can
learn from. However, overall, other folks that I have talked to
in the Asian American business community is, if I cannot get it
from the regular bank, I ain't going to the SBA because it
costs me a few more points.
Senator Snowe. That is interesting. Well, it is clearly
something--Mr. Morial?
Mr. Morial. I would just affirm everything that has been
said, but also to highlight the need for greater visibility for
the SBA programs.
Senator Snowe. Yes.
Mr. Morial. Mr. Mitchell made a very important point. You
go to the bank. So in the mind of the business, unless you go
to the bank, you are not even going to be aware of, perhaps,
the availability of loans through the SBA. So there is a
greater need for visibility about all of the programs that
exist and that are available.
Senator Snowe. Well, that is an interesting point. We have
that problem sometimes across the board, interestingly enough,
in communicating and getting the message out overall to
entrepreneurs and probably more especially among minority
communities. So that is clearly something we have to figure
out, which leads me to the next question, because as you heard
Ms. Johns refer to the new programs that were created, were any
of your organizations consulted in the drafting or the
development of these two programs, and by using other lenders,
like CDCs, the Certified Development Companies and so on, does
that help in any way, or is that still a barrier?
Mr. Mitchell. We were--Industrial Bank, we were--and the
National Bankers Association--we were not consulted. But I have
to say this about the SBA, that over the years, and
particularly in the last two or three years, the SBA has
improved its processing times tremendously. I believe that
these new programs are very much needed programs. In meeting
with Ms. Johns and Michael Grant, the President of the NBA,
about a month or so ago, I was very impressed with how they
have changed the administration at the SBA. They do need
funding so that they can eliminate or reduce some of their
fees, because traditionally, they are very expensive.
Senator Snowe. Ms. Montoya.
Ms. Montoya. In L.A., we had a wonderful Hispanic guy who
was the number one SBA gentleman, but I understood why, and we
discussed this, it is precisely because of the fact that he is
culturally sensitive to the variables that happen. So, no, we
were not consulted, but I understand that they are overwhelmed.
And these programs in particular, we are hearing about it
through the different people, but not really because they are
targeting through the banks or the banks are not coming to us.
I am concerned about that. Why is it that the banks are not
visiting us? I think that there is one suggestion I have. There
is the famous HR one that is about the training, workforce
training, that might be effective, and my suggestion was to try
to get the banks to apply for this type of workforce training
so we can train more bankers.
Senator Snowe. That is a good point.
Ms. Allen.
Ms. Allen. We have a regional chapter in California that
covers the Western Region. We have a very good, close working
relationship with the SBA in San Francisco. The L.A. office has
some leadership changes and we are still trying to figure out
who to work with.
But unfortunately for the headquarters here, in the last
two years, we have not been reached, and this is the first time
I have met Marie Johns. I tried to call her, and I told her
today, I said, I am glad I got to meet you. I had to come here
to meet you. I hope that the SBA would be more proactive in
reaching national organizations like us. I do not know about
Marc, but we have absolutely been absent at the table. During
President-Elect Obama's transition, I was at the table for
seven meetings from the SBA to the International Trade, and all
of a sudden, they just dropped dead. They were so concerned
with compliance or whatever.
And they had a conference or a summit in California where I
have a major chapter. I did not know about it until--when I
found out, the registration was closed. So maybe with your
influence, they could reach out more.
Senator Snowe. Absolutely. That is a message we will
definitely convey, if they have not already heard it right now.
Absolutely. Very important.
Mr. Morial. In our case, our position papers were
consulted, so----
[Laughter.]
We have a 12-point jobs plan. We last year had a six-point
jobs plan. And we have advanced some of the ideas that the SBA
has embraced in creating new, more available and accessible
loan products, and we think those are important steps in the
right direction.
I would again point out the guarantee fee, which means a
good product, you could add an expense and a cost to it that
makes it burdensome and makes it more expensive.
