[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]


                    SBA MANAGEMENT AND PERFORMANCE 
                  CHALLENGES: THE INSPECTOR GENERAL'S 
                              PERSPECTIVE

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

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                             MARCH 16, 2016

                               __________

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT] 
                               

            Small Business Committee Document Number 114-049
              Available via the GPO Website: www.fdsys.gov
              
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                   HOUSE COMMITTEE ON SMALL BUSINESS

                      STEVE CHABOT, Ohio, Chairman
                            STEVE KING, Iowa
                      BLAINE LUETKEMEYER, Missouri
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                         CHRIS GIBSON, New York
                          DAVE BRAT, Virginia
             AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
                        STEVE KNIGHT, California
                        CARLOS CURBELO, Florida
                          MIKE BOST, Illinois
                         CRESENT HARDY, Nevada
               NYDIA VELAZQUEZ, New York, Ranking Member
                         YVETTE CLARK, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                       BRENDA LAWRENCE, Michigan
                       ALMA ADAMS, North Carolina
                      SETH MOULTON, Massachusetts
                           MARK TAKAI, Hawaii

                   Kevin Fitzpatrick, Staff Director
             Emily Murphy, Deputy Staff Director for Policy
                       Jan Oliver, Chief Counsel
                  Michael Day, Minority Staff Director
                            
                            
                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Steve Chabot................................................     1
Hon. Nydia Velazquez.............................................     2

                                WITNESS

Hon. Peggy E. Gustafson, Inspector General, United States Small 
  Business Administration, Washington, DC........................     3

                                APPENDIX

Prepared Statement:
    Hon. Peggy E. Gustafson, Inspector General, United States 
      Small Business Administration, Washington, DC..............    21
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    None.

 
  SBA MANAGEMENT AND PERFORMANCE CHALLENGES: THE INSPECTOR GENERAL'S 
                              PERSPECTIVE

                              ----------                              


                       WEDNESDAY, MARCH 16, 2016

                  House of Representatives,
               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 11:00 a.m., in Room 
2360, Rayburn House Office Building. Hon. Steve Chabot 
[chairman of the Committee] presiding.
    Present: Representatives Chabot, Hanna, Huelskamp, Curbelo, 
Hardy, Kelly, Velazquez, Meng, Clarke, and Adams.
    Chairman CHABOT. Good morning. The Committee will come to 
order.
    I would like to welcome back before the Committee the 
Inspector General of the Small Business Administration, the 
Honorable Peggy Gustafson. Over the past few weeks, the 
Committee, along with its Subcommittees, has held a series of 
hearings in response to a report by the Government 
Accountability Office, the GAO, regarding management 
deficiencies within the Small Business Administration. The GAO 
noted that many of the challenges identified in its report were 
first identified by the SBA's Office of the Inspector General.
    Today, we will hear Inspector General Gustafson's unique 
perspective on the management of the SBA, as well as her 
insight into ways in which the SBA may more effectively and 
more efficiently assist small businesses.
    I was troubled by the findings made in the GAO's report, 
and I think most of the members of this Committee were as well. 
What was particularly disturbing was just how many of the 
challenges identified in the report had already been identified 
by the Inspector General and were known by the SBA. In fact, 
reports and audits compiled by the Inspector General reveal 
that some of the most serious management challenges affecting 
the SBA were first highlighted over a decade ago. As these 
issues have gone unresolved, SBA programs have remained 
vulnerable to waste, fraud, and abuse, which undermines the 
agency's mission to support America's small businesses.
    It is clear that the Inspector General plays a critical 
role in ensuring effective management of the SBA. By conducting 
audits to identify program mismanagement, by investigating 
fraud or other wrongdoing, or by recommending changes to 
increase the efficiency of SBA operations, she has provided 
independent and objective reviews of agency actions.
    Now the SBA, under the watchful eye of this Committee, must 
act. By clarifying the specific areas in which improvement is 
needed and highlighting possible paths forward for the agency, 
the insights offered by the Inspector General are invaluable as 
the Committee continues to work with the SBA to develop 
meaningful solutions to its management and performance 
challenges.
    I would like to thank you, Ms. Gustafson, for coming today, 
and we look forward to your testimony. I would now like to 
yield to the ranking member, Ms. Velazquez, for her opening 
remarks.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman. And welcome.
    Today we are holding the last in a series of oversight 
hearings this committee has undertaken over the past 2 months. 
It is only fitting that we culminate by examining the work of 
the Office of Inspector General and seek their input on ways to 
improve the agency. The OIG is an independent office tasked 
with auditing, investigating, and making recommendations to SBA 
that help the agency fulfill its mission. The OIG plays a 
critical role protecting the taxpayers' investment in SBA.
    In 2015, the OIG helped recover or save over $134 million. 
Every year, the OIG is tasked with informing this committee of 
SBA's top management challenges. This report not only helps 
with our oversight responsibilities, but also provides SBA with 
recommendations to address the challenges that are identified. 
Unfortunately, many of those issues are very longstanding 
problems, some going as far back as 1999.
    One area of serious concern is small business contracting. 
The OIG again identified several shortcomings in SBA oversight 
and data collection, and in turn, the reliability of the 
reporting of small business contracting goals. Furthermore, 
both the IG and GAO have recently reported weaknesses in SBA 
internal controls that ensure only eligible firms receive 
contracts set aside for the women-owned small business federal 
contracting program.
    Congress has given SBA the tools to address many of these 
problems, yet they remain unimplemented, and that is 
unacceptable. I look forward to hearing from the IG on ways SBA 
can improve the reporting on small business data and compliance 
with the small business minority and women-owned contracting 
goals. Another outstanding issue is the lack of oversight in 
the SBA-7 lending program. Though the agency has made progress, 
the IG continues to find fraud, waste, and abuse, particularly 
when loan agents are involved. The IG has recommended SBA 
assign unique identifiers to loan agents as a way to root out 
bad actors. I hope to explore this option during today's 
hearing and determine how we can better protect the American 
taxpayers.
    Additionally, multiple IG audits have uncovered millions in 
improper payments made under the 7(a) loan program. 
Particularly troubling to me is the IG's finding that SBA is 
not adhering to its own practices and procedures when reviewing 
high dollar, early default loans. As the size of the agency's 
portfolio increases, SBA must be more diligent in overseeing 
the 7(a) approval and purchase processes to minimize risk or we 
may need to reexamine the size of loans SBA can make.
    Finally, weaknesses in the administration of disaster loan 
programs continue to drag on at the agency. I cannot stress 
enough that this committee, the GAO, and the IG have all 
identified issues with disaster loan processing and we have 
implored the agency to implement the alternative loan programs 
enacted almost nearly 10 years ago.
    I know Administrator Contreras Sweet has prioritized 
improving the Disaster Loan program, and I am hopeful the 
increased scrutiny of the administrator's changes as a result 
of the IG adding this program to the list of management 
challenges will lead to its overall improvement. I am confident 
that we can use the IG's expertise and insight to explore ways 
for SBA to improve the delivery of small business contracting 
lending and entrepreneurial development resources.
    I look forward to hearing the IG's recommendations and 
working with you, Ms. Gustafson, to improve the SBA. I want to 
thank you for your presence here today, and I yield back. Thank 
you, Mr. Chairman.
    Chairman CHABOT. Thank you very much. The gentlelady yields 
back.
    I will now take a moment to go over our timing rules here, 
which with one panel member are pretty easy. We operate by the 
5-minute rule which we stick to, and we would ask you to stay 
within that if at all possible. There is a lighting system. The 
green light will be on for 4 minutes. The yellow light will 
come on for a minute to let you know that you have got about a 
minute to go, and the red light will come on. If you need a 
little more time since you are our sole witness that is okay. I 
ask Committee members if they have opening statements prepared 
to submit them for the record.
    We are now pleased to welcome back to the Committee 
Inspector General Peggy Gustafson, who has served as the SBA's 
Inspector General since 2009. We very much appreciate you being 
with us, and you are recognized for 5 minutes.

