[Senate Hearing 112-892]
[From the U.S. Government Publishing Office]
S. Hrg. 112-892
AN EXAMINATION OF SBA PROGRAMS:
ELIMINATING INEFFICIENCIES, DUPLICATIONS, FRAUD, AND ABUSE
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HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
JUNE 16, 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 R. Cravins, Jr., Democratic Staff Director and Chief Counsel
Wallace K. Hsueh, Republican Staff Director
C O N T E N T S
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Opening Statements
Page
Landrieu, Hon. Mary L., Chair, and a U.S. Senator from Louisiana. 1
Snowe, Hon. Olympia, a U.S. Senator from Maine................... 10
Paul, Hon. Rand, a U.S. Senator from Kentucky.................... 12
Witness Testimony
Panel 1
Gordon Mills, Hon. Karen, Administrator, U.S. Small Business
Administration................................................. 13
Gustafson, Hon. Peggy E., Inspector General, Office of Inspector
General, U.S. Small Business Administration.................... 20
Panel 2
Shear, William B., Director of Financial Markets and Community
Investment, U.S. Government Accountability Office.............. 44
Baron, Kevin, Director of Government Affairs, American Small
Business League................................................ 70
Dehaven, Tad, Budget Analyst, Cato Institute..................... 80
Pastore, Fran, Chief Executive Officer, Women's Business
Development Council, Stamford, CT.............................. 90
Clarkson, Greg, Executive Vice President--SBA Lending Division of
BBVA Compass Bank and Chairman of NAGGL Board of Directors..... 97
Alphabetical Listing and Appendix Material Submitted
Association for Enterprise Opportunity
Prepared statement........................................... 141
Baron, Kevin
Testimony.................................................... 70
Prepared statement........................................... 73
Clarkson, Greg
Testimony.................................................... 97
Prepared statement........................................... 99
Dehaven, Tad
Testimony.................................................... 80
Prepared statement........................................... 82
Gordon Mills, Hon. Karen
Testimony.................................................... 13
Prepared statement........................................... 16
Responses to post-hearing questions from Ranking Member Snowe 122
Gustafson, Hon. Peggy E.
Testimony.................................................... 20
Prepared statement........................................... 22
Landrieu, Hon. Mary L.
Opening statement............................................ 1
Article titled ``Small-business contracts under scrutiny from
several federal agencies''................................. 2
Article titled ``SBA suspends major contractor GTSI from
government work''.......................................... 5
Article titled ``SAB suspends two firms alleging contracting
abuse''.................................................... 8
Jobs Agenda map.............................................. 119
Pastore, Fran
Testimony.................................................... 90
Prepared statement........................................... 92
Paul, Hon. Rand
Opening statement............................................ 12
Shear, William B.
Testimony.................................................... 44
Prepared statement........................................... 46
Snowe, Hon. Olympia
Opening statement............................................ 10
West, Dennis
Prepared statement........................................... 148
AN EXAMINATION OF SBA PROGRAMS:
ELIMINATING INEFFICIENCIES, DUPLICATIONS, FRAUD, AND ABUSE
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THURSDAY, JUNE 16, 2011
United States Senate,
Committee on Small Business
and Entrepreneurship,
Washington, DC.
The committee met, pursuant to notice, at 10:05 a.m., in
Room SR-428A, Russell Senate Office Building, Hon. Mary L.
Landrieu (Chair of the committee) presiding.
Present: Senators Landrieu, Pryor, Snowe, Risch, Paul, and
Brown.
OPENING STATEMENT OF HON. MARY L. LANDRIEU, CHAIR, AND A U.S.
SENATOR FROM LOUISIANA
Chair Landrieu. Good morning. I would like to call the
Small Business meeting to order. The purpose of our meeting
this morning is to review duplication, inefficiencies, fraud,
abuse, and exploitation in programs run by the Small Business
Administration. I want to thank Administrator Mills and Peggy
Gustafson for being with us this morning, and we are looking
forward to a second panel as well.
I thank you for joining us today. I, along with members of
this Committee, have made it a priority to ensure that all SBA
programs are running efficiently, effectively, and free of
exploitation. In a December 2010 letter to SBA Administrator
Karen Mills, Ranking Member Snowe and I expressed our deep
concern with the allegations of some fraud and abuse in small
business contracting programs, as highlighted by recent
Washington Post articles--there were two that I am going to
submit for the record--and GAO reports that I will also submit
for the record.
I would like my staff to present the document that we are
working off of. This is a review of the last 5 years of all of
the reports done by GAO and the Inspector General. We have
reviewed these reports, we have summarized these reports, and
we are going to submit them. Of course, they are already part
of the record, but we will refer to them today, if necessary.
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Chair Landrieu. We requested that Administrator Mills
provide this Committee with a detailed plan for addressing and
rectifying some of the problems that have been brought to her
for her review. We are looking forward to that report this
morning.
In addition, in subsequent letters Administrator Mills and
SBA Inspector General Peg Gustafson were asked to make
recommendations for eliminating or substantially reducing
programs within the SBA that were duplicative, ineffective, or
redundant. I will report this morning that, as a result of at
least the initial review, two programs--Community Express and
the Coverdell Drug-Free Workplace Program--have been or are in
the process of being eliminated.
We are here today to further examine actions that can be
taken to reduce or eliminate inefficiency or fraud or abusive
operations. Even as we take on this task, we must be careful to
act in a manner that does not undermine the SBA's ability to
serve the needs of the 26 million small businesses in our
country that are the backbone of our economy and counting on
the SBA to do its job and do its job well.
On Panel 2 we will hear testimony from representatives from
the GAO, the American Small Business League, the National
Association of Government Guaranteed Lenders, the Cato
Institute, and the Women's Business Development Council in
Stamford, Connecticut, that will add their voice to this
debate.
I welcome an opening statement by Ranking Member Snowe and
look forward to hearing the testimony today.
OPENING STATEMENT OF HON. OLYMPIA J. SNOWE, A U.S. SENATOR FROM
MAINE
Senator Snowe. Thank you, Chair Landrieu, for holding this
critical hearing to assess and to analyze inefficiencies,
duplication, waste, fraud, and abuse in the programs of the
Small Business Administration. Clearly more can and must be
done to eliminate these obstacles that prevent the agency from
reaching its full potential. We are fortunate today to have
with us the SBA Administrator, Karen Mills, who is truly on the
front lines of this issue. Administrator Mills has shown strong
and outstanding leadership by putting a framework in place to
help prevent illegitimate firms from siphoning away contracts
from rightful small businesses trying to compete for Government
contracts.
Additionally, on the first panel we have Inspector General
Peggy Gustafson, whose testimony in March provided this
Committee valuable insight and recommendations for the SBA in
the area of procurement fraud, and we appreciate our second
panel of witnesses representing the Government Accountability
Office and the small business community. We are anxious to hear
everyone's suggestions for streamlining programs and efforts
while reducing fraud and improving the agency's effectiveness.
There cannot be any clearer impetus for us to find ways to
eliminate inefficiencies, duplication, and waste across the
Government than the current economic crisis. Our national debt
will reach 100 percent of GDP by the end of 2011.
The bottom line is that our Nation's revenues and spending
are vastly misaligned. We cannot and must not finance operating
expenses with perpetual deficits. It is through this lens that
we must examine every taxpayer dollar our Government spends and
utilize our Nation's small businesses to spur private sector
job growth.
Today's hearing is truly a piece of a much larger puzzle.
Congress has been reviewing a 345-page report issued in March
from the GAO that outlines Federal programs, agency offices,
and initiatives with duplicative goals and activities. As
revealed by this report, there is no shortage of waste to
identify.
What is so remarkable about these efforts is that the
Federal government could cut spending without eliminating
programs it services by simply implementing solutions such as
sharing resources or collaborating among departments. For
instance, the GAO report exposed massive duplication throughout
our Government, such as 80 economic development programs across
four Federal agencies, including the SBA, which administers 19
of the programs. Of those programs, the GAO identified that 52
either exclusively or in part address entrepreneurial efforts.
The total 2010 funding for these 80 programs alone amounted to
$6.5 billion.
While I am eager to hear the SBA's response to the GAO
report, I also would want to know what changes the SBA is
actively considering as it reviews all of its programs for
replication, such as working with other agencies to consolidate
programs and resources to help eliminate duplication.
To date, the SBA has taken some modest first steps with
regard to streamlining or eliminating programs. Last January
the Chair and I sent a letter to Administrator Mills and
Inspector General Gustafson soliciting their insight as to how
the agency recommends eliminating wasteful spending, and I want
to thank the Inspector General for her in-depth response.
I know the SBA has responded by deferring to the
President's fiscal year 2012 budget request which proposed
eliminating the Prime Technical Assistance Program, the Drug-
Free Workplace Program, and several special purposes counseling
grants for the Small Business Development Center Program. I
hope that we can be able to do more in that category.
In addition, today's discussion of making the agency more
efficient will also explore efforts to eliminate fraud and
abuse in any of the SBA's programs. Our Committee held a March
hearing to discuss steps to remedy the findings of the recent
GAO reports that revealed 14 ineligible firms receiving $325
million sole-source contracts and set-aside contracts, even
though these firms were not eligible for the 8(a) program to
begin with. At my request the SBA sent two letters outlining
actions taken against these 14 firms, as well as creating a
special task force focused on strengthening enforcement
actions. I appreciate the timely and comprehensive response
Administrator Mills provided my office and believe these
administrative changes present additional deterrence to those
who perpetuate fraud against the Government.
It is our duty in Congress to provide the statutory tools
necessary to create additional deterrence against fraud. That
is why I recently introduced, together with Chair Landrieu and
a number of my colleagues on this Committee, the Small Business
Contracting Fraud Prevention Act to bolster fraud prevention at
the SBA. This bill includes provisions specifying damages
sustained by the Government in cases of fraud, aims to
standardize the certification processes, and increases
transparency when the Government takes enforcement actions
against such firms.
Simply put, we must remain vigilant in assuring that all of
the SBA's contracting programs are running efficiently,
effectively, and free of exploitation.
Additionally, collaboration must extend to other agencies
such as the Department of Justice for enforcement of punishment
of any bad actors found to be fraudulent. This week I sent a
letter along with Senator Grassley, the Ranking Member of the
Judiciary Committee, to the Attorney General inquiring why the
Department of Justice is declining to prosecute cases that were
referred from the SBA's Inspector General, including 20 cases
since October of 2010 to March. In any event, we know that
strong punitive actions and strong enforcement will result in,
I think, a very strong deterrent, and that is what we have to
accomplish as well.
So I am hopeful that we will hear from our witnesses here
today about how best we can do that in identifying all the
waste and inefficiencies that may continue to exist and also to
implement many of the ideas that the GAO has recommended.
Thank you, Madam Chair.
Chair Landrieu. Thank you.
Senator Paul.
OPENING STATEMENT OF HON. RAND PAUL, A U.S. SENATOR FROM
KENTUCKY
Senator Paul. Thank you. Thank you, Chair Landrieu and
Senator Snowe for allowing me to participate and to bring a
witness from the free market think tank of Cato today. I am
happy to be here.