And secondly, just indicate the need for continued
extensive outreach. Ms. Johns did share with me today that they
are about to do some--take some steps toward outreach, and I
think organizations like ours are just an incredible resource,
because we touch 6,000 small businesses in nine cities and
probably another, you know, I am sure, 5,000 to 6,000 in other
communities, and people come to our organizations as trusted
conduits for information. Where can I go? What can I do?
Because we are not the government and we are not the bank, so
people sort of look for us to say, this is a program. Maybe
that one may not be so good. Why do you not check out this
person at that bank, because that is the SBA lender at that
bank in your community.
So we are a continuing resource for you here at the
committee, for the SBA, and for everyone that wants to really,
really grow our businesses.
Senator Snowe. Thank you.
Mr. Mitchell. If I may just add, given all the
conversation, I think----
Chair Landrieu. We need to conclude this panel. We want to
get to the third panel.
Mr. Mitchell. Yes. I think it makes it evident, the
importance of minority banks and community banks all around the
country, because community banks are the ones that are really
doing the lending to small businesses and that is on what I
call Main Street and Urban Street, and that is where our banks
operate. Thank you very much.
Chair Landrieu. Well, thank you, and I know that Senator
Snowe will join me in opportunities to promote this outreach,
potentially by the two of us doing some field hearings or
conferences specifically bringing organizations like this
together with the SBA, because we are very serious about making
these connections.
We thank you for the work that you do. We want to make sure
the Federal Government is doing its part. Thank you so much.
And we will get to the third panel. Thank you so much. Our
third panel today are two representatives of the Federal
Government. One is the Inspector General for the Small Business
Administration, Ms. Peggy Gustafson, and our final witness
today is Mr. Greg Kutz, Managing Director of Forensic Audits
and Special Investigations for GAO. His report has been
referenced several times today.
If you all would come forward, we thank you so much on the
second panel.
Ms. Gustafson, we will start with you. We thank you for
being here and for waiting patiently, both of you, for this
third panel.
We are going to probably continue this hearing until ten or
15 minutes after 12:00. We will give you all time for your
opening remarks. I know you prepared five minutes. If you can
shorten it at all, that would be great and we will get right to
questions, but please feel free. You have been very patient.
STATEMENT OF PEGGY GUSTAFSON, INSPECTOR GENERAL, U.S. SMALL
BUSINESS ADMINISTRATION
Ms. Gustafson. Senator Landrieu and Senator Snowe, thank
you very much for the opportunity to come speak to you today.
Based on my discussions with committee staff, I am going to
focus my testimony on issues we found both through the
investigations and audits in the government contracting
procurement area, though, of course, I am always happy to
answer any questions you may have about SBA programs and issues
we may have in those programs.
Now, getting right to the area of the criminal
investigations that we undertake involving procurement fraud,
generally, most of these cases involve people who are either
making false representations in order to be accepted into a
program where preference is given to those types of contractors
or there are schemes set up or illegal deals, as it were,
between a small company and a large company where basically the
small company is simply being used as a pass-through and
actually the money from the government and the work is being
done by the large company, and in many instances, of course,
contrary to the regulations and to the laws. And so those are
most of the types of cases we see.
For example, we recently had a guilty plea where there was
an 8(a) firm that was actually being managed and controlled by
a non-disadvantaged individual against the regulations that
specifically state how the firms are supposed to be managed and
had obtained over $5 million in Federal contracts and
eventually was convicted of that.
We have had an instance where there were people--there was
a person claiming falsely to be a service-disabled veteran and,
again, was receiving that preference and had received over $16
million in Federal contracts and has now been indicted for that
fraud.
And we have had actions under the False Claims Act where
companies are claiming to be in a HUBZone, Historically
Underutilized Business Zone, and again receiving contracts on
that. We have gotten some recoveries, including a recovery of
over $1 million from one company who was falsely claiming to be
in that HUBZone.