   STATEMENT OF THE HONORABLE PEGGY E. GUSTAFSON, INSPECTOR 
      GENERAL, UNITED STATES SMALL BUSINESS ADMINISTRATION

    Ms. GUSTAFSON. Chairman Chabot, Ranking Member Velazquez, 
and distinguished members of the Committee, thank you very much 
for the opportunity to be here today and for your continued 
support of the work of the Office of Inspector General. I am 
extremely proud to represent the dedicated men and women of our 
office, and I am very happy to come and talk to you about their 
work today.
    As you have noted, as an independent office, the Office of 
Inspector General conducts and supervises reviews and 
investigations relating to SBA programs and supporting 
operations. We seek to detect and prevent waste, fraud, and 
abuse and try to promote economy, efficiency, and effectiveness 
in the programs of the Small Business Administration.
    During the last fiscal year 2015, we achieved nearly $134 
million in recoveries and savings, which is more than a sixfold 
return on investment to the American taxpayer. We issued 17 
reports containing 80 recommendations for improving the SBA's 
operations and reducing fraud and the necessary losses. In 
addition, our criminal investigators, their investigations 
resulted in 52 indictments or informations and 57 convictions.
    While SBA's programs are essential to strengthening 
America's economy, this agency does face a number of challenges 
in carrying out its mission, including fraudulent schemes 
affecting all SBA programs, losses from defaulted loans, 
procurement frauds that allow large firms to obtain small 
business awards, excessive improper payments, and some pretty 
significant information technology management concerns.
    In October of 2015, we released our latest report on the 
most serious management challenge and performance challenges 
facing the SBA. Based on the agency's efforts, SBA did 
demonstrate positive progress in resolving recommendations 
associated with five of the identified challenges. However, 
they remained at status quo on four of the challenges and 
demonstrated no progress on one recommendation in an area 
related to information technology.
    Now, clearly these results I would say paint a mixed 
picture relative to SBA's commitment to addressing these 
challenges in earnest and their ability to overcome these 
challenges. As you have heard in your series of recent hearings 
held by the Committee, they face many serious concerns, SBA 
does, even beyond, of course, those designated as top 
management challenges. GAO did document some of these in 
September 2015 report, and I was certainly pleased to note that 
GAO cited the work products of this office as a basis for a lot 
of their findings in that report. It is nice to have one 
oversight give props to another. We appreciated that.
    So for your information, SBA currently has 144 open OIG 
recommendations pertaining to reviews conducted in recent years 
and not so recent years across SBA programs.
    I want to note that I do share the overarching concern 
expressed by GAO before this Committee in January. It would be 
irresponsible for me to not be concerned about the fact that 
SBA has not resolved many of these longstanding management 
challenges and that part of this reason may be due to a lack of 
sustained priority attention given to these challenges over 
time.
    Having said that, I think it also has to be acknowledged 
that SBA has shown that with a sustained, committed effort over 
time, they can achieve successful results in these challenges. 
For example, they moved to green and the very large challenge 
related to their LMAS IT system. So I think that really shows 
that these are challenges that with the right effort can really 
be conquered and met.
    The agency needs to strive for excellence in carrying out 
their programs. The agency leaders look to--it is essential 
that they look to and address the root cause of these problems 
evidenced by these recurring findings in these reports, and 
also pay attention to surveys, such as the Federal Viewpoint 
Survey mentioned in the GAO reports that where the SBA 
workforce does continue to express some dissatisfaction with 
the management.
    The challenge of long-term organizational transformation in 
areas of these, such as human capital and IT, they are hard 
challenges but they are not insurmountable with sustained 
attention by competent managers. I think that sustained 
leadership absolutely is necessary and that the SBA needs to 
try to close some of the revolving door on some of these key 
positions. For example, the CIO, the position of CIO that I 
know has been a source of concern and discussion within the 
SBA. There really needs to be an effort to work on having 
sustained leadership in positions like that.
    I am positive that everybody in the room agrees that 
America's small businesses and the taxpayer, they deserve no 
less than the SBA performing at its highest levels at all 
times. And for all those reasons, I really want to thank you 
for the opportunity to speak with you today, and I very much 
look forward to answering your questions.
    Chairman CHABOT. Thank you very much. We appreciate your 
time here, and now we will recognize some questions. I will 
recognize myself for 5 minutes for that purpose. You are right, 
we do owe the small businesses all across the country the best 
that we can provide and the best that the SBA can provide. You 
indicated their record as mixed, and mixed is not good enough. 
So they do need to do better, and also questions here is part 
of that process.
    My first question would actually be, last week your office 
released a report in which you identified a number of 
weaknesses in the SBA's management information security. 
Specifically, you found that the SBA is not sufficiently 
tracking security incidences, nor is it properly reporting them 
to the United States Computer Emergency Readiness Team. Your 
office made a similar finding last year looking at the SBA's 
2014 fiscal year. Could you expand upon that and address that 
issue and what you found?
    Ms. GUSTAFSON. Yes. Thank you, Chairman.
    The report that we are talking about, of course, is the 
annual FISMA, Federal Information Security, okay, FISMA report. 
You are right; one of the most concerning things about that 
report is in addition to 5 new recommendations in our report, 2 
of which the SBA was able to close in the course of our audit 
work, there were 31 recommendations that had been carried over 
from previous years, which is just an exceptionally large 
number of IT--we are talking about IT vulnerabilities, IT 
system issues. The ones that you are talking about, there were 
definite concerns about, again, instances not being reported 
timely, happening again. Information security is an excellent 
area where, again, it is clear that SBA, like every agency, has 
to always evidence a strong commitment to never, ever taking 
their eye off the ball on the state of information security and 
the state of their IT security. You will note that in their 
report, some of the issues that they talked about as far as the 
incidents not being centrally reported, not being reported in 
time, they even mentioned the idea of there has been a lot of 
turnover in the IT area. There are things that are happening 
where they almost dropped the ball. That is, of course, 
unacceptable. I think that FISMA, again, which was looking at 
how they did in fiscal year 2015, is a concerning report. I 
think it goes to show a perfect area where the agency needs to 
show leadership from the very top, saying this is not going to 
be acceptable. We are going to dedicate whatever resources it 
requires and address these issues.
    I will say that, you know, I know that the Deputy 
Administrator, Mr. Kramer, has taken this on as something that 
is important to him. In the middle of FISMA, there is also that 
cybersprint exercise where actually SBA did better. That was an 
exercise that all of the Federal Government went through after 
the OPM breach and things like that.
    Chairman CHABOT. Well, if I could just maybe--I have 
limited time.
    Ms. GUSTAFSON. Sure. I am sorry.
    Chairman CHABOT. I have 2 minutes to go. That is okay. You 
know, and I think the point is, and the important thing is they 
have a lot of sensitive information----
    Ms. GUSTAFSON. Right.
    Chairman CHABOT.--from a lot of small businesses all across 
the country.
    Ms. GUSTAFSON. Right.
    Chairman CHABOT. Bad actors are trying to get access to 
this information for all kinds of nefarious purposes. You know, 
we know that the Russians and the North Koreans and the 
Iranians and others want access to this, so the government has 
to do a better job.
    Ms. GUSTAFSON. Absolutely.
    Chairman CHABOT. The government has been hacked time and 
time again.
    Ms. GUSTAFSON. Absolutely.
    Chairman CHABOT. I assume you agree with everything----
    Ms. GUSTAFSON. I agree. I was hacked twice in the OPM 
audit. Do you know what I mean? I mean, in the OPM breach, so I 
think we all feel that. You are right, there is a lot of 
sensitive information related to businesses and individuals.
    Chairman CHABOT. Thank you. Let me follow up, also. Your 
reports have identified weaknesses in the SBA's incident 
reporting. Yet, in their most recent budget justification, the 
SBA claims to have had 100 percent success rate in timely 
reporting incidences during that time. Is there a way to 
explain how the SBA is making this claim? If the SBA is going 
to claim success in the face of failure, how can we be sure 
that they will actually address and resolve their management 
challenges?
    Ms. GUSTAFSON. Well, it would be hard for me to--and 
obviously, I cannot answer that question on behalf of the 
agency. I would note a couple of things. One is we are looking 
at a very specific time period when we are looking at FISMA 
where we did note that there were incidents not being reported. 
I would further note that the agency agreed with our findings 
in FISMA and actually had no quarrel with anything. So to the 
extent that there may be a disconnect on why one and not the 
other, I have to respectfully request that I think you may need 
to ask them because all I know is that they agreed with us.
    Chairman CHABOT. We will.
    Ms. GUSTAFSON. Yes.
    Chairman CHABOT. Thank you. My time is about to expire, so 
rather than trample on somebody else's time, I am going to 
yield back. I will now recognize the ranking member, Ms. 
Velazquez, for 5 minutes.
    Ms. VELAZQUEZ. Thank you. Your office has repeatedly 
recommended that SBA should implement a women-owned small 
business certification program in tandem with the sole source 
authority granted in the 2015 NDAA. However, the agency moved 
forward with only the sole source provision. Can you discuss 
the risk that this poses to the integrity of the program?
    Ms. GUSTAFSON. Yes, Ranking Member Velazquez. Thank you.
    I would point out two things that did cause us grave 