I was pleased last night to meet Ms. Mills, and we had a
great conversation, and I hope we get to continue that today in
public.
As I told Ms. Mills last evening when we met, I am a great
believer in the free market, and the thing about the free
marketplace and capitalism in general is it is a place where
you have voluntary interaction and people get to vote every
day. So in the marketplace, people vote with their dollars,
with their loans. Everybody gets to vote and everybody gets to
choose, so it is really about choice.
And to me, whether the Government makes the loans or the
private marketplace makes the loans, it is really about choice,
and it is whether or not we are going to say that our choice is
somehow superior to the market's choice.
As Ms. Mills told me, she thinks that there is market
failure, and I will let her describe that when we get to that.
The problem I think I have with that, with saying that the
market fails in giving loans is that you basically are bringing
your opinion to bear to say that the market is failing. It
could be that the market is just choosing other people that you
would rather choose, you know, certain people to get a loan and
the market is choosing other people to get a loan.
Frederic Bastiat was a philosopher back in the 19th century
and a French parliamentarian, and he wrote several books, and
he was a critic of mercantilism and protectionism. But one of
the things he talked about, that he is famous for talking
about, is the seen and the unseen. The seen is very easy. We
can show a small business loan, and we can say Mr. Smith got
this loan and look at this bright, shiny new building that he
has built and how good this is and how he created these jobs.
But the unseen is the money came from somewhere. You know, he
had to either tax somebody or he had to borrow it. There are
costs to Government loans. But basically really what you have
done is you have changed who gets to choose--private
individuals choosing where the money goes or Government, select
Government.
And then there is the possibility that the loans end up
going to your friends or your contributors, and I am not saying
anything about this Administration or anyone, but there is the
potential for Government abuse where the loans go to friends
and go to maybe windmills because we like windmills better than
coal companies or certain people might make those decisions.
There is possibility for politicization of the loans.
But the unseen is where the person who did not get the loan
because the loan was distributed by the Government, that money
is taken out of the marketplace, and that money would have gone
to someone else. So I do not think it is enough to argue that
we have these great multipliers. Everybody argues this. You
know, every business organization says, ``Oh, we created this
one job with this small business loan, and it created ten other
jobs.'' Well, so do all jobs that are created. I mean, that
just means that you have created it, but the private
marketplace may have delegated or designated the money to go
somewhere else, and it would have the same multipliers of
employing other people. The main difference is that a private
loan would have gone to--basically the decision is democratic
capitalism. We all vote every day on where those loans go.
And so I would just make a pitch and like to have the
viewpoint known that there are people who believe that the
marketplace and individuals should freely interact and make the
decision where loans go and that really Government should not
be in this business at all.
Thank you.
Chair Landrieu. Thank you so much.
Ms. Mills.
STATEMENT OF HON. KAREN GORDON MILLS, ADMINISTRATOR, U.S. SMALL
BUSINESS ADMINISTRATION
Ms. Mills. Well, thank you very much, Chair Landrieu and
Ranking Member Snowe and members of the Committee, Senator
Paul. Thank you for inviting me to testify today. Half of the
people who work in America own or work for a small business.
That is 26 million small businesses. And as you all know, two
out of every three jobs are created by small business.
Over the past 2 critical years, the SBA has helped put $53
billion in lending support and $195 billion in Federal
contracts in the hands of these small businesses. And at the
same time, we have counseled and trained and mentored over 2
million Americans who have turned to us to start or grow their
business. We have also delivered on our promises, such as this
Committee's request to reinvent SBA's website, and we launched
it in January. So far it has attracted over 3 million unique
users in just 6 months.
Our focus remains twofold: number one, to deliver proven
tools directly into the hands of small businesses; and, number
two, to give taxpayers strong oversight of their dollars and
the best possible bang for their buck.
We do this across our 3 Cs--capital, counseling, and
contracts--and I am going to touch briefly on the latter two.
Often, the first interaction a small business has with the
Federal government is with our field offices and counseling
partners. We are the front door.
Let us say you walk into the Tacoma Business Center in
Washington State. If you have a simple business idea, you will
be referred to the Tacoma SCORE chapter to help you flesh it
out and test its feasibility. Nationwide, 12,000 SCORE
volunteers helped 400,000 people last year, three-fourths of
whom were just starting out, and the cost of all of that
program is $7 million.
If you had a home-based small enterprise already running,
but you needed more guidance, the Tacoma Women's Business
Center would be your best bet. Nationwide, 110 Women's Business
Centers served over 160,000 clients last year, with a budget of
just $14 million because of public-private partnerships. They
are strategically located in easy-to-access, underserved areas.
And maybe you had an established business that needed help
with commercialization or exports. You would be referred to our
Small Business Development Center. Nationwide, we have about
900 SBDCs, often located at universities and community
colleges. They helped nearly 600,000 clients last year, about
half of which were established businesses. The cost was about
$110 million.
As Administrator, I have been all around the country. I
have been to 34 states over the past 2 years, and I visited
with these resource partners and small businesses in every
area.
This is our bone structure. Our doors are open to small
businesses in the places where they live and work. That is
important because our data shows that long-term counseling
leads to better sales and more longevity. We leverage this bone
structure to collaborate, as Senator Snowe described, across
the Federal government with the Veterans Administration to
serve veteran small business owners, by cross-training our
people with the Department of Agriculture in serving rural
business, with the Department of Commerce to serve small
exporters, and with many other Federal partners.
Finally, we remain, as you described, strongly committed to
oversight of taxpayers' dollars. I committed to this Committee
to get aggressive on fraud, waste, and abuse, and I committed
to remove fraud, waste, and abuse in our contracting with a
three-pronged approach.
First, up-front certification. We now have much stronger
requirements for 8(a) and HUBZone applicants.
Second, with continued surveillance and monitoring. For
instance, we made a dramatic increase in the site visits in our
HUBZone. Six months before I came, we had done seven site
visits. In the last year, we have done 1,200.
And, finally, with aggressive pursuit of misconduct. We
have removed many firms, suspended, or proposed for debarment
dozens of bad actors.
As the front door for small business seeking help in any
industry at any stage of growth, we will continue to ensure
that the benefits of all SBA programs flow directly to small
businesses so that they can do what they do best: create jobs.
Thank you. I look forward to your questions.
[The prepared statement of Ms. Mills follows:]
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Chair Landrieu. Thank you very much, and will you submit to
the record the list of the companies that you have just
debarred and disqualified?
Ms. Mills. Yes.
Chair Landrieu. Thank you.
Ms. Gustafson.
STATEMENT OF HON. PEGGY E. GUSTAFSON, INSPECTOR GENERAL, OFFICE
OF INSPECTOR GENERAL, U.S. SMALL BUSINESS ADMINISTRATION
Ms. Gustafson. Chair Landrieu, Ranking Member Snowe,
Senator Paul, good morning. I want to thank you for inviting me
again to testify in front of your Committee.
As you know, I head the SBA Office of Inspector General,
which is a statutorily created independent office established
to deter and detect waste, fraud, abuse, and inefficiencies in
SBA programs and operations.
My verbal testimony today is going to focus on three areas:
an update of my testimony from the March 3rd hearing of this
year regarding fraud in SBA's preferential contracting
programs; our concerns about fraud and abuse in SBA's business
loan programs; and some areas of potential cost savings in
SBA's programs, as mentioned in the letter that we had sent to
you in March.
As noted in my March 3rd testimony, my office remains very
concerned about fraud in SBA's preferential contracting
programs. The bottom line is that when ineligible companies are
fraudulently obtaining Federal contracts that are meant for
small and disadvantaged companies, the congressional intent
behind these programs is thwarted and legitimate companies are
deprived of the contracting and the business development
opportunity that these programs are supposed to provide.
Therefore, I want to commend the Chair, the Ranking Member,
and other members of this Committee for their support and
sponsorship of S. 633, the Small Business Contracting Fraud
Prevention Act of 2011. I believe this is very important
legislation that will greatly assist my office's efforts in
deterring, detecting, and prosecuting false statements made to
obtain these contracts.
I also want to recognize SBA's recently introduced plan to
promote suspensions and debarments. This plan provides for
greater training of SBA personnel to recognize suspicious
activity and envisions better processes for ensuring that this
suspicious activity is referred to my office and to agency
suspension and debarment officials for necessary action.
Since my testimony in March, my office has referred an
additional 14 contracting cases for suspension or debarment to
SBA. As of this morning, the agency has acted to debar or
suspend the wrongdoer in seven of these cases, and we have been
advised that the agency will proceed shortly with final
decisions on the remaining referrals.
I want to mention an audit my office recently conducted of
the SBA surveillance review process, which are the on-site
reviews that the agency conducts of procuring agency contract
files to determine whether procuring agencies are properly
awarding and monitoring these preferential contracts that are
supposed to be going to small, disadvantaged, and the other
preferential contracting programs. This review found that SBA
had only evaluated a limited number of procuring offices over
the past several years, and it was not using a systematic,
thorough, or consistent approach in conducting these reviews.
We also found that these review teams were not generally
evaluating whether small businesses and 8(a) firms were
performing the required percentage of work on set-aside
contracts.
I was very happy to note that the agency has agreed with
most or all of our recommendations, but I would note that there
is one final step in the audit process, which is the management
decision, which is where SBA tells us what they are going to do
to implement these recommendations. And I would gently note
that these management decisions are overdue as of today, and it
is pretty crucial that we get these management decisions, and I
look forward to them because they will really be a framework
for what happens next.
Another priority for my office is investigating SBA's 7(a)
and 504 business loan programs. Our investigations run the
gamut from false statements made by borrowers to get these
loans to fraud by lenders or fraud by third parties who are
involved in the loan process.
From October 1, 2008, to the present, in criminal cases
related to business loan programs, we have opened 84
investigations of alleged fraud and obtained 114 indictments,
82 guilty pleas and convictions, and restitution, civil fraud,
and asset forfeiture recoveries in excess of $91.5 million.
We remain concerned about fraud by third parties in 7(a)
loans, notably loan brokers, loan packagers, consultants, and
other loan agents. Although loan agents often serve a very
valuable purpose in the loan process because they work with the
borrower to connect the borrower to a lender who will help them
with the SBA loan and help them get an SBA loan, there have
been unscrupulous agents who have exploited the program through
sometimes very far-reaching fraudulent schemes. In the last
decade alone, my office has obtained convictions and guilty
pleas in cases involving loan agent fraud, where the amount of
loans involved were hundreds of millions of dollars.
We have had for several years a management challenge that
the SBA track the loan agent activity and institute some
enforcement processes to kick bad agents out of the program.
They are getting there. They are beginning to track the
activity. They do have the enforcement process in place, but
this has to be a big priority for SBA, and we look forward to
this getting finished.
As noted, I did submit a letter in March with some
suggestions for savings. I believe that letter was submitted
with my written testimony, and I welcome any questions, and
again, thank you.
[The prepared statement of Ms. Gustafson follows:]
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Chair Landrieu. Thank you.
Let us go ahead and start with the loan agents issue. Ms.
Mills, what would your response be? Do we know how many loan
agents are out there? Are they certified by your office? What
actions are you all taking to crack down on loan agents that
are acting inappropriately securing loans to small businesses?