Now, many times, our ability to prosecute this type of
contracting fraud is hindered by the fact that, in general, the
government is not assumed to have suffered a loss in these
instances, which is to say the government paid for services and
they got services in return. And many times, that makes these
cases very unattractive to prosecutors who are dealing with the
Federal Sentencing Guidelines that are ending up with these
cases resulting in very small fines, little or no jail time.
I do want to thank the committee for their hard work in
getting the presumption of loss language that has been
discussed briefly into the bill. I will suggest to you, as you
know from my testimony and from conversations we have had, we
do have legislative proposals that we hope the committee is
able to take that would go even further and would actually make
it--would statutorily mandate that when a contract is awarded
to a company that has gotten that under false pretenses, the
amount of loss is not just presumed to be the amount of the
contract, which is sometimes rebuttable. They can come back and
say, well, no, you got services in return. Instead, it is. It
defines it as the loss and it takes away their ability to rebut
that presumption.
And I think that would go a long way to getting some much
more serious jail time and some much more hefty fines from
these companies. A lot of times, nothing is a better deterrent
than the proverbial perp walk of somebody going in cuffs, and
especially if they are getting time or if it is really hitting
their pocketbook, because these are big contracts. The more
that you can do that, the greater impact you are going to have.
As mentioned prior in this hearing, suspension and
debarment is a key tool that the government has to stop some of
this activity, because if you can cut off the ability of these
wrongdoers to get government contracts, you are really hitting
them where it hurts.
Senator Snowe, there has been some discussion about some
statistics. I will tell you that we will work with the agency
to get you the statistics and make sure that we are doing
apples-to-oranges and you know exactly where these cases are,
because I think there is a little confusion going on there and
I just want to make sure that we will do that.
We do applaud the agency. I think they are doing a better
job. I think they were doing such a not better job for a long
time that there is a way to go, but I appreciate that the
agency has reached out to us. We are working with them and the
proof will be in the pudding. And so it will be interesting
going forward to continue to have this discussion and see how
we do.
To give the agency a little credit, I have to say,
suspension and debarment government-wide is a widely under-used
tool, so they are not the only ones who really need to get a
lot better at it.
I am going to cut it short there. Again, I am happy to talk
to you, look forward to talking to you about any audits.
Looking forward to April and hopefully the next hearing,
because I am very appreciative of, Senator Landrieu, your
commitment to doing oversight hearings. I am here when you want
me and I look forward to it, so thank you very much.
[The prepared statement of Ms. Gustafson follows:]
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Chair Landrieu. Thank you.
Mr. Kutz.
STATEMENT OF GREG KUTZ, MANAGING DIRECTOR OF FORENSIC AUDITS
AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT ACCOUNTING OFFICE
Mr. Kutz. Madam Chair, Ranking Member Snowe, thank you for
the opportunity to discuss the 8(a) program. Today's testimony
highlights the results of our 2010 investigation into
allegations of fraud and abuse in this program.
My testimony has two parts. First, I will discuss cases of
fraud and abuse, and second, I will discuss the importance of
having effective fraud prevention controls.
First, we receive dozens of allegations and leads related
to fraud and abuse in the 8(a) program. We invested 14 of these
cases, as Senator Snowe mentioned, which often included more
than one firm. We found that as of January 10, these 14
ineligible firms had received $325 million of 8(a) sole source
and set-aside contracts. In addition, they received $1.2
billion of other Federal contracts, including $17 million
related to the Recovery Act.
The key program eligibility requirements we looked at as
part of this fraud investigation, just to go over those again,
include, first, firms must be owned at least 51 percent and
controlled by socially and economically disadvantaged
individuals. Second, the firms must have reasonable potential
for success. Third, firms must perform 15 to 50 percent of the
work on their own. And fourth, they must be a small business.
A few examples of the fraud and abuse that we identified
include one owner misrepresenting her ethnicity; another owner
failing to report joint ownership in over $4 million of real
estate; another owner with a $2.5 million home on a private
island, a Lamborghini, and a $450,000 yacht; another owner
whose tax return showed over $1.9 million of wages and over
$100,000 of tax-exempt interest income; and finally, front
companies funneling 8(a) contracts to an ineligible firm that
had left the program in 2001.