concern about that. One was quite simply, the sole source 
authority was provided for that program in the very same 
legislative vehicle that directed SBA to institute a 
certification program for women-owned small businesses. On a 
very basic level, we believed that they should be done at the 
same time because Congress seemed to be telling SBA ``we think 
we should change this in the program but also do this.'' That 
was a concern to us, especially given our work early on in the 
WOSB program where there was self-certification being happened 
very early on when we took a sample, and when we looked to see 
what documents were behind the self-certification of some of 
these businesses that were supposed to be uploaded in that 
website to show why these businesses that are supposed to be in 
the program, they simply were not there. That seems to evidence 
a weakness in a self-certification program that was of concern 
to Congress, and yet, here you are doing sole source, which is 
a much faster way of getting contracts out. There is more money 
flowing out the door, and yet the safeguard that Congress has 
asked for has not happened yet. It is a source of great concern 
for us, and I appreciate Congress' continued attention to that.
    Ms. VELAZQUEZ. Thank you. So my understanding is that SBA 
recently asked for comments on an Advanced Notice of Public 
Rulemaking for what a certification could look like for the 
women's program. Has your office made any recommendation as to 
what the agency should do to prevent fraud and abuse when 
implementing a certification program?
    Ms. GUSTAFSON. I have the same understanding as you that 
this has been set out and sought comment. I know that we have 
done prior work in some of these self-certification programs 
and these certification programs that I think should always be 
a lesson for SBA when a new program, such as WOSB, comes in. I 
think that there are lessons to be learned from the HUBZone 
program, for example, that talked about those certifications. 
Those are out there and, of course, they are known to SBA, 
because those are recommended directly to SBA. Whether we have 
made formal comments on the WOSB, I do not believe so. I do not 
think that we have. But certainly, we are there to help. We are 
there to give opinions. If they have further questions, I would 
be happy to meet with them. And I certainly----
    Ms. VELAZQUEZ. I am just afraid that they will use that as 
an excuse saying that they are waiting for you to provide the 
comments they requested.
    Ms. GUSTAFSON. We are always happy to give them any 
comments that they ever want, Ranking Member Velazquez.
    Ms. VELAZQUEZ. Thank you. For years, OIG investigations 
have revealed a pattern of fraud by loan packagers in the 7(a) 
Loan program. Your office has recommended implementation of a 
registration system, including the issuance of a unique 
identifying number for each agent. However, the SBA has made 
only limited progress in implementing this recommendation. Can 
you explain how the implementation of a loan agent registration 
system will reduce fraud in the 7(a) program?
    Ms. GUSTAFSON. Yes. Thank you very much for your question. 
Loan agents are outside parties that help package the documents 
that are used for getting a loan through. What our 
investigators have found and have brought forward, and it has 
been a management challenge for a very long time, is if there 
is a loan agent out there who is falsifying documents and 
knowingly committing fraud, they are not doing it one time. 
That is what they do. What has been a source of frustration for 
us for years is at first there was absolutely no way to know, 
here I have Loan Agent Jones and I know he is a fraud. Can you 
tell me what other loans has he worked on? We have been for 
years saying you have got to find a way to have a system where 
we can look up Loan Agent Jones and see what other loans there 
are, not only to detect patterns, but absolutely to detect the 
amounts of fraud.
    Ms. VELAZQUEZ. What is the reason for SBA not to----
    Ms. GUSTAFSON. There have been----
    Ms. VELAZQUEZ.--implement this recommendation?
    Ms. GUSTAFSON. I apologize for interrupting. There have 
been several reasons. At one point, and they have evolved as 
they have tried to make progress, to be fair on the challenge. 
There were technology challenges. They wanted to do some 
updating of the databases. They did not want to, and believe 
that they cannot use Social Security numbers, which is fine, 
which is why we are suggesting you do not need a social. Make 
up a number. Just have a certain one. So I think that they are 
getting closer. I think they have now acknowledge that they 
need to have a searchable database that cannot just be that if 
I am Peggy Gustafson for one, but Peggy Elizabeth Gustafson for 
another, it will not get a match and stuff like that. So I----
    Chairman CHABOT. The gentle----
    Ms. GUSTAFSON. I am sorry.
    Chairman CHABOT. You can complete your thought.
    Ms. GUSTAFSON. No, I think that I am pleased that they are 
working with us finally on this because for a while there was 
no progress, but absolutely, it is time to have a central 
system. And the lenders agree. I really do not think there is 
any question about that.
    Ms. VELAZQUEZ. Very good. Thank you.
    Chairman CHABOT. Thank you very much. The gentlelady's time 
is expired.
    The gentleman from Mississippi, Mr. Kelly, is recognized 
for 5 minutes.
    Mr. KELLY. Thank you, Mr. Chairman, and thank you, 
Inspector General, for being here.
    Your testimony is not the first time we have heard of the 
problems of large businesses receiving contracts that were 
supposed to be reserved for small businesses. And as you know, 
this Committee is taking steps to address this concern. We have 
increased penalties, including liquidated damages imposed on 
companies for perpetrating fraud. We required companies to 
recertify their status as small upon a merger or novation of a 
contract. We have met with the GSA to require the new version 
of the government's procurement data system accurately classify 
small and large businesses. Just this past January, we marked 
up legislation requiring the SBA to report separately on 
companies who have outgrown their size status. The Committee 
has given the SBA tools to ensure that large businesses are not 
receiving small business contracts. Do you have any explanation 
on why the SBA is not using the tools provided to them by 
Congress?
    Ms. GUSTAFSON. I do not know, Representative Kelly, that it 
is a question of not using the tools. I think it is more a 
question of that this is just a very big issue involving a lot 
of money and there are so many kind of different aspects to 
this issue that there is not one good fix.
    Now, some of the things you mentioned I think should be 
tremendously helpful. The idea of recertification in the 
instance of a merge innovation should really change some of 
these things because when a small company is bought by a big 
company, now to have to be certified is a big deal. I think 
that those are all very positive steps. I think that we are 
talking about 23 percent of Federal contracting. We are talking 
about billions and billions and billions of dollars. Where 
there is money, there is going to be fraud. I think that--I do 
not know that SBA is not using them. I think that we are quite 
frankly at a moment in time when time is going to tell very 
soon whether this is having an impact. These are things that 
this Committee has advocated for and given in the relatively 
recent past. These are changes. It is hard to change IT systems 
and things like that. But I think that they are going to be 
crucial to kind of addressing those issues. So I think that is, 
to be fair, a better way of putting it. Some of them should be 
very impactful and should help on this.
    Mr. KELLY. Going back to your earlier opening statement, 
one of the things that is important is for leadership to 
prioritize and to set goals and to have suspenses and 
deadlines. In our answer, I am going to ask you another 
question, but I also want you to comment. Do you think that the 
leadership in SBA is properly prioritizing and properly setting 
standards and focusing on the right thing? Because in my 
experience as both a district attorney and as a commander in 
the military, our followers focus on those things which we 
check up on or those things which we prioritize. If we are 
looking at them, they fix them. If we are not and they just 
give it lip service, they do not. Do you think that they are 
setting the correct priorities?
    Ms. GUSTAFSON. I think that you are exactly right; that 
change is only going to happen when they are setting the 
correct priorities. I think, as I noted in my statement, when 
they do that, change happens, and I think that is why LMAS 
happened. I think that on some of these management challenges, 
what they have done in the recent past is they have gone to 
program officials and say, you own this challenge, and so if we 
do not make progress on this challenge, I am going to want to 
know why. You are absolutely right. Without that, change 
probably does not happen.
    Now, whether in the big picture, where their priorities are 
is exactly right, I think it is a bigger question. I think that 
sometimes SBA--and I have talked about this before--suffers 
from the fact that as hard as it is an advocacy organization, I 
think it often feels pressure to get the loans out the door, 
get the numbers up for 8(a). While those are lofty and 
important goals, they always need to be mindful that the right 
people and businesses have to be getting those goals. So it is 
an art really on applying the right type of pressure.
    Mr. KELLY. Right. When you referred companies for 
suspension or debarment or to the Department of Justice for 
prosecution using the liquidated damages provision, what has 
been the response from the SBA and the Department of Justice?
    Ms. GUSTAFSON. I think that SBA has been incredibly 
receptive to our suspension and debarment referrals, up to and 
including taking a lot of credit for it, which is fair, because 
in the end they do the suspensions and debarments, so I am 
happy to share the credit and things like that. We do find a 
receptive audience for them because we work very hard to give 
them a package that allows for a suspension or disbarment.
    The same thing with the Department of Justice. In my 
experience in the past 6 years, I have found, I think, a 
stronger appetite, especially in the procurement area, for 
assistant U.S. attorneys to take these cases. I think there has 
been progress made in defining damages which makes them more 
attractive to a prosecutor. We certainly do our best to give 
them the case all pretty and wrapped up and ready to go. And I 
think the will is there on both parts.
    Chairman CHABOT. The gentleman's time has expired. Thank 
you, gentleman.
    The gentlelady from New York, Ms. Clarke, is recognized for 
5 minutes.