Ms. Mills. Well, Senator, as you know, we have implemented
the same three-part process that I described for contracting
fraud, waste, and abuse on our loan fraud, waste, and abuse. So
we are making sure that those who come to get our loans are, in
fact, eligible, that we have oversight along the way in the
process, and that we go after bad actors.
This falls in the third category where we have partnered on
this loan agent issue very closely with the IG's office to ramp
up the aggressive enforcement against bad actors, in this case
these loan agents.
We are of like mind and aggressively pursuing this and will
not stand for it. This has been a problem that existed quite a
bit in the past, and when we came on board, we went after it
quite seriously.
Chair Landrieu. Do we have any idea how many loan agents,
unscrupulous loan agents, there may be out there, Ms.
Gustafson?
Ms. Gustafson. It is really early in the process to have a
handle on that. As noted, we for several years said what we
need is a central database such that should SBA or one of our
criminal investigators find a loan that just has all kinds of
problems, it would be incredibly helpful to know whether there
was an agent involved in that process, because sometimes the
fraud is happening with the agents. And it has been, I think, 7
years coming that it has been a management challenge, and there
is no doubt that the agency agrees with us now that
Administrator Mills is very supportive of this process.
My understanding of where we are is they are finally
beginning to capture that information. It is finally somewhere.
It is beginning to be somewhere. As a side note, at first they
were not capturing, for example, the loan numbers along with
the loan agent. That becomes not very useful. But that has been
fixed.
Chair Landrieu. Because we can pinpoint exactly what banks
the 1,000 or 1,200 out of the 8,000 banks are making loans
through the SBA programs. We know exactly what banks those are.
Ms. Gustafson. That is right.
Chair Landrieu. We also know the volume of loans that each
of those banks puts out every year. So I think this would be
relatively easy to try to track this information and eliminate
the bad actors from this program.
Ms. Gustafson. I think so. In general, there has always
been a piece of paper somewhere with who the loan agent was.
This centralization is new, and it is crucial because I will
tell you, we have cases where the loan may be in Mississippi,
and the loan agent for some unknown reason is in Florida. So,
you know, there has to be a central database; otherwise, they
are going to go undetected. Certainly the schemes will.
Chair Landrieu. Okay. Well, I will look forward to seeing
how we are advancing on that.
On the general programs, in the March 15th letter that we
sent to the SBA regarding improper payment rate, which I think
is across the whole agency, the Inspector General said the rate
could be as high as 27 percent. When you all reviewed the same
data, you said the estimate is 1 to 2 percent. So there is a
great disparity there, and if we could try to get some
clarification on that with you two sitting at the same table
this morning, that would be helpful. I do not know which one of
you wants to go first.
Ms. Mills. This is a conversation actually that we have on
a fairly routine basis. There is a disagreement about the
definition about improper payments. So we are referring to not
actually the payment, but a loan that was a loan properly done.
And if the T is not crossed and the I is not dotted, in one
definition that is improper. In another definition we might
draw the line in a different place and say that is a foot
fault, and that it can be corrected, and the intent was honest
and proper and that the loan guarantee should be honored or the
loan was proper.
In the past situation there was no good dialogue on this
issue, and when we came on board, we started a very
constructive dialogue. We have made tremendous progress. There
is still progress and conversation to be had, and we are
working, I think--but Peg can tell you--constructively and
aggressively on this issue.
Chair Landrieu. Okay.
Ms. Gustafson.
Ms. Gustafson. Yes, let me quibble a little bit and then
talk about progress that has been made. There is no question
that both the agency and the IG did a review of the 7(a)
improper payment rate for fiscal year 2008, and what you cited,
Senator Landrieu, were the two rates that we came up with--
vastly different. And, yes, we did begin a discussion about
where we were disagreeing and why, and some of it is
fundamental questions of what is and what is not under the law
an improper payment. And that is a very constructive
conversation to have that I think will inform the next improper
payment review, which is going to begin shortly, both by the
agency and by ourselves.
The one thing I would note is we have been having this
discussion for about 2 years, and so we are slowly getting
there. I am concerned about the speed, or lack thereof, that it
is taking to reach these decisions, but I do think as we get
there, we will come closer. And I would note that, in general,
where we go so far, for what it is worth, they are coming
closer to us. And so my quibble is we never say it is an
improper payment if a T is not crossed or an I is not dotted.
It is always a material issue. But we are working through
those, and we will get there, but it needs to be done much
quicker than it is being done.
Chair Landrieu. Okay. And, finally, I know my time has
expired, but I will acknowledge Senator Snowe in just a moment.
One of my strong beefs with the agency actually is in
overcollecting funds, approximately $925 million in CDBG block
grant funding that the agency, in my view, collected
aggressively without warrant and unnecessarily by requiring
victims--in this case of Hurricanes Katrina, Rita, or other
natural disasters--to immediately repay back their 30-year SBA
loan the minute they received the CDBG grant to rebuild their
home. I am going to try to fix this legislatively because while
it might be too late for the people of Louisiana, it is very
timely for the people of Joplin, Missouri, who are going to be
experiencing this exact same horrific nightmare, where they
finally after 6 months get an SBA loan to help rebuild their
home, which they might have had insurance or might not. The
minute they receive a $30,000 grant from some other agency of
the Federal Government, the SBA grabs the grant money to repay
itself, leaving the homeowner with absolutely nothing to
rebuild.
So I am not sure how Joplin, Missouri, which lost 30
percent of their city, 8,000 structures were destroyed,
including hospitals, homes, and businesses, but I hope it works
better for them than it worked for us.
Chair Landrieu. I am going to be pursuing this, and I just
want to put everybody on notice that I am going to try to
find--because HUD actually agrees with me, and so does either
the GAO or the Inspector General, where HUD cites receipt of
partial benefit from a major disaster or emergency shall not
preclude provision of additional Federal assistance for any
part of a loss or need for which benefits have not been
provided. This is in the Stafford Act already. So we have had
conversations about it, but I just want to go on the record
that I think it is something, with the Chairman of the
Subcommittee here on Disaster Response and Preparedness, I
thought I would bring it up before Senator Pryor, and the two
of us are going to work on some sort of appropriate legislative
fix.
Senator Snowe.
Senator Snowe. Thank you. Thank you, Madam Chair.
Just on that last issue on the improper payments, is it
difficult to define what an improper payment is?
Ms. Gustafson. Well, it requires some analysis. Especially
in the loan area, it is not as easy as just saying did we
double pay for a widget or was there some wrongdoing there. So
it definitely takes some analysis.
We were able to do it, and as you know, it can be
difficult, but we were able to do it.
Senator Snowe. I guess on a lot of these issues,
Administrator Mills and Ms. Gustafson, what is in place, what
is actually operational and implemented, because I think that
that is still not clear on some of the enforcement mechanisms.
Now, Administrator Mills, you mentioned certification,
enforcement, and monitoring procedures that you have put in
place to respond to all these issues. Have they been actually
implemented? Are they in play now?
Ms. Mills. Yes, they have.
Senator Snowe. They have been. Are you satisfied with those
procedures?
Ms. Gustafson. We are pleased and on paper are satisfied
with the enforcement procedures against loan agents, against
third parties who people obtain Government contracts. That is
in place. To the best of my knowledge, it has not been
implemented yet, but to give credit, that was years in coming.
For years the agency just did not even bother to have
enforcement procedures in place, and then we would say, ``You
need to do something against the loan agent.'' And they would
say, ``We do not have any enforcement procedures in place so we
cannot.''
So they are there, and we were very, very pleased by that.
They are brand spanking new, but they are there.
Now, what is, I believe, not quite fully in place is the
overhaul of the suspension and debarment process, which is to
say they have a very strong plan, I think, to get serious about
suspension and debarment and to as an agency become more of an
enforcement agency than they were before. It is in its nascent
stages, which is to say they are doing training, but I do think
the agency is going to need to send a strong message that they
are serious, hold people accountable for not just knowing this
stuff but making sure that referrals are made and things like
that. That has not happened yet, and it needs to happen soon.
Senator Snowe. So, Administrator Mills, on the question of
the task force, is that the purpose?
Ms. Mills. Yes, the task force on----
Senator Snowe. Right. Is that in play now? Is that
implemented?
Ms. Mills. The task force has been in play for a while. It
completed its work and recommendations. We implemented these
recommendations. We are, as Peg said, working very closely in
the beginning stages. We have begun to demonstrate on the last
round of cases that were brought up, every single one has been
pursued through these procedures, and we plan to continue to be
aggressive.
Senator Snowe. I think we have to be. I think we have to
send a very strong message, and there has to be a clear and
delineated process by which this all occurs, both in the
implementation of these procedures to detect and to avert any
potential fraud, but also on the other end is making sure that
the SBA personnel are trained, informed, you know, aggressive
in the implementation, and that there is a consistent standard.
Now, in changing this culture--because, you are right, Ms.
Gustafson, it has built up over the years. In the article that
the Chair was referring to that appeared in the Post back in
March, it said, ``D.C. insiders can reap fortunes from Federal
programs for small businesses'' and that Government officials
were not monitoring contracts for compliance with rules. There
is no question that the report exposed some glaring
deficiencies in contract oversight with officials, but what was
disturbing in this article--and that is why I want you to
answer it, Administrator Mills--was when the Pentagon said that
the responsibility for oversight fell to SBA, yet an SBA
spokesperson was quoted as saying that the SBA, and I quote,
``long ago transferred that authority to the Pentagon and other
agencies.''
Now, I know that is not your attitude, Administrator Mills,
but I think that it is very clear, the Federal Acquisition
Regulations require that the SBA be the oversight agency. But
can you tell me what is happening to bolster that oversight and
that everybody in SBA understands that it is uniquely and
singularly their responsibility?
Ms. Mills. Yes, the oversight for the Government contract
program, which, as you know, is $100 billion and multiple--
every agency--is SBA's responsibility. I believe the comment
was referring to the agencies that actually do the contracts,
and we jointly--we are responsible, but we jointly need to
monitor. There are 30,000 contracting agents out there making
these decisions, and there are 8 million individual contracts
that get done every year. So we have in the Small Business Jobs
Act and on a continual basis increased and beefed up the way we
train our partners at the Federal agencies to detect issues,
whether it is in certification issues, whether it is issues in
a small business that does not meet the qualifications or
anything improper. And then as we have talked about, we go
after the bad actors.
So this is an ongoing partnership. We appreciate the fact
that the Small Business Jobs Act gave us some additional powers
to do this more effectively. We are continuing to implement the
improvements in this, and there is no question about the
commitment at the SBA to this project.
Senator Snowe. My time is up. Thank you.
Chair Landrieu. Thank you.
Senator Paul.
Senator Paul. Thank you.
The NFIB did a survey recently of small businesses and
found that the number one concern was not really access to
capital. It was taxes and regulations. I am a big fan of small
business. I think we should do everything possible to help
small business. I was in a small business before I came to the
Senate.
The President wants to increase taxes on those who make
more than $250,000. A lot of those are small businesses. Do you
think that is a good idea for small business, Ms. Mills?