With respect to fraud prevention, we found some strengths
and weaknesses at the SBA. For example, several strengths in
the application process helped prevent three of the bogus
applications that we filed from being approved. The review of
these applications appropriately raised questions about our
firm's income, assets, and potential for success. However, we
were successful in obtaining certification for a fourth bogus
firm.
Key weaknesses that we identified include SBA's lack of
independent validation of key owner information, including
assets and net worth. In addition, SBA often does not perform
thorough annual reviews for 8(a) eligibility. For example, case
file information had tax returns that showed that the firms
were no longer eligible for the program. And as Ms. Gustafson
said with respect to enforcement, historically, enforcement has
not been necessarily an effective tool here for this program.
We have provided six recommendations to SBA to strengthen
their fraud prevention controls and they have taken action on
some of those recommendations, while implementation of others
is in progress.
In conclusion, for just 14 cases, we identified $325
million of fraud and abuse in this program. The victims of this
fraud and abuse are not only taxpayers, but legitimate socially
and economically disadvantaged firms. And along the lines of
the hearing today, one way to expand access to legitimate firms
to the 8(a) program is to prevent the kind of fraud and abuse
that we identified.
Madam Chair and Ranking Member Snowe, that ends my
statement and I look forward to your questions.
[The prepared statement of Mr. Kutz follows:]
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Chair Landrieu. Thank you very much.
I appreciate, Ms. Gustafson, your testimony as being
confirmed, I guess, over a year and a half ago now----
Ms. Gustafson. About so, yes.
Chair Landrieu [continuing]. By this committee. What would
you say you found when you came into the SBA in terms of
oversight for fraud and abuse and what you are finding now, I
mean, in comparison to existed prior to you getting there and
now? I am going to ask you the same, Mr. Kutz.
Ms. Gustafson. Senator Landrieu, as you noted, I was
confirmed in September. I started in October. And so what I
found when I got there, I would say, is a longstanding attitude
of SBA that enforcement was really kind of anathema to what
their mission was, and in some ways it is because they are
there to promote small businesses, make sure that the small
businesses are getting the contracts and the access to capital
that they need. And often, enforcement, both in the lending
area and the contracting area, is contrary to that in some ways
because you are--it runs counterintuitive to promoting as much
as you can and encouraging as much as you can.
I have been heartened in the year and a half that I have
been there by the attitude and by some of the actions that have
been taken since I have been there, like the insistence that
they will be serious about enforcement. I think the message
from the top has been exactly the right message. I think the
movement that they have done in the suspension and debarment
area to really shore it up and to be not as afraid to suspend
companies as they were, because I think they had had a
traditional theory of unless there was a conviction, you know,
they would suspend or debar you if you had been convicted of
something, but before that, there was a real hesitancy, and I
think they have made definite indications that they are willing
to protect the government's interest before that happens, which
is why suspension and debarment is there.
Again, there has been some very good movement. The right
things are being said. It is a big battleship, like everything
else, that takes a while to turn, and that is why I look
forward to continuing the oversight of our office, to having
the authorizing committees kind of keep them on their toes,
because it is hard to change a culture and there is a little
bit of a culture change that has to be done and seems to be
being done in SBA.
Chair Landrieu. Mr. Kutz, you have been with the GAO since
1991, so you have got over a ten-year history--well, it would
be 20 years----
Mr. Kutz. Almost 20, unfortunately.
Chair Landrieu. Almost 20.
Mr. Kutz. Yes.
[Laughter.]
Chair Landrieu. Getting tired----
Mr. Kutz. I had a lot more hair when I started.
[Laughter.]
Chair Landrieu. I should be able to add that, at least. But
over 20 years. Is your view the same as Ms. Gustafson just
testified, or do you see it differently as opposed to the
change over the last, let us say, ten years or so?