    Ms. CLARKE. I thank you, Mr. Chairman, and I thank our 
ranking member. I would also like to thank our distinguished 
witness, The Honorable Peggy Gustafson.
    Ms. CLARKE. Ms. Gustafson, is it imperative that the Small 
Business Administration accurately report the contracts awarded 
to small businesses? I am raising this because I think it is 
impossible to know where to focus our efforts in meeting small 
business contracting goals when we are possibly dealing with 
inaccurate procurement data. Can you speak about how the SBA 
plans to mitigate this issue of inaccuracy in goaling data?
    Ms. GUSTAFSON. I think that, Representative Clarke, you are 
alluding to an incredibly crucial point, which is it makes no 
sense to tout a goal and to tout having reached the goal if in 
the end you cannot really have confidence in the numbers behind 
that goal. I do think that there has been a body of work by my 
office and by GAO that has called into question whether there 
can be complete confidence in those goaling numbers. I think it 
is a complicated issue because when you start getting into 
goals and the reporting, often the reporting begins with the 
procurement agency doing the right coding and putting it into 
the system, and SBA ends up doing kind of a capping of, you 
know, we are adding those up. I acknowledge that that is a 
challenge, but I do think that it is important that SBA take a 
hard look and really be not skeptical but question the numbers 
just so that they can reach a confidence level that really is 
representing small businesses; that when you talk about the 
billions of dollars and save 25 percent, that you can look at 
the American public and say, I am telling you that 25 percent 
of that money, that money is going to small businesses who is 
performing that work.
    I do think that for various reasons, both in inadequacy of 
data systems, data errors, which seem to always be one way and 
not the other, which is it is coded small when it should have 
been coded large, you do not see the opposite happening. I 
think with some of the very complex rules related to what 
Representative Kelly referred to, which is companies that 
graduate out of the program, that get big, that get bought, 
that is a whole lot of details that get lost when it is just 
about the numbers. I think what is crucial is that the number 
really be delved into by those of us, myself included, GAO, 
Committees such as yours, and really what you think that number 
means, SBA. Explain to us why Northrop Grumman might be on 
there. Let's talk about that. I think it is important to shine 
a light. But the work after that gets very complex. Without 
holding feet to the fire, both the SBA and the procuring 
agencies, there is too big an incentive to really meet those 
numbers. There is a huge incentive to meet those numbers. That 
is often at the cost of making sure that you can tell the 
taxpayers that those numbers are right.
    Ms. CLARKE. Very well. I hope that you will continue to 
encourage them to sort of drill down.
    Ms. GUSTAFSON. Absolutely.
    Ms. CLARKE. As we will as well.
    As you are aware, collaboration between the SBA and other 
Federal agencies is so critical to the mission that small 
businesses can fairly compete for Federal contracts. How can 
the SBA improve its collaboration with other Federal agencies 
so that small businesses are treated fairly in contracting 
practice? Which steps are the SBA already taking to do so?
    Ms. GUSTAFSON. When you look at our management challenges, 
especially when you look at them historically, there has always 
been a challenge related to small business, to the contracting 
goals and things like that. One of the things that I think SBA 
is to be commended for is that we really tried to push them to 
say, look--and I think this is a government-wide issue--you 
cannot say your responsibility ends at the door to the 
procuring agency because these are difficult programs that you 
know better than anybody else. The problem becomes to diffuse 
if you are going to say, well, that is a DOD contract or that 
is an Air Force contract or an EPA contract. And I think that 
they have taken some steps in that as far as training, as far 
as going to the colleges. I do not mean the colleges, but the 
acquisition courses that teach acquisition because it is a very 
confusing area and say, hey, let's have a small business 
section and let's talk about that. I think that that is 
progress on their part, and I think they need to continue to do 
that and really continue to own the responsibility for ensuring 
the integrity of those programs. Because of SBA does not own 
them, nobody is going to.
    Ms. CLARKE. I thank you for your answers this morning, and 
I yield back, Mr. Chairman.
    Chairman CHABOT. Thank you. The gentlelady yields back.
    The gentleman from New York, Mr. Hanna, who is the chairman 
of the Subcommittee on Contracting and Workforce, is recognized 
for 5 minutes.
    Mr. HANNA. A couple of quick things. You are doing a great 
job, incidentally. It is wonderful to hear you speak.
    The 22 cases, $333 million, can you describe to me what 
that looks like in the real world? How that can even happen? 
Why should someone have to be prosecuted criminally to 
eliminate them from a loan organization that is designed to 
help people? You know, there is a national group. Frankly, we 
would like to have the cap raised from the $21 billion I think 
it is today, even higher. It is hard to justify or it is going 
to be more difficult with this kind of fraud. But should it be 
necessary to have somebody prosecuted criminally in order to 
get them debarred?
    Ms. GUSTAFSON. Absolutely not. Absolutely not. I mean, the 
easiest way to debar somebody is to wait for a conviction, and 
then it is easy because you can debar them with no question. 
But the law has always provided for what we would call, and you 
are well aware, of fact-based debarment or suspension. I do not 
think it necessary takes a criminal prosecution, especially 
because in these programs it is a very sophisticated type of 
person who knows how to take advantage and defraud these 
programs because they are confusing. You need to know how to 
take advantage of the system. All it really takes is--I do not 
think it takes somebody behind bars, but I think you need to 
hit them in their pocketbook. I think debarment is often a very 
easy way to do that.
    Mr. HANNA. The next question is, if it is that easy, why is 
it that you need to be the person to identify this? That you 
need to be the person, the organization, actually, to see that 
this is done? If I were running the SBA and I had credible 
suspicions----
    Ms. GUSTAFSON. Right.
    Mr. HANNA. Go ahead. You know where I am going.
    Ms. GUSTAFSON. Oh, no, no, no, no. I think the quick answer 
to your question is it does not have to be me. I mean, they 
certainly have the enforcement authority and ability and that.
    Mr. HANNA. Okay, so the question is, is there a cultural 
problem?
    Ms. GUSTAFSON. I do think, first off, I think government-
wide, just in my experience as an IG and speaking to other IGs, 
I think government-wide there had been a cultural problem of, 
especially on the suspension and disbarment front, of trying to 
touch that if you did not have a conviction. I think the 
Federal Government, and there was a task force that was 
created, I think they are doing better government-wide on doing 
that, led by some much more aggressive agencies. EPA was 
actually pretty aggressive about S&D, as was the Air Force. 
They had some pretty strong suspension and debarment officials 
who were out there really doing that type of work, which is 
always easier to follow somebody who does it first because then 
you know how to do it. I think SBA has that capability.
    I will say that as I previously mentioned, but I absolutely 
think it is true, I think it is sometimes hard for SBA to put 
their enforcement hat on. I really do. I think it is because it 
really--I think they somehow feel it is at odds with their 
advocacy element, which I personally do not understand but I am 
not an agency official in that way. Just because any time 
somebody is getting, be it a loan or a contract that are not 
supposed to, some legitimate small business is getting hurt. I 
firmly believe that the honest participants in these programs, 
be it the small businesses getting the contracts or the 
lenders, they would be happy to see these bad actors get out of 
there.
    I do think that it is unfortunate that a lot of times the 
enforcement angle has not been given the same priority as the 
advocacy angle. Anecdotally, I think they are better about it, 
and I think one of the reasons is--I wish it was because of me, 
maybe it is--but I also think it is because of you. I think it 
is because of Congress, because nothing, nothing is more 
impactful, quite frankly, than hauling an agency official up 
here.
    Mr. HANNA. Well, you seem pretty scary to me.
    Ms. GUSTAFSON. Do I?
    Mr. HANNA. So is there something that you might advise this 
Committee to do to kind of open that opportunity for them or 
reinforce--they should not have to go through this to get to 
that point.
    Ms. GUSTAFSON. Right. I think that the best thing that 
Congress can possibly do is to never let the agency forget that 
you are there. I do not think they forget that you are there, 
but I think that as somebody noted before, unless they think 
you are anybody--it is a rational actor kind of thing--unless 
they are worried that this is what you are paying attention to, 
they are going to worry about the other stuff. In addition to 
the series of hearings, which I think really has been 
impactful, at least certainly right now in the short term, 
there are other things that you can do that would not be as 
onerous for you all as hearings. You do not have to call me up 
all the time or anything like that, but I think just kind of 
holding their feet to the fire. I think it pays off immense 
dividends, be it a letter or briefings or things like that in 
addition to this. They will not forget that.
    Mr. HANNA. Thank you, Chairman. I yield back.
    Chairman CHABOT. Thank you. The gentleman from New York's 
time is expired.
    Another member from New York, Ms. Meng, who is the ranking 
member of the Agriculture, Energy, and Trade Subcommittee. I 
think 80 or 90 percent of the people that have asked questions 
other than the chairman himself are from New York are here 
today.
    Chairman CHABOT. The gentlelady is recognized for 5 
minutes.
    Ms. MENG. Thank you, Mr. Chairman, and to our ranking 
member. Thank you to our witness for being here today and all 
the great work that you are doing.
    In your testimony you identify weak oversight and lack of 
regulatory clarity as among the reasons that under the 8(a) 
mentor protege program larger companies can end up benefitting 
more from the program than minority-owned small businesses, 
which is contrary to the aims of the program and the SBA Act. 