Ms. Mills. Actually only 2 percent of those who make over
$250,000 are small businesses or report over $250,000 of
business income, and some of that is from unrelated business
activities.
But to your point about this survey and removing barriers
to small business, I think that is very much a shared goal,
particularly on the removal of excess regulation. We are
working quite aggressively on that as well.
Senator Paul. With regard to why we have small business
loans, you indicated to me yesterday evening that it is a
market failure. I guess the problem I have is that when you say
the market fails, it to me seems somewhat arbitrary because if
the market is failing to give loans, maybe the market just
decided these people were not good credit risks or maybe they
went to the bank and the bank said, ``You know what? I like so-
and-so-'s project better.'' And that is sort of how we would do
it if we had a voluntary society.
This sort of arrangement, those people who are told no by
the bank and then they are told yes by Government because
Government decides, ``We like your project,'' I guess that to
me just seems somewhat dictatorial and contradictory to the
freedom of the marketplace. How do you define ``market
failure''? How do you say that the market is failing to give
these people loans and they should get loans instead of the
rest of us deciding in the marketplace?
Ms. Mills. Well, I enjoyed our conversation, and, as you
know, many of these are economic terms. But specifically to the
SBA program, let me give you an example. When the market is
functioning and you can get a loan from a bank, there is no
reason for you to get an SBA guarantee or taxpayer involvement
because you can get a loan. But if you are a good small
business and you cannot get access and opportunity, we are able
to provide these guarantees. In the market, you go to a bank,
the bank makes that decision, and so it is not sort of a top-
down from the Government; it is a bottom-up from the small
business.
The example is when the credit crunch hit in October 2008,
these banks shut their doors to small business. You could not
get a loan, even if you had previously been creditworthy. And
we were able to put $42 billion into the hands of the small
businesses at a very low cost and saved--I travel all around
the country, and I was in rural Arkadelphia at a saw mill, and
a husband-and-wife team looked at me and they said, ``You saved
my business.'' This was a part where their local community
bank, whom they had had a long relationship with, just could
not make that loan. It is a good loan. We have very low default
rates on our loans, as you know. And we are able to step in on
these, let us call them ``market gaps,'' to provide access and
opportunity to viable, important small businesses who create
jobs.
Senator Paul. I guess my point in response would just be
that you can see that and you can see how you helped that
person, and it seems really good and we feel good about
ourselves because we helped this person whose business would
have gone out--you know, they would have gone bankrupt. What we
do not see is the $100,000 you gave to them did not go to
someone else. The unseen is what we do not see. We see the
seen, but we do not see the unseen. And then when the market
directs those, they direct them on everybody getting together
and interacting in a voluntary way; whereas, the decision by
Government is done involuntarily and done by a few select set
of people. And I think there is danger for those select set of
people making the decisions based on either political reasons
or other reasons rather than the validity of whether or not it
is a good enterprise.
One of the things that when I hear from people about access
to capital they are concerned about is we have just passed
thousands of new regulations through Dodd-Frank. Most people
think this is making it harder to get capital. Do you think
Dodd-Frank is making it easier or harder for small businesses
to get capital?
Ms. Mills. At the moment it is not clear that there is an
appreciable effect on small business access to capital from
those regulations. We know that small businesses have been
concerned by the regulators' making more oversight on banking
institutions that had had issues. We are working very hard with
third-party regulators to make sure that they give clear
direction to their banks so that small businesses who have
previously been creditworthy are considered appropriately.
Senator Paul. And I guess my final--do I have another
minute?
Chair Landrieu. Go ahead.
Senator Paul. My final point would just be that when you
went in and you intervened in the crisis after the housing
market collapsed, that is sort of like putting Band-Aids on
things, and you found problems. But it is really not addressing
how we got to those problems. Why did we have all these
calamities? Why did we have housing prices that were going up
20 percent a year? Why did we have an exponential rise in
housing prices? And, really, that had to do with bigger
problems. It had to do with the Federal Reserve setting the
interest rate below the market rate of interest. It had to do
with Congress telling people they should have home loans when
they had no downpayment. People would purchase a $160,000 home
with no downpayment, and the next year it was worth $180,000,
and they said, ``Put a swimming pool in. You have got $20,000
in equity.''
So we have to diagnose the problem correctly before we just
keep giving people loans, and I think there was a rash of
failures, and stepping in seemed to be noble. But I think we
have to remember the seen and the unseen, and the unseen is the
money that has to come from somewhere. We have an enormous
debt. Our debt equals 100 percent of our economy. People have
estimated we are losing 1 million jobs a year because of the
burden of our debt.
So these things cost money. I just hope we will all pay
attention to that. Thank you.
Chair Landrieu. Thank you, Senator.
The Senator from Arkansas.
Senator Pryor. Thank you, Madam Chairman.
Let me start with you, if I might, Ms. Mills. On May 10 you
wrote me a letter, and you said that you are committed to
continuing the review of SBA programs to eliminate overlap and
duplication. You also stated that OMB is working with all
Federal agencies to better organize Federal programs and
functions.
So can you give us an update today on how this review
process is being performed and how the members of your staff
are involved in the review and whether OMB and SBA are finding
program efficiencies?
Ms. Mills. Well, as you know, we do have a continuous
process, and it was driven around the 2012 budget for
eliminating duplicative programs and reducing costs and
focusing current programs. So we did offer up a series of
programs for elimination, and they included the Drug-Free
Workplace, they included selected special purpose counseling
grants, and they included the PRIME program. It was not because
these programs were bad, but it was because we found other ways
to deliver some of those services more effectively, notably in
PRIME through our micro-loan intermediaries.
We continue to look at how to do the things that we do more
effectively and deliver that money. The first criteria is: Does
the money go directly into something that gets in the hands of
small businesses and improves their situation, allows them to
grow and create jobs? And the second criteria that we use is:
Or is it creating oversight and elimination of fraud, waste,
and abuse? And those are the two criteria. If it does not match
that, then that is something that we cannot afford to do.
Senator Pryor. And do you feel like that your work is done
there? Or do you feel like you are still looking for ways to
find more efficiencies?
Ms. Mills. Well, it is a continuous improvement process.
Senator Pryor. Let me ask about sort of a different area of
that continuous improvement that I hope you are working on, and
that would be--when I look at your SBA loan data, a few minutes
ago you said that you have a very low default rate on SBA
loans, which is great. But when I look at your data for fiscal
year 2010, you wrote off more than $2.6 billion in bad loans.
Am I reading that right?
Ms. Mills. No, that actually is not that year's loans.
Senator Pryor. Okay. So tell me how that works.
Ms. Mills. When I referred to our low default rates, we
have a subsidy rate that we calculate that is based on our
previous loan rates. Generally that runs around 5 percent. In
recent times, because of the economic recession, those loan
rates for us and for all financial institutions have climbed.
They have more than doubled in many situations. The reason for
that is that we take all the collateral, and the collateral
that were pledged in the 2005, 2006, 2007 cohorts was on
inflated real estate prices. So now, as we go to collect on
that collateral, the value is not there. So there are many more
losses on those loans than one would have projected when the
collateral was high.
I want to make sure that you know that this is not the
current loans or the loans that were given in 2009 and 2010.
This is really a cohort from a day where things were quite--
bank lending was quite aggressive and real estate was quite
high. That is a large part of the dollars that you have
described. I believe the other piece of the dollars you have
described is the tail end of the Participating Securities
program which was canceled and eliminated in 2004.
Senator Pryor. Okay. And even with all that said--and I
appreciate that clarification--it looks to me, if I understand
your numbers correctly, that you have not been able to recoup
on those bad loans. In other words, it just seems like you are
writing those off. I think I see a figure here of $107 million
that you have been able to recoup. Am I understanding that
right?
Ms. Mills. I am not familiar with the $107 million, but we
are happy to look at it. We very aggressively go after
recouping, but as I have just said, right now on the real
estate portions the value is not there.
Senator Pryor. Right. But will you ever recoup any of that
loss, or do you just write off the entire loan amount?
Ms. Mills. We collect. The first thing we do is we try to
see if the borrower can get back into payment, and if not and
we go after the loan, we recoup everything we can.
Senator Pryor. Okay. Well, we ought to follow up on that
more, but, Madam Chairman, I am out of time so thank you.
Chair Landrieu. Thank you, and I just want to follow up on
that. I was looking at those documents myself in preparation
for this meeting. My question is: Do you have all the authority
you need under the current law to try to recoup as much debt
that is owed to us as possible? And if not, are you prepared to
ask for additional authority?
Ms. Mills. That is a very good question, and I would like
to come back to you on that after a consultation.
Chair Landrieu. Okay. I would really like to pursue that,
because I understand the market collapsed and these loans were
made prior to this Administration coming on. But, again, the
taxpayers are still on the hook for approximately $2 billion in
loans that were made prior to this administration that have
gone sour. And we need to try to figure out a way to recoup
that money if we can, even if it takes a little extraordinary
financial management or oversight or some sort of workout
schedule that may not be available to you. So take a look at
that and get back to me.
That is my final question, Senator Snowe, and then I would
like to go to the second panel, if possible.
Senator Snowe. Yes, thank you.
Administrator Mills, I just think it is important to
understand what exactly the agency is doing with respect to the
process on improper payments. Now, I understand Ms. Gustafson
is saying that you may have the process in place, but it is not
moving quickly. And I think we need to have a response to this
Committee, in writing or whatever, to understand fully how this
is going to be administered and to respond quickly in dealing
with those improper payments, because I do think that that has
to be acted upon. And there should not be any ambiguity with
respect to that.
Ms. Mills. Thank you. We are happy to respond. One thing I
will note is that we are starting--what we decided to do
together to move on exactly the issue you describe is that the
agency suggested that we conduct voluntarily another audit, and
then after we do our audit, that the IG will audit our audit
and see if we can use that process to come to agreement on what
is proper, what is improper, where we draw the lines. And so we
have actively begun that process to get to the bottom of the
questions that you raise.
Senator Snowe. Well, I know that in a 1-year period the SBA
made approximately $234 million in improper payments in the
7(a) loan and the audit recommended a corrective action plan.
So do you agree that this is the plan, Ms. Gustafson?
Ms. Gustafson. They are still responding and working, as
you noted, and I would also note I agree with Administrator
Mills. The concurrent or almost concurrent review of improper
payments will be helpful. But, again, we are still waiting for
answers on fiscal year 2008, and I am concerned that if we have
not reached agreement on fiscal year 2008, that may very well
impair our ability to reach agreement on 2010.
Our fiscal year 2008 audit came out in July of 2009, and so
they say it has been over a year. I would say it is almost 2
years that we are waiting literally on their decisions on the
same loans we looked at.
Senator Snowe. So what is the problem, Administrator Mills?
What is the problem here?
Ms. Mills. I am happy to look into it, but my impression is
that we are working constructively. We just do not agree.
Senator Snowe. Well, I just hope that we can find some
agreement and move forward because, obviously, this is
languishing in terms of improper payments, collection,
corrective action, enforcement action, and so on. We have got
to get a standardized process in place, that this happens, you
know, without delay.