Mr. Kutz. My experience with SBA only goes back three or
four years, so even though my GAO experience is 20. But I would
say when we started three to four years ago, the culture of
advocacy versus enforcement was clearly there, and it still is
to some extent. But service-disabled and HUBZone were basically
self-certification, rubber stamp-type programs. HUBZone has
moved forward and they are making good progress, although there
are still issues, as you mentioned earlier, about The Alamo, et
cetera. Eight-A had the strongest controls of the three
programs that we have looked at, but as our report last year
shows, there is still room to grow there. So I think they have
taken some steps in the right direction, but there is still
quite a ways to go.
Chair Landrieu. Thank you.
Senator Snowe.
Senator Snowe. Thank you both for outstanding work. Again,
it is essential we make sure that all of the taxpayers' dollars
are being spent efficiently and legally, and that is the key
here, and all the more so given the fact that we have enormous
deficits, and so trying to exact the oversight that is
essential, especially now.
But more importantly is, to the point that you were making,
Ms. Gustafson, about the idea that we have to create an
environment to make sure that we do not create any
disincentives, whereby people or companies or organizations
feel that they can utilize and take advantage of these programs
illegally or unethically. So I think that this is the issue
that we need to revamp, especially on the question of how we
can increase the penalties, and also to exact responsibility on
the part of the agencies, as well, not make it so optional in
terms of whether or not they take action.
Now, on the 26 that you cited and that I referred to
earlier to Ms. Johns, can you explain to me in any way at this
point about the three in which they did take action, but what
happened to the remaining 23?
Ms. Gustafson. Yes, Senator Snowe. I do have some
information on that and I think that there was some confusion
about my testimony, and I apologize for that, in that the three
that I was discussing that I was giving the agency credit for
because they deserved credit for being out there on that was
not the only subset of the 26 where action had been done.
So just--what I can give you right now, and again, I will
get back to you with more specifics, of the 26 universe with
more specificity, the agency has declined to do anything in six
of those cases. They have suspended eight. There are two
pending. They have debarred six. Two of those cases were
actually debarred by somebody else while SBA was kind of
deciding what to do. And two, there were warning letters sent.
So there was more action taken than was, I guess, implied by--
--
Senator Snowe. What generally is the reason for an agency
not taking action? Too expensive, or they do not have the
personnel? What is the issue here, because I am not sure that I
understand, even if somebody is out of the program.
Ms. Gustafson. I really think it is a mind----
Senator Snowe. The fact that they violated the law----
Ms. Gustafson. I really think it is a mindset. There is a
risk aversion to doing something affirmative like suspension
and debarment. And again, I think it is probably government-
wide. That really is not warranted, given what the suspension
and debarment program is supposed to do, which is to say--it is
a tool there pre-conviction. Before you can get to the point
where you have proven somebody guilty by reasonable doubt,
there are ways to protect the government's interest when you
think that somebody is acting unethically or illegally, you
know, doing things in opposite to the way the program is to be
run, and I am kind of amazed at that.
I mean, I am kind of amazed at that because you really do
need to be out there and be a stronger protector for the
interests, and that is why I say I do think the current General
Counsel, the Deputy General Counsel, they have been very
aggressive in these matters and we as an office have been very
appreciative of that, because they have reached out to us.
But again, when I talk about turning the ship, there are
people who have been there who just are honestly almost
terrified of the thought of getting out there and suspending or
debarring people. That is the best that I can explain because I
do not explain it--I cannot--I do not understand it past there.
Senator Snowe. Right. I understand what you are saying----
Ms. Gustafson. Right.
Senator Snowe [continuing]. But that is very helpful to us
in trying to determine how to proceed on those issues----
Ms. Gustafson. Okay.
Senator Snowe [continuing]. Because, clearly, action is
warranted and we have to reverse that culture, any inhibition
that exists in taking proactive action, frankly.
Ms. Gustafson. Right.
Senator Snowe. I mean, when you are talking--just thinking
this cumulatively across government-wide, all the agencies----
Ms. Gustafson. Right.