What resources does the SBA need to strengthen oversight of 
this program? Can existing loopholes in the regulation be 
closed? I also want to find out if anything more can be done 
through outreach and education to enable some of these small 
businesses to better protect themselves.
    Ms. GUSTAFSON. I cannot address the resource issue because 
I think that is really more appropriate for the agency. I do 
not know if they feel like they have enough resources or they 
do not on that. Our Mentor-Protege audit is at least a couple 
of years old now, but it did evidence a source of concern, 
especially in the joint venture area because the Mentor-Protege 
Joint Venture will count for small business credit, will count 
towards the small business goal. So it is really crucial that 
the requirements of that program and the limits and things like 
that be met.
    I think you are right. There is always an education 
component because, again, it is not an excuse, but those regs 
are no fun to read and they are complicated. I think that, 
similar to what I noted before, I think SBA needs to continue 
their education component because they really are the best ones 
to educate the procuring agencies and things like that on what 
the issues are. So I think it is a tremendous tool if used 
correctly. If Mentor-Protege Joint Ventures are not used 
correctly, they become kind of almost a passthrough where not 
only are there credit being given for things being done by 
small businesses, or pardon me, by large businesses, but I 
think even just as tragically, the small businesses are not 
getting the development experience that the whole Mentor-
Protege program is meant to do which is to say you have this 
mentor and we are going to show you how to do it. When that 
program is not running the way it should, they are not 
developing the way that Congress has anticipated that they 
would be developed.
    That is kind of the attention that I think needs to remain 
and I do not really have an update in all candor on Mentor-
Protege since then, but I am hopeful that the agency has 
followed through on some of that. I cannot remember off the top 
of my head.
    Ms. MENG. On the same program, in 2011, the SBA revised its 
regulations for this program and established additional 
standards to address the definition of economic disadvantage. 
In your report you indicate concern that the additional 
standards are not justified or objective. Can you explain your 
concerns as well as your recommendation for improving the 
standards?
    Ms. GUSTAFSON. The definition of economic disadvantage has 
been if you are aware of our color coding that we use for 
management challenges currently, which is red, orange, yellow, 
and green, like a stop sign but with orange in there. It has 
been at red because we believe there is no progress. And it is, 
quite frankly, a place where the agency has just completely 
disagreed with us. We firmly believe, and we think it is 
crucial, that there be an economic analysis done to try to 
figure out what economic disadvantage means in terms of 
numbers. I mean, we do not think that the agency has performed 
or contracted out to get that robust economic advantage.
    I think it is crucial because if you are not defining 
economic disadvantage based on a competent and strictly done 
economic analysis, then how can you be sure that only the right 
people are getting into the program? If you are letting people 
in who are not economically disadvantaged, again, not only are 
the wrong people getting contracts, but, quite frankly, they 
are at an advantage because they are probably more wealthy, 
they may be more sophisticated, have more assets. It really 
puts the truly academically disadvantaged behind the 8-ball to 
even benefit from the program.
    I have been here now for two administrators. They do not 
agree with me on this, and they do not agree before me and 
before the first administrator, they do not agree with us on 
this. But I think it is something that really needs to be--it 
is an important enough issue that we have kept it at red. It is 
in the management challenges, and we think it is crucial to 
really be again. These programs are not worthwhile if you are 
not benefiting the right people. Because they are expensive 
programs, very often the Federal Government pays a premium on 
some of these contracts if you believe that full and fair and 
open competition would be maybe cheaper for the government, and 
so you need to benefit the right people. Without starting with 
the right definitions, I do not think you are going to do that.
    Chairman CHABOT. The gentlelady's time has expired. Thank 
you very much.
    The gentleman from Nevada, Mr. Hardy, who is the chairman 
of the Subcommittee on Investigations, Oversight, and 
Regulations, is recognized for 5 minutes.
    Mr. HARDY. Thank you for being here.
    Ms. GUSTAFSON. Thank you.
    Mr. HARDY. As a small business guy myself, hearing some of 
the things that have happened with the SBA, I know they are 
trying to do a good job but I continue to hear these issues 
over and over again, and it gives me a lot of angst as a small 
business person myself. I truly believe overall the SBA is 
trying to do a good job.
    I am going to ask you a question that has to do with your 
office. I believe you are the head of that office, are you not?
    Ms. GUSTAFSON. Yes.
    Mr. HARDY. When you put people into place, do they know 
their responsibility?
    Ms. GUSTAFSON. I believe so.
    Mr. HARDY. Do you assure that they are fulfilling their 
responsibility?
    Ms. GUSTAFSON. Well, all of my employees are career 
government employees who have to be, who have to fit the 
qualifications that we have for the positions, and then are 
managed. I have certainly made it a priority to make sure that 
we are managing the employees so that they are doing the right 
thing. So we provide the training that they need. Our auditors 
have to go through continuing CPE, which is like CLE for 
lawyers.
    Mr. HARDY. Thank you. I think you know where I am headed 
with this.
    Ms. GUSTAFSON. Yeah.
    Mr. HARDY. You have issued dozens of recommendations, and 
with these recommendations, do you feel like they are being 
implemented in the expeditious manner that they should be? Or 
does it seem like it is taking too long? I have only been here 
a year, a little over a year now, and I know this has been 
going on before I got here. Is this happening in a manner that 
you perceive should be happening if you were managing this 
department?
    Ms. GUSTAFSON. Representative, clearly, no. In my opening 
statement I referred to 144 open recommendations, and some of 
those date back to at least 2011. There are some that--so we 
are talking about some 5 years old, 4 years old, 3 years old, 
and that is a source of frustration. It can be frustrating at 
times as the IG because we cannot make them do anything. So we 
report the recommendations and we keep them there.
    I will tell you that as IG even, I have emphasized to my 
staff that it is also on us. Do you know what I mean? It is 
kind of like we have said a couple of times but I think it is 
crucial, it has to be a priority and it kind of has to be 
mentioned and I think that certainly my head of audits has made 
it a priority as well to let our auditors know as well, hey, 
where are those recommendations? Where do they stand? There is 
no point in making a recommendation if nobody----
    Mr. HARDY. I think that is my point, is if we make 
recommendations and people do not follow them, something has to 
change. This culture has to change. You brought it up yourself. 
You believe it is a culture, and I believe it is a culture. I 
think it is what is happening in the Federal Government in a 
lot of cases. I do not know what caused it but we need to fix 
it and I do not know how to get to that point. I guess that is 
what we are asking.
    With improper payments, do we really need to tell the SBA 
that they need to accurately report these? I mean, do we really 
need to do that?
    Ms. GUSTAFSON. Well, I think you could extrapolate that to 
the whole government. I think the emphasis on the Improper 
Payments Act has been much higher in the last several years 
after some improvements to the act and stuff like that, and I 
think it would be fair to ask, does it really take an act of 
Congress to make the agencies care about improper payments? The 
answer sometimes is yes, because sometimes while they are 
running their programs and getting their stuff done, it is 
hard. The stuff in the mirror, the stuff in the rearview mirror 
sometimes gets left behind. I do think that the Federal 
Government as a whole has made progress because of the Improper 
Payments Act and because of the attention paid to it. And SBA 
to a certain extent, too. But they started with no processes on 
some of this. So we are at a stage now, after 4 years or so, of 
these improper payments reports of where on some of these 
programs, okay, now they have the processes and now we, as the 
IG, are going to wait to see what they have instituted now that 
what they have been told to do are working. I cannot defend the 
inaction for that, but I am grateful for acts like that because 
I do think some progress has been made.
    Mr. HARDY. Well, I appreciate what your office is doing, 
but you really need to help us because I truly believe the SBA 
is one of those economic drivers for this nation, and this 
nation is hurting economically. The small businesses are our 
economic driver overall. We need to get this thing functioning 
in the proper manner and we need your help to make sure that we 
continue to push. We need to continue to do our job, but it is 
becoming very frustrating that this engine is not getting 
moving. So thank you.
    Ms. GUSTAFSON. Thank you.
    Chairman CHABOT. The gentleman's time is expired.
    The gentleman from Kansas, Mr. Huelskamp, who is chairman 
of the Economic Growth, Tax, and Capital Access Committee, is 
recognized for 5 minutes.
    Mr. HUELSKAMP. Thank you, Mr. Chairman. I appreciate the 
topic of this hearing, and I am looking for some 
accountability, and I appreciate your work on that.
    I want to follow up on the issue of improper payments. I 
think in multiple reports your office found that SBA is 
currently understating its improper payment rate. Can you 
describe that more fully for the Committee, or at least 
summarize what is in your report and whether we have seen any 
steps at the SBA to fix this problem?
    Ms. GUSTAFSON. Again, absolutely. As I noted, it has been a 
process over the last several years. Starting with the first 
time that agencies were required to report improper payments, 
that year we actually went and did our own analysis. You may 
recall, and again, it certainly is in my tenure, I think it was 
2011, we vastly disagreed where those numbers were. It was 
inconceivable how far apart the agency was from the IG on that. 
We very quickly got into the weeds on some of this. Was it a 