Furthermore, on the Inspector General's surveillance review
process, again, this is another issue. You made
recommendations, Ms. Gustafson, to SBA on deficiencies that
were identified by the surveillance review teams.
Ms. Gustafson. Right.
Senator Snowe. And according to the SBA, there was a lack
of staff resources and competing priorities preventing the SBA
from doing so. So what is the issue here, Administrator Mills?
Do you have enough people to do what you need to do to provide
the oversight of these contracting activities?
Ms. Mills. Well, I----
Senator Snowe. I mean, I gather that the SBA's contracting
office conducted reviews of nearly 30 contracting activities
which represented less than 1 percent of all small business
contracting activities last year. So that is minuscule in terms
of the overall, let alone, you know, the dimension of the
dollar amount. So what is the issue here?
Ms. Mills. Well, I think this is a very interesting new--
this is a new finding that the IG has come to us. The IG is
referring to surveillance reviews that we do on the rest of our
sister agencies. There is no statutory obligation to do any of
these reviews. In fact, they were proactively begun by us as a
way to make sure that our sister agencies who were doing these
procurement activities were on the ball, they were more
educated, that they were--it was part of an oversight.
Now, we did this within the resources that we had at the
moment so we began, and we think it is a positive step. We have
asked for 24 additional personnel across fraud, waste, and
abuse to augment these kinds of activities.
Remember, there are 30,000 contracting offices, and there
are 8 million of these individual activities. So we have, I
think, put a good foot forward to begin this, and we have to
understand, you know--we certainly would like to increase it.
We think it is a positive thing to do. We are not staffed and
it is not part of the overall statutory obligation that we had
been staffed to go after. But we do think it is important, and
we have begun.
Senator Snowe. Well, I think the question is on the
statutory obligation. As I understand it, the SBA would be the
prime agency for SBA contracting. Is that correct?
Ms. Mills. Yes.
Senator Snowe. I mean, even if you collaborate with other
agencies, but ultimately it is in your purview. Would you
agree?
Ms. Mills. Yes, we agree.
Ms. Gustafson. Let me just briefly, Senator Snowe, kind of
talk to your point. What we are talking about here goes
directly to what you had mentioned on the Washington Post
article, which I think is a huge problem in Government
contracting, which is procuring agencies think SBA is doing one
thing, and SBA thinks that it is up to the procuring agencies
to do it. And SBA has become exponentially smaller since the
time when they used to do it. But I do not think it is getting
done. I do not think it is getting done well. And so there
needs to be a very robust conversation not just with SBA at the
table, but I think we need as a Government to figure out how we
are going to make sure that these contracts are being monitored
and go into the----
Senator Snowe. That is a good point, and that is the issue
here, and that is what is obvious. We have to do something to
either clarify that to make sure that this is a primary
obligation obviously with the agency, the contracting agency,
but the procurement agencies have to commit to it as well.
Ms. Gustafson. Absolutely.
Senator Snowe. So we will have to figure that out. I would
welcome some ideas on that question if we have to change it
through legislation.
Ms. Gustafson. We would love to work with you. Procuring
agencies want to get their contracts done, and they need their
stuff, so----
Senator Snowe. Right. But they have no responsibility for
the ultimate contract. Thank you.
Ms. Gustafson. Thank you.
Ms. Mills. Thank you.
Chair Landrieu. Thank you so much. I appreciate it. Let us
move to the second panel. Thank you for your testimony.
Our second panel today will be William Shear, Director of
Financial Markets and Community Investment at the U.S.
Government Accountability Office. Bill has directed substantial
bodies of work addressing the Small Business Administration.
Kevin Baron has been the Director of Government Affairs for
the American Small Business League since 2007. In his capacity
he coordinated the organization's government affairs activities
in Washington, D.C.
Tad DeHaven is a Budget Analyst on the federal and state
budget issues for the Cato Institute. Previously he was Deputy
Director of the Indiana Office of Management and Budget.
Fran Pastore is the Founder and President and CEO of
Women's Business Development Council, for more than 14 years, a
leader of entrepreneurial training for women in Connecticut.
And finally we have Mr. Greg Clarkson, who currently serves
as Executive Vice President and Manager for BBVA Compass SBA
Division, formerly Compass Bank. Clarkson is active in industry
trade associations, and the National Association of Government
Guaranteed Lenders.
I have asked you all to limit your opening statements to 3
minutes, and then we will do a round of questioning. We will
start with you, Mr. Shear. If you could pull the microphone
closer to you, please. Thank you.
Mr. Shear. Can you hear me now?
Chair Landrieu. Yes.
Mr. Shear. Okay. Great.
STATEMENT OF WILLIAM B. SHEAR, DIRECTOR OF FINANCIAL MARKETS
AND COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Shear. Chair Landrieu, Ranking Member Snowe, and
members of the Committee, it is a pleasure to be here today. My
written statement discusses our work on potential duplication
and fragmentation in economic development programs as well as
our work on internal controls in contracting and business
development programs. This oral statement is devoted to our
work on potential duplication. In Q&A I would be glad to answer
questions on either body of work as well as other topics in
this hearing where we have conducted evaluations, such as SBA
loan guarantee programs.
Our recent work on economic development programs includes
the information on 80 programs at four agencies; SBA,
Agriculture, Commerce, and HUD. SBA administers 19 of the 80
programs. Absent a common definition for economic development,
we had previously developed a list of nine activities most
often associated with economic development. For example, the
agencies administer 54 programs that fund entrepreneurial
efforts, which includes business development. All 19 SBA
programs can fund such efforts.
We found that the design of each of these 80 programs
appears to overlap with that of at least one other in terms of
the economic activities they can fund. Here I want to stress
that our focus to date has been on the design of the programs.
In other words, we have evaluated the permitted uses of funds
and have not as of yet drilled down to see how each program's
funds are actually distributed among various uses.
In addition to addressing overlap, we focused on: one,
collaborative efforts agencies should consider using to
maximize performance; and, two, actions the agencies take to
measure outcomes. Here we have found that Commerce, HUD, SBA,
and USDA appear to have taken actions to implement some
collaborative practices but have offered little evidence so far
that they have taken steps to develop compatible policies or
procedures with other Federal agencies or to search for
opportunities to leverage physical and administrative resources
with their Federal partners. And we have found that the
agencies appear to collect only limited information on program
outcomes--information that is necessary to determine whether
the potential for overlap and fragmentation is resulting in
ineffective or inefficient programs.
Building on our past work, we are in the planning phase of
a new, more in-depth review that will focus on a subset of
these 80 programs. Our current thinking is that we may have a
focus on the 54 programs that fund entrepreneurial efforts, and
this would include all 19 SBA economic development programs.
We plan to evaluate how funds are used, identify additional
opportunities for collaboration, determine and apply criteria
for program consolidation, and assess how program performance
is measured.
Chair Landrieu, Ranking Member Snowe, members of the
Committee, this concludes my prepared statement. I would be
happy to answer any questions.
[The prepared statement of Mr. Shear follows:]
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Chair Landrieu. Thank you very much.
Mr. Baron.
STATEMENT OF KEVIN BARON, DIRECTOR OF GOVERNMENT AFFAIRS,
AMERICAN SMALL BUSINESS LEAGUE
Mr. Baron. Thank you, Madam Chair, Ranking Member Snowe,
Senator Paul. My name is Kevin Baron. I am the Director of
Government Affairs for the American Small Business League. We
are an independent small business advocacy organization that
focuses on creating the greatest opportunities for small
businesses to work with the Federal Government and on ending
the diversion of billions of dollars a month in Federal small
business contracts to large corporations. The American Small
Business League reaches a constituency of approximately 100,000
small businesses nationwide, the majority of whom are small
Federal contractors or small businesses that are wanting to
work with the Federal government.
Considering the current economic climate, small businesses
are a vital asset to the U.S. economy, so we must not only
ensure that they are being provided all possible help, but the
greatest opportunity to effectively work within the Federal
marketplace. According to the latest data from the U.S. Census
Bureau, small businesses are currently creating over 90 percent
of all net new jobs. Furthermore, small businesses are
responsible for over half of the GDP and more than 50 percent
of the non-farm private sector workforce. And, historically,
small businesses are our Nation's driver for job creation and
the creators of the economic growth necessary to pull our
country out of times of recession. This is key to understanding
the important role that small business contracting programs
play to the overall health of our Nation's economy.
In 2005, the Small Business Administration Office of
Inspector General released Report 5-15 that stated, ``One of
the most important challenges facing the Small Business
Administration and the entire Federal Government today is that
large businesses are receiving small business procurement
awards and agencies are receiving credit for these awards.''
For the past 6 consecutive years, the SBA IG continues to list
the same issue as one of the agency's top management
challenges.
In addition to Report 5-15, since 2003 there has been a
whole series of Federal investigations from the GAO and various
other Inspectors General showing areas of fraud and abuse
within these small business contracting programs. This fraud
and abuse has materialized in the diversion of billions of
dollars in small business contracts to large companies,
multinational corporations, Fortune 500 firms, and businesses
otherwise not qualified as small. We have conducted extensive
analysis on our own of this data, a lot of which was submitted
with my written testimony, and I would be more than happy to
discuss that in greater detail if necessary.
Small business contracting programs are credited with
helping millions of small businesses nationwide, and in these
times when we are focusing on the area of fiscal
responsibility, small business contracting programs are a major
answer to this.
Federal small business contracting programs are a deficit-
neutral way of creating jobs and stimulating economic growth.
The programs are already in place; the infrastructure already
exists; the money that the agencies spend is already being
budgeted. The Government does not produce computers. It does
not construct buildings. So there will always be contracting
out for goods and services. Thus, these programs are a vital
way to drive demand back into the hands of our small firms.
Senator Landrieu, in February of last year you specifically
stated, ``Government contracts are perhaps one of the easiest
and most inexpensive ways the Government can help immediately
increase sales for America's entrepreneurs, giving them the
tools they need to keep our economy strong and create jobs. By
increasing contracts to small businesses by just 1 percent, we
can create more than 100,000 new jobs--and today, we need those
jobs more than ever.'' I could not agree with you more on that
statement. Based on that estimate, fixing some of these
programs could result in the creation of over 1 million jobs.
I know I am short on time. Let me wrap up really quick,
please.
Our understanding is that some agency employees and SBA
officials believe that the Government's 23-percent procurement
goal is not achievable. I am here to state that that belief
could not be further from the truth. And, in fact, the
Government's small business goal can be achieved or surpassed
by simply implementing a series of targeted reforms to small
business programs. I will just outline three real quick steps.
One is to pass a Senate companion version of the Fairness
and Transparency in Contracting Act. This was a bill introduced
in the previous Congress by Congressman Hank Johnson of
Georgia. He plans on reintroducing this bill in the House again
this year. It will shut down a major loophole that has allowed
large firms to get small business contracts.
Secondly, to establish a small business set-aside program
for task orders placed against GSA schedules or other
Government Wide Acquisition Contracts, or GWACs, or large
Government contract vehicles. Years ago, Congress passed
legislation mandating that any contract with a value less than
$100,000 be specifically set-aside for small businesses.