Senator Snowe [continuing]. The millions, if not the
billions, that might be out there that have been
misappropriated, you know, utilized illegally.
Ms. Gustafson. Exactly. Yes.
Senator Snowe. So I appreciate your work in that regard and
we would like to have those numbers that you have.
Ms. Gustafson. Oh, absolutely, yes.
Senator Snowe. You will? You will submit them?
Ms. Gustafson. Yes, I will.
Senator Snowe. Okay. Mr. Kutz, on the 14 ineligible firms,
what happened within the agency? I noted in the report here, as
well, that there was an indication the SBA staff who were
responsible for assessing firms' continued eligibility did not
always follow established program criteria during the annual
review process. So what was the case? So were there existing
standards and criteria by which these ineligible firms could
have been initially detected?
Mr. Kutz. Yes. I mean, someone making $1.9 million a year,
based upon historical case law and now in the new regulations,
I believe, would not be eligible for the program. Yet there
were case files that SBA had reviewed, and in several cases had
seen and we had talked to them about, and they did nothing to
address those at that time. There were three of those where
they knew and they left them in the program, and they got new
contracts afterwards.
Senator Snowe. Boy, that is really hard to understand. That
is amazing, because, really, it was a simple effort, but you
also pointed it out to them and they did nothing.
Mr. Kutz. Right. I mean, you had deception in most cases,
but in several cases, right there in the file was the
information----
Senator Snowe. It was transparent and obvious.
Mr. Kutz [continuing]. It was there, and then even once we
made them aware, they did not really take action. That gets
into the culture a little bit, too, I think, of not taking
aggressive action, especially when those companies that we know
are ineligible got new contracts after that.
Senator Snowe. Well, you know, that is amazing. It is like
shrugging your shoulders, oh, so what? I mean, that is just
unacceptable and that is very important that we address,
because the bottom line is that those who are legitimate firms
that should be eligible for these funds are not able to get
them because somebody else is using them illegally. So it
diverts the funds from the good actors because of the bad
actors----
Mr. Kutz. I agree.
Senator Snowe [continuing]. Let alone what they are doing
with taxpayers' money.
Mr. Kutz. Yes.
Senator Snowe. So we have to aggressively pursue this, not
only in this agency, in every agency with respect to how we
deal with individuals and companies inappropriately using
taxpayers' dollars. It really is stunning, to be honest with
you that agencies are not aggressively pursuing it.
Finally, the SBA has developed two new programs that Ms.
Johns referred to. One of the programs requires lenders to
maintain at least 60% of their loan portfolio in low to
moderate communities, including to businesses with 50 percent
of their workers residing in low to moderate communities. Is
there a way of making that determination? I mean, through self-
certification, is that not a prescription for more fraud?
Mr. Kutz. Yes, that would be the same thing as a service-
disabled veteran-owned small business now, with the exception
that VA has that bid certification process. But the rest of the
service-disabled program is still essentially self-
certification, just like that, and we have seen massive
potential for fraud in that program.
Senator Snowe. Yes?
Ms. Gustafson. I would just add, it is also kind of similar
to the HUBZone program. One of the biggest weaknesses in the
HUBZone program is there is a requirement that a certain
percentage of the people in the company getting the contract
live or attempt to maintain a residence in that area.
Honestly, I am not sure how you enforce that. I mean, I am
not sure how you go and prove beyond a reasonable doubt there
has not been this attempt to maintain and where these workers
are living, and do you stop them from moving or do you fire
them? I mean, that is, I think, an inherent weakness when it is
that kind of measure.
Senator Snowe. I see. Yes, that kind of measure.
Ms. Gustafson. Yes.
Senator Snowe. So that probably should be adjusted and a
different standard.
Any other recommendations? The SBA implemented five of the
six recommendations.
Ms. Gustafson. Mm-hmm.