sampling error? Things like that, and projection and stuff like 
that. The process as we have gone forward, and as the 
management challenges have noted, is that we have really tried 
to hold their feet to the fire to institute the type of quality 
assurance reviews and the more stringent look at high dollar, 
early default loans which are often an indicator that there may 
be something wrong with the origination of those loans. That 
really did require SBA to kind of start some processes that 
were not there and dedicate some resources that really had not 
been dedicated.
    I think when you look at the Management Challenges report, 
to be fair to SBA, we have seen progress. There has been 
absolute upward movement in a positive way instituting some of 
those processes and getting those in place. As I noted before, 
when you look at our report of last October, which was our most 
recent Management Challenges report, the next step is for us to 
be shown that the processes are now working and they are being 
used the way they are supposed to be used and that they are 
working. The numbers that SBA has reported and the loan 
programs have been the largest numbers, and especially the 
Disaster Loan Program, which started at a very, very high 
number, they have gone down extraordinarily in the last several 
years. Now, I will tell you that----
    Mr. HUELSKAMP. But at the beginning, if I might interrupt, 
at the beginning, though, they were denying those high rates, 
so I did not follow----
    Ms. GUSTAFSON. They were. They were. And I am sorry. At one 
of them they were indicating that they did not think there was 
an improper payment rate. I forget if it was 7(a) or if it was 
disaster. It was one of them where they said we do not think 
there are any improper payments. That is not the case anymore. 
They have started reporting rates and our most recent and 
proper payments reviews which come out in the spring--our 
latest one will come out within the next couple of months--it 
is either April or May--have shown that they have followed the 
act and instituted the processes that are in there. Again, I--
--
    Mr. HUELSKAMP. But at the beginning, when you came in, you 
were using SBA data or did you go back and pull more 
information separately?
    Ms. GUSTAFSON. Oh, no. We were doing SBA data and trying to 
use the same sample. It got to questions of--and of course, 
because we are talking about projections, I know that in some 
of the early work it was just a matter of disagreeing over a 
couple of loans that caused them to have an incredibly low rate 
and then to cause us to have what we felt was a more 
reasonable, and not excessively high but a higher rate, and 
that was several years ago under Administrator Mills' tenure. I 
was pleased because the end result of that--and of course, that 
always takes a while and that is after the numbers have been 
reported and stuff, and everybody has kind of moved on because 
the rates are there--they ended up agreeing with us and 
adjusting. I remember getting into a fight with them over are 
you going to go back and change the report? We will put it in a 
little footnote. You know what I mean. But whenever they agree 
with us, however begrudgingly, I think that that is good.
    Mr. HUELSKAMP. Do you think that is at the administrator 
level? What about kind of the upper midlevel management, the 
folks that likely a year from now will still be there even 
though a new administrator? Have they somehow agreed with you 
all's assessment and the actual data mining that it takes to 
generate this type of rate and understanding of it?
    Ms. GUSTAFSON. We do believe that, and that is where the 
work is done, of course, is at the centers and at that program 
level. If they had not come around there would not have been 
movement on the challenges. We think that they are there. The 
latest rate in disaster is down to under 10 percent. What is 
interesting about that is it started at about 28 percent. What 
is interesting about that is that causes them to be in 
compliance with IPRO, which is the act, which is good, but last 
year it was at 12 percent. That is a big jump or decline or 
whatever you do when you go from 12 to 8 percent.
    Mr. HUELSKAMP. What is the penalty for noncompliance?
    Ms. GUSTAFSON. You have to start instituting processes and 
devoting resources. There are financial penalties after a 
certain extent in that you can only----
    Mr. HUELSKAMP. No, for SBA, if they do not reach----
    Ms. GUSTAFSON. No, that is what it is. The act begins to 
require you to, you know, it kind of takes away your ability to 
spend money in certain ways because you have to devote certain 
amounts of money to those processes and things like that. It 
was good that they went to 8.5 percent. It was a pretty crucial 
number.
    Mr. HUELSKAMP. Well, thank you. Chairman, I am out of time. 
I yield back. Thank you.
    Chairman CHABOT. Thank you. The gentleman's time has 
expired. Thank you.
    I would now like to yield up to 5 minutes to the gentlelady 
who has a few more questions.
    Ms. VELAZQUEZ. I just have one more question. This is an 
area that I have been deeply engaged in since 2005, when 
Hurricane Katrina struck, and we saw the poor response from 
SBA, particularly in terms of the disaster lending program and 
the processing times. As a result of that, we passed 
legislation in this committee that provided tools for SBA to be 
ready for the next disaster. We saw what happened during Sandy. 
Processing times took over 40 days and the decline rate was 
extremely high, to the point where I introduced legislation 
that the president signed into law, reopening for the first 
time in its history the Disaster Loan program, and the fact 
that tens of millions of dollars has been already disbursed 
shows that the need is still there.
    My question to you is, since then the SBA has improved its 
response during recent disasters with loan processing times of 
less than 13 days; however, these events have not been of the 
magnitude of Superstorm Sandy or Hurricane Katrina, both of 
which resulted in significant delays. What level of confidence 
do you have that SBA will be able to respond as quickly as it 
has to another large catastrophe?
    Ms. GUSTAFSON. I think the best way to describe my 
confidence level is probably mixed. I think that the pressure 
that was put on and the attention that was paid to the 
inadequate response times and processing times in Sandy surely 
got the attention of the agency. I know that you have paid a 
great deal of attention. I am sure you have met with Mr. Rivera 
on that. You did that report that I thought was extraordinarily 
helpful about the processing times and things like that.
    I do think that in a way, again, when the agency knows that 
this is something that they have to be laser focused on, they 
will be laser focused on it. I think that certainly that is 
going to be a number one priority for wherever the next big 
disaster, a Sandy or a Katrina or something like that. That is 
going to be a huge priority. But the challenge is going to be, 
and I know that you are keenly aware of this, is one of the 
things that affected the processing times in Sandy was the kind 
of new programs that they were trying to institute. In an 
ironic twist, the things that they were instituting that 
involved--they were supposed to expedite some of the processes 
both in IDOL and in some of the smaller home loans--because 
there is a learning curve there, because of whatever reason, 
that did not help. It showed, and we did a report that showed 
that that did not really help. That remains a concern for me.
    If there is going to be this kind of learning curve in the 
initial response to disaster, especially in the context of the 
programs that I know that you have talked about and that we 
have talked about in our management challenges that have yet to 
be instituted, the third-party lender programs and things like 
that that Congress had told SBA to use, I believe, in 2008, I 
think. So my fear is, I guess, if this time they are really 
going to do that, that is going to be good except for is that 
going to again cause a learning curve or a lag in the beginning 
and we find ourselves exactly where it is?
    I hate to quote yourself back to you, but I think this may 
have been in your report. If so, I apologize for parroting back 
to you, but SBA needs to not be so reactionary. As long as they 
continue to be reactionary and trying to do that, I think they 
are always going to be a little bit behind the curve on that. 
In the disaster area, that has such dire consequences because, 
again, that means that the people who have just been 
devastated, their business or their homes, are not going to get 
the type of service that Congress, and certainly SBA, wants 
them to get.
    Ms. VELAZQUEZ. Thank you. Thank you.
    Chairman CHABOT. Thank you. The gentlelady yields back.
    I would like to note, as chair of this Committee and having 
worked with the gentlelady from New York, just to acknowledge 
how determined and how fiercely she has fought for her 
constituents in the matter of the devastation that was wreaked 
upon them by Hurricane Sandy, and they were challenged, many of 
them. Some were bureaucratic challenges. The SBA and others 
made it very difficult for people to rebuild, and she fought 
time and time again consistently, never gave up, and has not 
given up to this day, so I want to publicly recognize that. And 
they say we are never bipartisan in Congress, right?
    Ms. VELAZQUEZ. Thank you, Mr. Chairman. With your help, it 
was a bipartisan effort, and we have to make sure the agency is 
ready because there will be another diaster.
    Ms. GUSTAFSON. Right.
    Ms. VELAZQUEZ. We cannot go back to them and say, I 
understand your pain, but we are not ready to provide the 
assistance that you need in a timely basis. Many of these 
businesses have to shut down their doors if they do not get the 
assistance they need in the next four weeks after a disaster 
strikes, and that is unacceptable.
    Chairman CHABOT. Absolutely. We want to thank the Inspector 
General for appearing before this Committee today, and we also 
want to thank her for all the work that her office does and 
continues to do highlighting the management and performance 
challenges within the SBA, the Small Business Administration. 
Moving forward, this Committee will remain committed to working 
together with the SBA to ensure that these challenges are 
addressed and that the agency is able to provide effective and 
efficient assistance to America's small businesses, and that is 
what this Committee is all about, working in a bipartisan 
manner to improve the lot of small businesses in this country.
    All members will have 5 legislative days to submit 
questions or to supplement their remarks. If there is no 
further business to come before this Committee, we are 
adjourned. Thank you.
    Whereupon, at 12:06 p.m., the Committee hearing was 
adjourned.
                            A P P E N D I X

