[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

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

                               ROUNDTABLE

                               BEFORE THE

            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 3, 2011

                               __________

    Printed for the Committee on Small Business and Entrepreneurship







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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                      ONE HUNDRED TWELFTH CONGRESS

                              ----------                              
                   MARY L. LANDRIEU, Louisiana, Chair
                OLYMPIA J. SNOWE, Maine, Ranking Member
CARL LEVIN, Michigan                 DAVID VITTER, Louisiana
TOM HARKIN, Iowa                     JAMES E. RISCH, Idaho
JOHN F. KERRY, Massachusetts         MARCO RUBIO, Florida
JOSEPH I. LIEBERMAN, Connecticut     RAND PAUL, Kentucky
MARIA CANTWELL, Washington           KELLY AYOTTE, New Hampshire
MARK L. PRYOR, Arkansas              MICHAEL B. ENZI, Wyoming
BENJAMIN L. CARDIN, Maryland         SCOTT P. BROWN, Massachusetts
JEANNE SHAHEEN, New Hampshire        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

                              ----------                              

                           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

                              ----------                              


                        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:]


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    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:]


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    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:]


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    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:]


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    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:]


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    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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