Shortly after passage, the FAR Council passed a rule exempting
GSA schedule contracts from that, and let me say that
contracting data shows that over one-fifth of all Federal
contract actions are under $100,000; however, a majority of
those contracts go to large firms. So simply removing that
exemption and putting a set-aside rule in place for other GWACs
could significantly increase the pool of opportunities for
small businesses to work with the Government and would help in
achieving or superseding that 23-percent goal.
Lastly, we ask for and applaud the introduction of S. 633
and push for the passage of that legislation. It creates some
teeth within the law and provides tools for various agency
officials such as the SBA IG as well as outside advocates to
strictly enforce fraud in contracting programs. Contractors
need to know that there is punishment for committing fraud and
that that will be followed up on.
Let me finish please by stating again----
Chair Landrieu. Mr. Baron, you are already 2 minutes over.
I am sorry.
Mr. Baron. Okay.
Chair Landrieu. It was wonderful testimony, but I have to
be fair to everyone, and thank you so much.
Mr. Baron. I understand. Thank you.
[The prepared statement of Mr. Baron follows:]
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Chair Landrieu. I really appreciate it.
Mr. DeHaven.
STATEMENT OF TAD DEHAVEN, BUDGET ANALYST, CATO INSTITUTE
Mr. DeHaven. Chair Landrieu, members of the committee,
thank you for inviting me here to testify today regarding the
Small Business Administration.
Chair Landrieu. Is your microphone on? Is your button
pressed?
Mr. DeHaven. There we go. Thank you.
Chair Landrieu. There we go.
Mr. DeHaven. Most Americans correctly recognize that
Washington does a poor job of managing their money. The Cato
Institute has documented countless examples of waste, fraud,
and abuse at its website, www.DownsizingGovernment.org.
Policymakers on both sides of the aisle recognize that
examples of waste, fraud, and abuse do not sit well with the
American people and are, therefore, constantly promising that
they will work to eliminate Government waste.
What few in Washington want to acknowledge is that waste,
fraud, and abuse always comes with Government programs--the
same way a Happy Meal always comes with a toy and a drink.
For decades, there have been efforts to end such abuses,
but Federal programs are extremely complex and they deliver
benefits to thousands or millions of recipients. As a result,
Government programs are always chasing their tail. In the
private sector, businesses have a financial incentive to stop
abuses before they happen. No such incentive exists with
Government programs.
The Small Business Administration is no stranger to waste,
fraud, and abuse. By the mid-1970s, the agency had earned the
nickname ``Small Scandal Administration.''
Now, we have already discussed today many examples of
waste, fraud, and abuse, duplication, and inefficiency, so we
will move along, therefore. And as I discussed, however,
Government programs and waste go hand in hand. Generally
speaking, the more the Government spends, the more taxpayer
dollars will be wasted. Therefore, the best way to rein in
waste and inefficiencies is to rein in the size and scope of
Government.
Economic development subsidies are not a proper role of the
Federal Government. Indeed, what policymakers innocuously refer
to as ``economic development'' is just a form of central
planning. Central planning can end badly for the general
public, as demonstrated by the recent housing collapse and
economic downturn, which is a direct result of distortions in
the housing market fostered by Government policies.
In addition to the taxpayer costs, there are other problems
with SBA-style economic development or what is called
``corporate welfare.
First, corporate welfare creates an uneven playing field.
By aiding some businesses, corporate welfare puts other
businesses at a disadvantage, which distorts markets. For
example, small businesses that do not receive a loan backed by
the SBA are disadvantaged because they must compete against a
business that did receive Government backing.
Second, corporate welfare programs duplicate activities
that are routinely, provided in private markets, such as
lending. If such commercial-oriented activities are useful,
then private markets should be able to perform them without
Government help.
Third, corporate welfare generates an unhealthy
relationship between businesses and Government. Corporate
welfare creates special interests that work to protect their
Government-granted privileges. Privileged interests have a
strong incentive to build organized groups to lobby Congress to
expand their benefits. These groups set up camp near Capitol
Hill to advocate their issues, and many policymakers become
convinced of the merits of special interest causes after
hearing about them year after year.
At the same time, average citizens do not have a strong
incentive to battle against particular subsidies because each
program costs just a small part of their total tax bill.
In conclusion, many of the problems with the SBA that have
been discussed today have been discussed for decades. There is
only one way to eliminate those problems, and that is to
abolish the Small Business Administration. The United States
grew to become the economic envy of the world with a small
central Government that largely left business development to
the private sector. The dramatic ascent of the American economy
did not come about as a result of small business subsidies and
central planning from Washington. We should dispense with
Government favoritism to small businesses and large businesses,
and allow America's entrepreneurs to compete on a level playing
field serving their customers.
Thank you very much.
[The prepared statement of Mr. DeHaven follows:]
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Chair Landrieu. Thank you very much.
Ms. Pastore.
STATEMENT OF FRAN PASTORE, CHIEF EXECUTIVE OFFICER, WOMEN'S
BUSINESS DEVELOPMENT COUNCIL, STAMFORD, CT
Ms. Pastore. Thank you, Madam Chair Landrieu, Ranking
Member Snowe, and Committee members, for taking the time to
bring much-needed attention to this very crucial issue facing
entrepreneurs. I am honored to speak before you today regarding
the Small Business Administration.
My name is Fran Pastore. I am the Founder, President, and
CEO of the Women's Business Development Council. I have been
actively engaged in the Women's Business Center program for
more than 17 years, and I have a long history of working with
SBA and its partners.
I come before you today to provide my testimony on a
subject that is obviously not only near and dear to me
personally, but also to the more than 160,000 clients that are
served by the Women's Business Centers funded by SBA.
My goal is to illustrate that the Women's Business Center
program, which provides a wide variety of services, including
training, counseling, and mentoring, is vital to women
entrepreneurs of all socioeconomic backgrounds--especially
minority and low-income women to whom entrepreneurship provides
a logical and reachable goal to economic self-reliance. And it
is not duplicative of other SBA programs; rather, the Women's
Business Center (WBC) program strives to work in concert with
its partners.
According to the SBA's Office of Entrepreneurial
Development 2010 Impact Report, WBC clients who received 3 or
more hours of counseling reported a 47-percent increase in
sales. Businesses that receive assistance from Women's Business
Center programs have significantly higher survival rates.
Women's Business Center programs offer access to all of
SBA's financial programs, which have had a major impact on
women-owned microbusinesses. During fiscal year 2009, the SBA
backed nearly 10,000 loans worth about $2 billion to women
business owners, and women entrepreneurs received $26.8 million
in investment capital through the SBA's small business
investment companies.
For a Federal investment of $36.5 million between 2001 and
2003, a total of $500 million in gross business receipts were
generated--a 14:1 ratio of business revenues to Federal dollars
invested.
The WBCs establish long-term relationships with clients and
serve them from inception through the life cycle of their
businesses; whereas, SBDCs and SCORE chapters are more likely
to provide one-time, transactional support.
Women's Business Centers provide a variety of services,
including counseling, training, peer groups, and mentoring
support; whereas, Small Business Development Centers and SCORE
chapters are more likely to provide one solution to their
clients.
Given that the Women's Business Center programs are locally
designed and embedded within local economic development groups,
Women's Business Center support is more customized and tailored
to the needs of particular communities; whereas, SBDCs and
SCOREs are more likely to look similar regardless of location.
A study conducted by the National Women's Business Council
found that there was no difference in program outcomes of
Women's Business Centers based on their proximity to Small
Business Development Centers or SCORE chapters. The clients
they serve and support they provided are different, and the
number of firms launched or businesses created are the same.
I draw your attention to the 2007 GAO report, which
specifically outlines issues within SBA that impede the
effectiveness of its relationship with Women's Business
Centers.
I recommend that SBA continue to implement strategies that
eliminate the silos that currently exist between those three
organizations: the Women's Business Center program, the SCORE
chapters, and the Small Business Development Centers. It is
worth a closer look at the SBA organizational infrastructure
and how institutional processes can be streamlined for each
program rather than simply eliminating an already underfunded
program for women that has a proven track record.
Let us not destroy the hopes and dreams of women
entrepreneurs, many from low-income and minority backgrounds,
many of whom are single mothers, working multiple minimum wage
jobs, who see the dream of entrepreneurship as a game changer
for their future and the future of their families. Owning and
operating a microenterprise and developing good financial
habits empowers these women to achieve their humble goals: a
roof over their heads, a secure future for their children, and
a way up. Thus, it has a positive impact on their children and
on their communities because they become active contributors to
the American economy as taxpayers and by creating jobs for
themselves and others.
If we eliminate the SBA's valuable programs specifically
targeted for women, what are we saying about the value that we
place on women in our country and our belief in their ability
to play a vital role in turning this economy around?
Cutting the Women's Business Center program will compromise
SBA's legacy and its ability to help lead the Nation out of
this recession and will call into question the fundamental
reason for their existence.
Chair Landrieu, this concludes my prepared statement. Thank
you for your commitment to women-owned businesses and for
giving me the opportunity to speak before you today.
[The prepared statement of Ms. Pastore follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Landrieu. Thank you very much, Ms. Pastore.
Mr. Clarkson.
STATEMENT OF GREG CLARKSON, EXECUTIVE VICE PRESIDENT-SBA
LENDING DIVISION OF BBVA COMPASS BANK AND CHAIRMAN OF NAGGL
BOARD OF DIRECTORS
Mr. Clarkson. Chair Landrieu, Ranking Member Snowe, and
members of the Committee, thank you for holding this hearing
and inviting me to testify today on the inefficiencies in the
SBA process. Thank you also for your ongoing support of the SBA
and the recognition that this lending program is vital to
economic growth and job creation during good times and bad.
The SBA loan programs keep credit flowing and fill a
critical gap for small businesses, particularly startup and
early stage companies--those that need access to longer-term
loans. Since the banking industry is highly regulated as
opposed to a free-market environment, arbitrary parameters have
limited qualified small business owners' access to credit on
reasonable terms. The lender is the one that says yes to the
loan. The SBA then in turn says yes to the partial guarantee.
The SBA, through its private sector lending partners, now
accounts for approximately 70 percent of the outstanding
balance of all long-term small business loans made in America,
making the agency the single largest provider of long-term
capital to U.S. small businesses. That is not a duplication of
lending efforts, but it is a vital component to overall capital
access.
The importance of SBA lending to small businesses is
clearly evidenced by the demand for the programs. In the last 2
years the SBA loan programs have delivered $42 billion to small
business owners. The 7(a) guarantee program has worked so well
and the need is so great that the SBA risks exceeding the
authorization level of $17.5 billion this fiscal year. Without
legislative relief, this could result in a curtailment of vital
credit to small businesses or possibly a shutdown of the 7(a)
program availability until that authority is restored.
The SBA must have an environment that continues to foster
responsible participation by its lending partners. A key
component in that effort is an effective lender oversight
program. Lender oversight should be a means for the agency to
identify variances from established lender benchmarks and to
provide a reasonable process for lenders to remedy
deficiencies.
NAGGL has long advocated an oversight program that is
timely, consistent, and constructive while it provides value to
the agency, lenders, and taxpayers. Loan risk and losses cannot
be eliminated from any lending program; however, they can be
managed to reasonable tolerances.