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                              Introduction

    Chairman Chabot, Ranking Member Velazquez, and 
distinguished members of the Committee, thank you for the 
opportunity to discuss our oversight activities of the U.S. 
Small Business Administration (SBA or Agency).

    The Office of Inspector General (OIG) was established 
within SBA by statute to promote economy, efficiency, and 
effectiveness and to deter and detect waste, fraud, and abuse 
in the Agency's programs and operations. During FY 2015, OIG 
achieved nearly $134 million in monetary recoveries and 
savings--a more than a six-fold return on investment relative 
to our FY 2015 operating budget--and made 80 recommendations 
for improving SBA's operations and reducing fraud and 
unnecessary losses in the Agency's programs.

                               OIG's Role

    OIG promotes economy, efficiency, and effectiveness in 
Government operations and helps detect and deter fraud, waste, 
abuse, and mismanagement. The stated purpose of the Inspector 
General Act of 1978, as amended (IG Act), is to create an 
independent and objective unit within specified agencies to 
combat fraud and abuse in the programs. To this end, my office 
is responsible for conducting audits and investigations of the 
programs and operations, and undertaking other activities, such 
as inspections and evaluations, to promote economy, efficiency 
and effectiveness in its programs. Importantly, as IG, I am 
charged with keeping the Administrator and Congress fully and 
currently informed about problems and deficiencies in the 
Agency. The IG Act contains a variety of statutory guarantees 
of OIG independence, designed to ensure the objectivity of OIG 
work and to safeguard against efforts to compromise that 
objectivity or hinder OIG operations. It is these guarantees of 
independence that make statutory IGs unique.

    The IG Act affords my office the authority to mount a 
multi-disciplinary approach to Agency oversight. We have a 
broad statutory mandate to conduct audits and investigations 
relating to the programs and operations of the agency and to 
conduct other activities for the purpose of promoting economy 
and efficiency in the administration of the agency. Within this 
broad mandate, I am given full discretion to undertake those 
audits and investigations that are ``necessary or desirable.''

    OIG audits are conducted in accordance with Federal audit 
standards established by the Comptroller General, and other 
reviews generally are conducted in accordance with standards 
established by the Council of the Inspectors General for 
Integrity and Efficiency (CIGIE). In addition, we coordinate 
with the Government Accountability Office (GAO) to avoid 
duplicating Federal audits. We also establish criteria to 
ensure that the non-Federal auditors (typically, CPA firms) OIG 
utilizes comply with Federal audit standards.

    OIG investigations are conducted in accordance with the 
CIGIE Quality Standards for Investigations and Federal law. In 
conducting investigations, whenever the IG has reason to 
believe that Federal criminal law has been violated, the IG 
must promptly report that evidence directly to the Department 
of Justice, without prior clearance by Agency officials outside 
OIG.

                  Top Management Challenges Facing SBA

    We have aligned our resources to focus on the areas of 
highest risk within SBA, especially those programs with 
identified, systemic concerns. In accordance with the Reports 
Consolidation Act of 2000, OIG released its Report on the Most 
Serious Management and Performance Challenges Facing the Small 
Business Administration in FY 2016 in October 2015 and has 
prepared similar reports since FY 2000. This report represents 
our current assessment of Agency programs and/or activities 
that pose significant risks, including those that are 
particularly vulnerable to fraud, waste, error, mismanagement, 
or inefficiencies. Its overall goal is to focus attention on 
significant issues in order to work with Agency managers to 
enhance the effectiveness of SBA's programs and operations. The 
report highlights top management challenges facing SBA, which 
are listed below:

          > Weaknesses in Small Business Contracting Programs 
        and Inaccurate Procurement Data Undermine the 
        Reliability of Contracting Goals Achievements

          > Weaknesses in Information Systems' Security 
        Controls Pose Significant Risks to the Agency

          > SBA Needs Effective Human Capital Strategies to 
        Carry Out its Mission Successfully and Become a High-
        Performing Organization

          > SBA Needs to Further Strengthen its Oversight of 
        Lending Participants

          > SBA Needs to Modify the Section 8(a) Business 
        Development Program So More Firms Receive Business 
        Development Assistance, Standards for Determining 
        Economic Disadvantage are Justifiable, and Firms Follow 
        8(a) Regulations When Completing Contracts

          > Effective Tracking and Enforcement Would Reduce 
        Financial Losses from Loan Agent Fraud

          > SBA Needs to Modernize its Loan Accounting System 
        and Migrate it Off the Mainframe

          > SBA Needs to Accurately Report, Significantly 
        Reduce, and Strengthen Efforts to Recover Improper 
        Payments in the 7(a) Loan Program

          > Disaster Assistance Must Balance Competing 
        Priorities to Deliver Timely Assistance and Reduce 
        Improper Payments

          > SBA Needs to Effectively Manage Its Acquisition 
        Program

    The management challenges report is driven by SBA's current 
needs and based on not only our understanding of SBA's programs 
and operations but also recent OIG, GAO, and other reports. 
Accordingly, the challenges we present each year may change 
based on the Agency's risks, as well as the actions that have--
or have not--taken to remedy past weaknesses.

    For example, this year, OIG expanded its challenge 
regarding small business contracting (Challenge 1). SBA is 
responsible for managing and overseeing the small business 
procurement process throughout the Federal Government. Last 
year, we reported that procurement flaws allow large firms to 
obtain small business awards and allow agencies to count 
contracts performed by large firms towards their small business 
goals. While large firms continue to receive contracts that are 
counted towards small business goals, we have realigned the 
discussion to include our concerns regarding weaknesses in 
small business contracting programs, the reliability of data 
used to calculate contracting goal achievements, and 
unnecessary restrictions on SBA using fraud remedies.

    In addition, we added a new challenge regarding SBA's 
Disaster Assistance Program (Challenge 9). SBA's disaster 
assistance helps people and businesses recover from disasters 
by providing loans to homeowners, renters, and businesses. 
However, there is an inherent risk of non-repayment for 
disaster loans because these loans repair or replace existing 
property, which means that loan recipients are incurring 
additional debt to maintain existing assets. In carrying out 
its mission, SBA must balance competing priorities to deliver 
timely assistance and reduce the risk of fraud and default.

    We also removed the challenge pertaining to SBA's 
implementation of a quality control program in its loan centers 
(previously Challenge 4), since the Agency has made progress in 
implementing a quality control program for all of its loan 
centers. This program is designed to verify and document 
compliance with the loan process, from origination to close-
out, and to identify where material deficiencies exist so that 
the Agency can take remedial action. However, SBA needs to 
demonstrate that the program is effective at identifying and 
correcting material deficiencies. We will continue to monitor 
SBA's quality control program during FY 2016 to verify that 
reviews are completed and effective at identifying and 
correcting material deficiencies.

    The management challenge process is an important tool that 
we believe assists the Agency in prioritizing its efforts to 
improve program performance and enhance its operations. A 
summary chart of depicting the status of top management 
challenges is below:
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                            Risk Assessment

    SBA was established to maintain and strengthen the Nation's 
economy by protecting the interests of and assisting small 
businesses, and by helping families and businesses recover from 
disasters. While SBA's programs are essential to strengthening 
America's economy, the Agency faces a number of challenges in 
carrying out its mission. These include fraudulent schemes 
affecting SBA programs, significant losses from defaulted 
loans, procurement flaws that allow large firms to obtain small 
business awards, improper payments, and information technology 
(IT) management concerns. OIG plays a critical role in 
addressing these and other challenges by conducting audits to 
identify wasteful expenditures and program mismanagement, 
investigating fraud and other wrongdoing, and taking other 
actions to deter and detect waste, fraud, abuse, and 
inefficiencies in SBA programs and operations. As you have 
heard in recent hearings before this Committee, OIG works 
closely with GAO to provide oversight of SBA's programs and 
operations and to promote integrity and efficiency.

    Risks Due to Limited Oversight and Controls in SBA's 
Lending Programs

    SBA faces a heightened risk of losses and improper payments 
due to expedited loan processing initiatives and its 
considerable reliance on outside financial institutions, over 
which the Agency has not always exercised adequate oversight. 
The Agency's business loan programs include the Section 7(a) 
Loan Program, in which SBA partially guarantees loans to small 
businesses made by its lending partners. The majority of loans 
made under the Section 7(a) Loan Program undergo little or no 
review by SBA prior to loan approval because the Agency has 
delegated most of the credit decisions to lenders originating 
these loans.

    Audits of early defaulted loans and improper payments 
continue to note a number of lender errors in originating 
loans, resulting in undue risk and loss to the program. In 
addition, OIG reviews have detected vulnerabilities in SBA's 
Standard Operating Procedure (SOP) for the Section 7(a) Loan 
Program. These vulnerabilities include a provision that allows 
financing of large amounts of intangible assets, including 
goodwill, in change-of-ownership transactions where the entire 
equity injection can be provided in the form of seller take-
back financing. Further, OIG has identified management 
challenges relating to the Agency's quality control process at 
the loan servicing centers and the National Guaranty Purchase 
Center, efforts to prevent loan agent fraud in the Section 7(a) 
Loan Program, and improper payments under the Section 7(a) Loan 
Program. Finally, a recent OIG audit (Report 15-06) highlighted 
that the outsourcing of traditional lender functions in SBA 
lending programs to third-party agents has significantly 
increased, further impacting SBA's ability to maintain 
appropriate oversight.