Senator Snowe. Have they set up an appropriate measurement
for accountability and certification, and do you----
Mr. Kutz. Yes. One of the things that the first witness
mentioned is they have tightened up certain regulations that
are effective, I think, March 14, and that has addressed
certain more specifics about eligibility, social and economic
disadvantage, et cetera, and along with additional steps being
taken. So they are headed in the right direction, but again, I
think 8(a) is--of the programs we have looked at at SBA, is the
strongest of them from a standpoint of fraud prevention.
Ms. Gustafson. If I could just----
Senator Snowe. Well, is that all relative? So, obviously,
we have got to do a lot on all these programs.
Mr. Kutz. Well, it is relative. I mean, if you look at
service-disabled government-wide, it is basically at almost
zero because you have no controls. HUBZone is between three to
five, maybe, on a scale of ten. And 8(a) is better than that.
So that is kind of how I would assess where they are.
Senator Snowe. Well, what could we do better, then? That is
what we have to figure out, is how best to attack this problem.
What would be your recommendation? In other words, to get them
up to the level where they should be?
Mr. Kutz. Well, it is program by program. Like service-
disabled, one of our recommendations, which really is a
government-wide one, is to have everybody utilize this VetBiz
certification process. Why recreate the wheel when you have got
someone already setting a process up? VA does know who is a
legitimate service-disabled veteran to start. So I think SBA is
trying to work with VA on that and it needs to--that is a
government-wide solution rather than a stovepiped agency-
specific solution.
Senator Snowe. Right. Good point. Excellent point.
Ms. Gustafson. And just to kind of build on those comments
just quickly, if I may--I am sorry--but as Mr. Kutz has said,
the 8(a) program has the most strict, I think, requirements to
get into the program, which is to say it is an older program
and there really are--the agency takes a very active role and
does a lot more review before you even get into the 8(a). Where
I think the agency definitely needs to do better is as the
participants go along and the reviews, like the annual reviews
that Mr. Kutz talked about and how they need to do a better job
of those.
And if I could just quickly reference the audit that I
mentioned in my written testimony on the surveillance reviews,
and just very, very briefly, surveillance reviews are
undertaken by the Small Business Administration of other
procuring agencies to see how well those agencies are running
the small business contracting part of their contracting
portfolio. We were very interested to see how well--how
thorough those reviews were, because, really, that is one of
the few checks that SBA has kept as the procuring agencies have
taken more of the execution of the contracts, of the 8(a)
contracts. The check that SBA has retained is doing these
surveillance reviews. This is an audit that we have already
discussed with the agency. Again, it is referenced.
We were very concerned about what we saw. I mean, we
definitely think the agency needs to do a much better job at
doing a very thorough risk analysis and making sure these
surveillance reviews really are checking on how the 8(a)
program is being administered and how these contracts are being
seen. We were very disappointed in the thoroughness of these
reviews or lack thereof. Some of the employees undertaking
these reviews did not realize they were supposed to kind of be
sure to be looking at 8(a).
So that is something that I think is really crucial for
SBA. I mean, that is really one of the few checks they maintain
to make sure that this program that is such a big part of
government contracting and so important, especially when it
comes to access to these opportunities, to make sure that this
is being undertaken the correct way. So that is something that
I want to point to that we are going to continue to look at and
we will definitely make sure that the committee is aware of----
Senator Snowe. Are these annual reviews required by law?
Ms. Gustafson. The annual reviews of every 8(a) firm are
required by law. The surveillance reviews are not. That is one
of the things that the agency sets. However, the agency, when
they talk about their oversight of the 8(a) program, they speak
to these surveillance reviews and how this is such an important
tool for them, and that is why I think it is important that
they do a very thorough review and make sure that the employees
undertaking these reviews--I mean, if this is how they are
going to make sure the agencies are doing the 8(a) program
right, then these reviews take on import, whether or not they
are legally required, and they place a lot of reliance on these
reviews, so they are really crucial.
Senator Snowe. Yes. Thank you all. Thank you both very,
very much.
Chair Landrieu. Thank you very much.
The meeting is adjourned.
[Whereupon, at 12:18 p.m., the committee was adjourned.]
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