The SBA has established a lender oversight structure that
combines off-site monitoring and on-site reviews. However,
NAGGL believes that there are correctable weaknesses in the
current program that need to be addressed. We have some
recommendations.
First, the SBA should establish and publish commercially
reasonable lender performance benchmarks and periodically
update them as economic conditions warrant.
Second, the SBA should use existing data that is provided
by lenders on a monthly basis and that is derived from loan
origination to develop an early-warning system that detects on
a real-time basis risk in any lender's portfolio. Currently
they are using a third-party contractor that uses a predictive
scoring model that has questionable results and is expensive to
the lenders.
Third, the lender oversight program should reach all of the
lending partners--large banks, community banks, high-volume and
low-volume.
NAGGL has raised concerns about the timeliness and
transparency of the existing lender oversight program. That
includes the timeliness of written on-site reports, PLP renewal
timeliness, and also accuracy of lender portal information and
ratings.
I commend Administrator Mills and Associate Administrator
Smits for their efforts to improve the oversight program. What
they have done, they have taken some managerial and
administrative changes to help improve those issues.
The public-private partnership that exists in SBA's lending
programs has been and continues to be an example of what can be
achieved when the Federal Government and the private sector
work together. It is vital to economic growth and job creation
to keep SBA's loan programs available to meet the capital needs
of tens of thousands of creditworthy small businesses that have
limited options. These loan programs merit continued bipartisan
support in Congress.
Chair Landrieu and Ranking Member Snowe, this concludes my
oral statement. I have also submitted written testimony for the
record. Thank you for all that has been done for America's
small businesses through this Committee and through your
efforts.
[The prepared statement of Mr. Clarkson follows:]
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Chair Landrieu. Thank you very much, and thank you for
being specific in your recommendations on how to improve this
program, which I believe is very important.
Let me start with you, Mr. Shear. You have outlined the
duplication across agencies of many different economic
development programs. It is my understanding that based on your
report, SBA and USDA have entered into some sort of memorandum
of understanding to better coordinate their programs. Is that
your understanding? And if so, could you give us an update, if
you are knowledgeable about that arrangement between
Agriculture and SBA?
Mr. Shear. Yes, I can. We are aware of the MOU, and we
think that it is very broad, it is general, where many times
what we are looking for for comprehensive collaboration are
more specific MOUs.
When we reach out to each agency to ask them what type of
collaborative practices are actually evolving, the one agency
that has responded to us is USDA. SBA has not provided us
information that would suggest the type of collaboration that
was conveyed in the first panel of this hearing, and it is
disturbing to us because we have heard about plans to
collaborate, yet we observe that USDA seems to be the one
agency that is interested, and collaboration cannot be a
unilateral action.
What USDA is doing at this stage is it is reaching out to
its own field offices to try to assess how much collaboration
is occurring out in the field rather than trying to develop
more collaborative practices at the agency-wide level.
Chair Landrieu. Okay. We will follow up on that.
Mr. Baron, you gave a fairly strong statement supporting
the notion--and we agree--that the Federal government does have
a particular role and obligation to make sure that the 26
million small businesses have access to Government contracting;
otherwise, they could be muscled out or squeezed out by big
businesses that have potentially greater access in terms of
lobbyists, et cetera, et cetera. But there are some members,
and even on this Committee, that would disagree with that.
What are your best one, two, or three arguments as to why
this contracting program--a special set-aside, if you will--for
small business is necessary? Some people think business is
business. Small businesses should compete against large
businesses for government contracts. What would you give as
your best arguments as to why this program should be continued
and supported and improved?
Mr. Baron. Sure. Essentially in looking at these
contracting programs, we kind of view it as looking at the
health of the economy as a whole. We see the Small Business Act
that was established in 1953 as being one of the greatest
stimulus plans for the economy put into place.
There has been a lot of research done not only by our
organization but by others showing that small firms more often
than not can compete in providing products, goods, and services
of a higher quality at a cheaper price. We look at the fact
that small firms are not going to build tanks, boats, and a lot
of the big-ticket items. For example, Boeing was awarded the
tanker contract. However, small firms contribute as
subcontractors to all of those items quite a bit. And in
looking at the fact that one out of every $5 being spent by the
Federal government in contract actions is on contracts under
$100,000. Those are well within a range for small firms to
easily compete with and should be used. If we see right now
that small firms are creating the majority of net new jobs and
are the most vibrant part of our economy, we should be doing
everything possible to help provide demand, drive demand for
them.
We have been hearing more and more from small businesses
that what they are looking for right now is they need business
walking in the door. They need demand to increase. So we see
these contracting programs as a way of literally bringing that
demand to them and having them--we see that multiplier effect.
When small firms get Federal contracts, they hire out of the
local community. That money gets spent back within the local
community that grows and builds from the ground up, which is
exactly what we need going forward to help rebuild our economy,
get us stabilized, and move forward again.
So I think, you know, when we are looking at this,
historically speaking these programs have provided for
thousands of small businesses, taken a business from just a few
employees and helped it grow into a very successful company
that employs lots of Americans today.
Chair Landrieu. Thank you.
Mr. Clarkson, some members have indicated that they do not
believe Government should be choosing who to lend money to. It
is my understanding--and I want to ask you if it is yours--that
under the current lending programs, isn't it the community
bankers in the community that are making those decisions as to
who to lend to and the Government is just providing a
guarantee? How would you describe that? Is it Government
choosing or is it the local community bankers that are in the
communities that must know the people very well or know them
more than the Federal Government would know them?
Mr. Clarkson. It is the lenders that are actually making
the credit decision as to whether the loan is made or not made,
and so that includes not only the community lenders, but all of
the other lenders that are out there, the 3,000 lenders that
are participating in this program.
We do our credit analysis. We evaluate the structure of the
loan, and we are the ones that are making the decision. In
turn, the SBA provides the guarantee, so it is not even a
straight dollar out of that the SBA is having to commit. It is
a guarantee of potential losses on that transaction. And to
note, it is a sharing of the risk. It is not a complete
transfer of the risk over to the SBA or the Government. And as
lenders, we not only collect fees from the borrower that are
remitted to the SBA, but we in turn also remit fees to the SBA
for our participation in that program. So it is a well-run
program----
Chair Landrieu. A public-private partnership really from
the community lending perspective.
Mr. Clarkson. That is exactly what that is.
Chair Landrieu. And my final--and I will get to the
Senators. I beg your forbearance here.
Ms. Pastore, I am considering very strongly trying to
review and look out into the country the best entrepreneurial
training programs that exist because I do believe that
America's strength is in entrepreneurial activity and trying to
figure out who is doing that well, who is doing it better than
others for some potential legislation.
You mentioned in your testimony that, unlike SCORE, Women's
Business Centers are there helping a business to grow, et
cetera, et cetera. How many volunteers, either in numbers or in
volunteer hours, are associated with the Women's Business
Centers? And if you do not know that, if you could get that
information. Because my understanding is that a SCORE model is
really more volunteer driven; yours is more 100 percent
Government funded. And I am trying to find what model is the
best, et cetera. So what would you say to that? And then I will
get to the other Senators in a moment.
Ms. Pastore. I would say to that, in terms of the number of
volunteer hours and the numbers of volunteers across the
country, across all 110 Women's Business Centers, that is a
very big part of the operation. I can get you those specific
numbers. But I can tell you that in Connecticut we have over
150 volunteers, because when you are thinking about a small----
Chair Landrieu. Statewide or----
Ms. Pastore. Statewide. We have two Women's Business
Centers in our state, and I represent both of those, and we
have about 150 volunteers that teach, train, counsel, and
mentor, because with a very limited budget--usually a
shoestring--we have a small staff, and we have to leverage
community resources.
What the Women's Business Centers provide is an opportunity
for professionals in the community to volunteer their area of
expertise, and I bring a volunteer with me here today,
actually, from Connecticut, who volunteers her time and her
expertise to clients. We make it very easy and very comfortable
for them to do that.
So it is a very similar--it is similar in some degrees, but
the oversight and the training that we provide to our
counselors and our mentors and our volunteers is pretty
rigorous. And not just anybody can volunteer. There are serious
qualifications that have to be reviewed.
Chair Landrieu. Thank you.
Senator Risch, who has taken over for Senator Snowe or
Senator Paul.
Senator Risch. There goes your battlefield promotion.
[Laughter.]
Mr. Baron, have you heard about--well, I am sure you have
heard about the proposal from the President by Executive order
to require anyone who is doing Government contracting to
disclose their political contributions, not only the company
but also the directors and that sort of thing. Have you heard
about that proposal that is on the table?
Mr. Baron. Yes, I have.
Senator Risch. Okay. What is the position of your
organization on that?
Mr. Baron. Well, our organization has not come out with an
official position, but essentially the way that we have fallen
in discussion with several congressional offices on this is
that we are always pushing in favor of greater transparency.
And we believe that the Presidential Executive order, while not
perfect, does offer greater transparency into how some of the
money is being spent when it comes to contractors' connection
with Members of Congress or members within the Administration.
What we see frequently, I think, based on several websites
that you can go to that track a lot of money, is just seeing
how money is being spent and influenced and trying to determine
whether or not campaign contributions or things of that nature
have a direct impact on companies' abilities to land Federal
contracts and is that really having an impact in helping skew,
so that contracts are not being awarded based on who can
provide a better, a superior product at the best price but who
has connections.
Senator Risch. Are you worried about the reverse of that,
that is that those who are awarding the contracts want to see
that their money is going to the right place as far as they are
concerned?
Mr. Baron. Are we worried about that?
Senator Risch. Yes.
Mr. Baron. I would say at this point not as much. From what
we are hearing from our members, small businesses do
participate in contributing to various candidates, campaigns as
well. They do not seem to have a concern as far as that
information being public.
Senator Risch. My constituents would disagree with the
membership of your organization.
Mr. DeHaven, I think I probably know what Cato's position
is on this, but have at it.
Mr. DeHaven. Well, yes, I mean, we believe that the SBA
should be abolished. We believe that there is absolutely no
role for the Federal Government in the credit markets.
Actually, if you look at history, the SBA is an interesting
character because it is actually one of those few Government
programs----
Senator Risch. Mr. DeHaven, I got that. Could you go back
to the issue of the President's Executive order to disclose
campaign contributions, without the force of law? He is doing
an Executive order as opposed to having a congressional
statute.
Mr. DeHaven. Cato has written books on the abuse of
Executive power. It has been building for years. The Bush
Administration took it to new levels, and the Obama
Administration is basically building on what came before him.
As to the specifics of that issue, I am not completely
familiar.
Senator Risch. Ms. Pastore, does your organization have a
position on that particular Executive order?
Ms. Pastore. We do not.
Senator Risch. Okay. Thank you very much.
Mr. Clarkson, you are in the lending--you represent the
lenders so I assume you do not have a position on that.
Mr. Clarkson. We do not.
Senator Risch. Thank you very much.
Thank you, Madam Chairman.
Chair Landrieu. Thank you.
Senator Brown, thank you for joining us, but Senator Paul
has been here. Do you mind if he does his questioning? Then we
will go to you.