    Numerous OIG criminal investigations have identified fraud 
by borrowers, loan agents, lenders, and other participants in 
SBA business loan programs. Since 2005, OIG has investigated at 
least 22 cases with confirmed loan agent fraud totaling at 
least $335 million. Criminals fraudulently obtain--or induce 
others to obtain--SBA-guaranteed loans through a variety of 
techniques. These include submitting fraudulent documents, 
making fictitious asset claims, manipulating property values, 
using loan proceeds contrary to the terms of the loans, and 
failing to disclose debts or prior criminal records. The result 
is a greater chance of financial loss to the Agency and its 
lenders. In addition, higher loan limits in recent years are 
likely to attract additional attention by criminals and 
increase the consequences of improper lending decisions.

    Through the Disaster Loan Program, SBA makes direct loans 
to homeowners and businesses harmed by disasters to fund repair 
or replacement of damaged property and to businesses to provide 
needed working capital. This program is vulnerable to fraud and 
unnecessary losses because (1) loan transactions are often 
expedited in order to provide quick relief to disaster victims, 
(2) lending personnel hired in connection with a disaster 
declaration may lack sufficient training or experience, and (3) 
the volume of loan applications may overwhelm SBA's resources 
and its ability to exercise careful oversight of lending 
transactions.

    OIG reviews of SBA loan processing activities have 
disclosed significant problems in making, servicing, and 
liquidating disaster loans. For example, expedited processes 
implemented to reduce Hurricane Sandy application backlogs were 
not effective in reducing loan approval cycle times. Further, 
insufficient training and internal controls resulted in 
incorrect economic injury disaster loan amount determinations 
(Report 15-13). In a separate audit, we found that principals' 
incomes are relied upon as a source to repay disaster business 
loans without sufficient consideration and analysis of the 
impact on the principals' ability to pay living expenses, 
placing the loans at a higher risk of default (Report 15-05). 
In addition, OIG investigations have led to numerous 
convictions of disaster loan borrowers for making fraudulent 
statements to obtain loans or misusing loan proceeds.

    Risks Affecting SBA's Oversight of Contracts for Small and 
Disadvantaged Businesses

    The Small Business Act directs SBA to promote the award of 
Federal contracts to small businesses and firms owned by 
disadvantaged individuals such as minorities, service-disabled 
veterans, women, firms from areas of low economic activity, and 
others. Under a statutory goal, the Government directs 
approximately 23 percent of Federal procurement funds to these 
programs. For FY 2014--the latest year for which information is 
available--SBA reported that small and disadvantaged firms were 
awarded $91.1 billion Government-wide in prime contracting 
assistance. However, OIG audits and investigations have 
identified numerous instances where firms that were neither 
``small'' nor ``disadvantaged'' have improperly obtained 
contracts under SBA contracting programs. For example, a joint 
investigation with other agencies resulted in the president of 
a Colorado firm pleading guilty to conspiracy in connection 
with his concealment of millions of dollars in assets and 
income in order to maintain the company's 8(a) status. This led 
to the wrongful award of over $17 million in 8(a) contracts to 
the firm. In addition, GAO has issued a series of reports 
documenting that ineligible companies had been admitted to SBA 
contracting assistance programs and were seeking set-aside 
contracts. These improprieties have resulted from a variety of 
factors, including fraud by company managers, excessive control 
over small or disadvantaged firms by large companies or non-
disadvantaged individuals, SBA's and federal procurement 
personnel's weak oversight, and regulatory ambiguities and 
loopholes. OIG has issued management challenges recommending 
corrective actions to promote integrity in small business 
contract awards and oversight of the Section 8(a) Business 
Development Program.

    Risks Associated with SBA's Information Security Controls 
and Other Operations

    SBA's IT systems play a vital role in managing the Agency's 
operations and programs, including a loan portfolio that is 
approaching $120 billion. However, OIG audits and other reviews 
have identified serious shortcomings in SBA's information 
systems and related security controls. SBA has not fully 
implemented adequate oversight of its IT systems, has not 
established an effective process to remediate security 
vulnerabilities, and has not developed an effective process to 
upgrade IT capabilities. Consequently, OIG has issued 
management challenges recommending corrective actions in SBA's 
IT security and acquisition processes.

    Risks Associated with SBA's Oversight and Controls of 
Grants for Entrepreneurial Development

    SBA provides training, mentoring, and counseling services 
to small businesses through a variety of strategic 
partnerships. In its FY 2016 budget submission, SBA requested 
$206 million in grant funding to support these training and 
assistance programs. SBA's Office of Entrepreneurial 
Development (OED) oversees a network of programs and services 
that support the training and counseling needs of small 
business. OED manages and leverages three major resources: 
small business development centers (SBDCs), SCORE, and women 
business centers (WBCs). Although each resource program's goals 
and target audiences may vary, they share a common mission: to 
provide business advice, mentoring, and training to small 
businesses and entrepreneurs. The SBDC program is the largest 
grant program in the Agency's portfolio. OIG has identified 
problems with co-mingling SBDC grant funds with private-
enterprise contributions and accounting for required matching 
funds. Some SBDCs are also co-located with WBCs, which makes it 
difficult to determine what services are associated with each 
grant program. In addition, having two grant programs 
delivering similar services increases the risk of duplicating 
services and contributes to government waste. A recent OIG 
review determined that SBA's internal controls did not detect 
that an SBDC failed to meet matching requirements for grant 
funding and other critical grant requirements (Report 14-19). 
In addition, for grants awarded under the Disaster Relief 
Appropriations Act of 2013, OIG found that SBA did not enhance 
its internal controls to ensure program goals were achieved and 
expenditures were allowable (Report 15-15).

    Risks Associated with SBA's Acquisition Program

    SBA spends approximately $120 million annually to acquire 
goods and services to assist in carrying out its mission. OIG 
has identified common risks in SBA's acquisition program, 
primarily inadequate acquisition planning, poorly defined 
requirements, internal control deficiencies, an incomplete 
acquisition policy, and inadequate oversight that contributed 
to ineffective or inefficient results and increases costs. A 
recent OIG review determined that SBA personnel did not 
adequately plan for contracts and inconsistently evaluated 
vendor quotes while performing a best value determination. In 
addition, SBA did not establish effective controls to manage 
the Agency's use of assisted acquisitions (Report 16-05). An 
OIG investigation recently found an improper relationship 
between an SBA employee and the president of an 8(a) and 
Historically Underutilized Business Zone (HUBZone) business 
regarding the award of an SBA contract, resulting in the 
employee's removal from his position. Additionally, in FY 2015, 
SBA reported an estimated improper payment rate of 13.52 
percent for disbursements for goods and services, which is a 
significant increase from the FY 2014 estimated improper 
payment rate of 8.46 percent. OIG has issued a management 
challenge recommending corrective actions in SBA's acquisition 
process.

                        OIG Oversight Activities

    Through audits and other reviews, OIG provides independent 
oversight of critical aspects of SBA's programs and operations 
to improve the Agency's efficiency and effectiveness. An 
important aspect of this work is identifying and following up 
on SBA's major management and performance challenges, as 
required by the Reports Consolidation Act. OIG also supports 
SBA's mission by detecting, investigating, and deterring fraud 
and other wrongdoing in the Agency's programs and operations. 
OIG serves as a Government-wide training resource for small 
business fraud and enforcement issues. These activities help to 
ensure that SBA employees, loan applicants, and program 
participants possess a high level of integrity. This is 
critical to properly administrating SBA programs because it 
helps ensure that the Agency's resources are utilized by those 
who deserve and need them most.

    FY 2015 Accomplishments

    During FY 2015, OIG issued 17 reports containing 80 
recommendations for improving SBA's operations and reducing 
fraud and unnecessary losses in the Agency's programs. In 
addition, OIG investigations resulted in 52 indictments/
informations and 57 convictions. We made 74 debarment referrals 
to SBA. OIG also conducted training and outreach sessions on 
topics related to fraud in Government lending and contracting 
programs, providing 28 presentations for more than 1,067 
attendees, including SBA and other Government employees, 
lending officials, and law enforcement representatives. Topics 
included types of fraud, fraud indicators and trends, how to 
report suspicious activity that may be fraudulent, suspension 
and debarment, the Program Fraud Civil Remedies Act, and other 
topics related to deterring and detecting fraud in Government 
lending and contracting programs. Overall, OIG achieved 
monetary recoveries and savings of nearly $134 million from 
recommendations that funds be put to better use agreed to by 
management, disallowed costs agreed to by management, court 
ordered and other investigative recoveries and fines, loans or 
contracts not made as a result of investigations, and name 
checks.

                               Conclusion

    SBA OIG continues to focus on the most critical risks 
facing SBA. Our resources are directed at key SBA programs and 
operations, to include financial assistance, Government 
contracting and business development, financial management and 
information technology, disaster assistance, Agency management 
challenges, and security operations. We also will continue to 
partner with the Agency to ensure that taxpayer and small 
business interests are protected and served well by reviewing 
proposed regulations and initiatives, pursuing debarment and 
administrative enforcement actions, and providing fraud 
awareness briefings. We value our relationship with this 
Committee, and with the Congress at large, and look forward to 
working together to address identified risks and the most 
pressing issues facing SBA.

                                 [all]