Senator Brown. No, no. I just came from SASC. We are in our
SASC hearing.
Chair Landrieu. Thank you so much.
Senator Paul. I still get to assume some sort of authority
and seniority here.
Senator Brown. We will see.
Senator Paul. We will see.
[Laughter.]
Chair Landrieu. First to come, first to question.
Senator Paul. All right. Thank you very much.
Mr. DeHaven, if the SBA exists to give loans to firms that
are--there is this market failure, firms are not getting loans,
this is sort of--in other words, these are firms that I guess
the marketplace has already voted against, the marketplace
voted not to give them funds, so the Government is going to
give them funds.
If so, I guess we are kind of lucky the SBA is only giving
out about 1 to 5 percent of business loans because if they were
giving out loans at the rate, for example, of the home
mortgages--80 percent of them were owned by the Government, by
Fannie Mae and Freddie Mac--we set sort of sub-standard ideas
for who we gave the money to, and because of that it led to an
enormous problem in our economy.
So I guess the only thing I can think of is that we are
lucky maybe the SBA gives a few loans and that they are giving
them to people who are less creditworthy by definition because
this is supposedly the market failure.
Now, my other question and what I would like you to comment
on is that we are told, well, SBA is not making the decisions,
this is just the banks who are making the decision on the
creditworthiness. But, also, if we look closely at the
requirements here, 23 percent of Federal contracts have to go
to small businesses. We are dictating how the Federal
contracting policy works. We are also dictating that the small
business loans are either women or minority owned, and they get
preferential treatment, not based on creditworthiness but just
based on their chromosomes or the color of their skin.
I would like you to make a comment on the market failures
and also how SBA loans are being dictated not based on
creditworthiness.
Mr. DeHaven. There was an interesting comment made by Mr.
Clarkson about the community lender, the community banks. They
have relationships with the folks closest to the community and
the Federal Government does not, so, therefore, the Government
is not dictating.
But that argument in itself mitigates against there being a
market failure because you are saying that we are closest to
the lender, we have a relationship, therefore, we can make the
decision.
This idea of market failure--you know, I was out in the
State of Indiana, and one day I tried out a new pizza place,
and up on the wall is a newspaper article that says ``we got
started with a small business loan.'' And that really set off
bells in my head. I thought, well, there are thousands of pizza
places in Indianapolis. Why are they getting an SBA loan that
helps them compete against somebody else?
Now, that is inherently discriminatory, and I am not sure
what the constitutional basis for the SBA is. Some might say
the general welfare, but that is not the general welfare. You
are discriminating against other businesses.
Senator Paul. I guess the question would be how good is the
pizza. You know, the other people got their loan and are
successful based on the taste of their pizza and pleasing their
customers. This person got a loan because they were connected
somehow to Government.
The other question I have for you, Mr. DeHaven, would be:
Right now do you think it is a good idea to increase taxes on
individuals and businesses that earn over $200,000 a year?
Mr. DeHaven. No, of course not, and I accidentally started
answering Senator Risch's original--is that when the SBA was
created, the small business community was either ambivalent or
did not even want it. What they were concerned about at the
time in the 1950s was the increase in government in terms of
regulation and taxes as a result of the New Deal in World War
II. So what was the response from the Government? Instead of
addressing those problems and fixing those problems, we will
create a Government bureaucracy. And the rest is history. Once
that bureaucracy became entrenched--and, again, we are having a
hearing today about waste, fraud, and abuse in Government
programs. I staffed a hearing for Senator Coburn 5 years ago on
the SBA. William Shear was there to testify. This is like
Groundhog Day for me. The only difference between 5 years ago
and today is that I am sitting and talking to you instead of
sitting behind you.
Senator Paul. May I have a few seconds?
Chair Landrieu. Go right ahead.
Senator Paul. One last question would be: Mr. DeHaven, do
you think that Dodd-Frank is going to help with small
businesses getting loans, or do you think it is going to hurt
with small businesses getting private loans?
Mr. DeHaven. Our regulatory experts are dead set against
it. As you mentioned, just yesterday the NFIB, the National
Federation of Independent Businesses, came out with their
latest survey: 3 percent of their small business respondents
said that credit was their number one concern--3 percent. And
that has been consistent throughout even the recession.
When you look at the combination of taxes and regulations,
that is their biggest issue, and yet we persist, as we have for
50 years, trying to address the interests of small business
through bureaucracies and Government programs. And then we
wonder why we have waste, fraud, abuse, and inefficiency.
Senator Paul. Thank you, Madam Chairman.
Chair Landrieu. Thank you so much.
Senator Brown.
Senator Brown. Thank you, Madam Chair.
Mr. Shear, I know your GAO report suggested that agencies
should leverage physical and administrative resources,
establish compatible policies and procedures, monitor
collaboration, basically streamline, consolidate, et cetera, et
cetera. I know the SBA has taken some initial steps. Are you
satisfied that they have taken rigorous steps to incorporate
your suggestions on how to address the issues from overlapping
programs and the like?
Mr. Shear. At this stage we have identified potential
duplication, potential overlap, so it is not like we have
gotten down to specifically what programs might be those most
prone for consolidation. But where we have taken very strong
positions based on rigorous audit work in the past has been
that when multiple agencies and multiple programs are providing
at least compatible programs and services, there should be--
collaboration can improve the leveraging of resources and can
lead to more efficient distribution of those resources. And
when it comes to SBA and USDA particularly in rural areas, we
have been, in all honesty, disappointed by the lack of action
of the two agencies to work together to come up with
collaborative practices that could provide some structure for
them delivering their services.
Senator Brown. So, in other words, not much has been done
to basically address those issues.
Mr. Shear. I would agree with that, that they have
established an MOU without taking it further.
Senator Brown. I get it. Thanks. All right.
Just to go back to you, Mr. DeHaven. You indicated that you
went to the pizza place, and you wondered how they got the
loan. And then you also said you felt it was discriminatory
that they would actually get the loan. How can you make that
statement based on the fact that you know nothing about the
loan? You do not know what circumstances at all that they got
the loan. They may have been the only one who applied for the
loan. They may have rehabilitated the building. They may have
taken a chance in an area that nobody else did. How do you make
that statement and stand behind it?
Mr. DeHaven. The discrimination occurs against those pizza
shop entrepreneurs who did not get Government backing.
Senator Brown. But they could have applied, potentially,
just like everybody else.
Mr. DeHaven. I do not. They could have, but they did not.
Senator Brown. You do not know, but you are claiming that
that is discriminatory based on basically having no basis in
fact.
Mr. DeHaven. Unless every single pizza shop in that area in
the State of Indiana, and I would say across the country, is
getting their start with a Government-backed loan, then there
is necessarily discrimination.
Senator Brown. But they potentially could have done that
had they sought the application and applied for it.
Mr. DeHaven. Not necessarily because the SBA is capped in
how much loans--and I think that actually brings up an
interesting issue. If it is such a great program and such a
good idea, why is there a cap on 7(a) lending volume?
Senator Brown. To take it a step further, I find it kind of
inappropriate that you would make a statement that it is
discriminatory for that pizza place to get a loan without
having the facts, and I think it is the kind of rhetoric like
that, as you throw it around--and we hear those things in a
whole host of areas in Washington. It does not help solve the
problem and basically step up and, you know, make it better and
encourage people to take a shot in business. That is just my
thoughts on that.
Mr. Clarkson, back to you, if I could shift gears a little
bit. I also find it disconcerting that the SBA's lending
program has not specifically been directed to find ways to
minimize expenditures and losses in a way that a bank tries to
do. Do you think it would work or could work if the SBA were to
engage the CDC in a collection process in order to stop
surrendering that money that we otherwise could recover?
Mr. Clarkson. Are you talking about under the 504 program?
You had said the CDC----
Senator Brown. Any program where it is applicable.
Mr. Clarkson. Under the guaranteed program, what we do as
lenders, we are the ones that liquidate the collateral, and
then we request from the SBA their sharing, their pro rata
sharing of the loss in the residual. And we as lenders do not
give up all of the risk, so we do have our capital at risk. We
do have our personnel and our process involved in the
collection of those loans. So, yes, I mean, the system in and
of itself in my mind is working appropriately.
Senator Brown. Okay. And, Mr. Shear, back to you a little
bit. I know you have the reports, and you have noted the
duplication, and you commented that they really have not done
anything. At what point do you--or what role do you play to
say, you know what, you really have to start to do this?
Because every other--I mean, I am in SASC right now. We have
been in there for 2 days. We are cutting billions and billions
of dollars from the military budget at a time when we are in
two and a half wars. And yet we have other agencies that, you
know, they note these duplications and overlaps and ways that
they could consolidate and streamline to save the taxpayers
money, and they are not doing anything. At what point do you or
other agencies, you know, say, hey, guys, it is time, you have
got to really kind of get with the program here?
Mr. Shear. One of the reasons why we are undertaking this
work and devoting resources to it to look at economic
development programs and why as an agency we are looking across
the Federal Government and the Comptroller General has made a
commitment that we will reach across the Federal Government by
2013 to look for duplication, overlap, and fragmentation in
Federal programs is to try to inform Congress as far as how
programs are operating and where there might be chances for
efficiencies, for better program delivery, an also for
efficiencies that could reduce Federal costs.
Senator Brown. Madam Chair, thank you. I would hope that we
could, in fact, find a mechanism to put some teeth into some of
these recommendations to have these agencies actually get
cracking and save us some taxpayer money.
Chair Landrieu. Thank you, Senator Brown. I really
appreciate your sincerity, and I would like to close with just
two comments.
One, the defense budget is about $649 billion; homeland
security is $42 billion. The entire SBA program is less than
$900 million. Now, that is not an excuse to not make it as
efficient and as effective as it can be. But, you know, if we
did take Mr. DeHaven's recommendation to completely eliminate
it, it would save $900 million. A small percentage cut in
defense would double or triple that in one fell swoop.
Having said that, that is what this hearing is about.
Senator Snowe and I are committed to eliminating waste, fraud,
abuse, and exploitation of government programs.
Finally, in conclusion, I am going to present this to all
of our members because I carry this around with me. These are
the private sector partners of the SBA. Some of them are
private sector partners. SCORE is for the most part private
sector. The government funds it at a small amount, but it
leverages an extensive volunteer network which is private. The
SBDCs are supported by the government and the Women's Business
Centers. So you can see they are represented all over the
country.
There are other partners--that would be state economic
development offices--that are not on here. There are city
economic development offices. In the city of New Orleans, there
is the Idea Village, which is run privately by entrepreneurs,
with some government funding.
Mr. Shear, what I am getting at is I really want to try to
get to a position where we can identify which of these are
working well, leveraging taxpayer money well, and which are
absorbing a lot of taxpayer money without working well, so that
I can do my job in this Committee to eliminate those that are
not living up to the mark.
So I want to share this with you for the record, and I look
forward to working with you so we can identify, again, out
there in the country what entities are really doing a very good
job and which ones are not and trying to do our job by
eliminating those that are weaker.
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Thank you so much, and we will end the hearing. Thank you
all very much for coming. I appreciate it.
[Whereupon, at 11:53 a.m., the Committee was adjourned.]
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