[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]




   OVERSIGHT IMPROVEMENTS NEEDED: SBA OIG'S REVIEW OF THE MICROLOAN 
                                PROGRAM

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

                                HEARING

                               before the

       SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT, AND REGULATIONS

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                            OCTOBER 12, 2017

                               __________

 
 
 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

 
                               

            Small Business Committee Document Number 115-041
              Available via the GPO Website: www.fdsys.gov
   
                                   ______

                         U.S. GOVERNMENT PUBLISHING OFFICE 

27-252                         WASHINGTON : 2018               
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
                   HOUSE COMMITTEE ON SMALL BUSINESS

                      STEVE CHABOT, Ohio, Chairman
                            STEVE KING, Iowa
                      BLAINE LUETKEMEYER, Missouri
                          DAVE BRAT, Virginia
             AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
                        STEVE KNIGHT, California
                        TRENT KELLY, Mississippi
                             ROD BLUM, Iowa
                         JAMES COMER, Kentucky
                 JENNIFFER GONZALEZ-COLON, Puerto Rico
                          DON BACON, Nebraska
                    BRIAN FITZPATRICK, Pennsylvania
                         ROGER MARSHALL, Kansas
                      RALPH NORMAN, South Carolina
               NYDIA VELAZQUEZ, New York, Ranking Member
                       DWIGHT EVANS, Pennsylvania
                       STEPHANIE MURPHY, Florida
                        AL LAWSON, JR., Florida
                         YVETTE CLARK, New York
                          JUDY CHU, California
                       ALMA ADAMS, North Carolina
                      ADRIANO ESPAILLAT, New York
                        BRAD SCHNEIDER, Illinois
                                 VACANT

               Kevin Fitzpatrick, Majority Staff Director
      Jan Oliver, Majority Deputy Staff Director and Chief Counsel
                     Adam Minehardt, Staff Director
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Trent Kelly.................................................     1
Hon. Alma Adams..................................................     2
Hon. Dave Brat...................................................     2
Hon. Dwight Evans................................................     3

                               WITNESSES

Mr. Hannibal ``Mike'' Ware, Acting Inspector General, United 
  States Small Business Administration, Washington, DC...........     3
Mr. William Manger, Associate Administrator, Office of Capital 
  Access, United States Small Business Administration, 
  Washington, DC.................................................     5

                                APPENDIX

Prepared Statements:
    Mr. Hannibal ``Mike'' Ware, Acting Inspector General, United 
      States Small Business Administration, Washington, DC.......    17
    Mr. William Manger, Associate Administrator, Office of 
      Capital Access, United States Small Business 
      Administration, Washington, DC.............................    21
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    Audit of SBA's Microloan Program.............................    24
    The Friends of the SBA Microloan Program.....................    43

 
   OVERSIGHT IMPROVEMENTS NEEDED: SBA OIG'S REVIEW OF THE MICROLOAN 
                                PROGRAM

                              ----------                              


                       THURSDAY, OCTOBER 12, 2017

                  House of Representatives,
               Committee on Small Business,
    Subcommittee on Investigations, Oversight, and 
                                       Regulations,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 2:00 p.m., in 
Room 2360, Rayburn House Office Building, Hon. Trent Kelly 
[chairman of the Subcommittee] presiding.
    Present: Representatives Kelly, Chabot, Brat, Blum, Bacon, 
Adams, Evans, and Murphy.
    Chairman KELLY. I call this hearing to order. Today we will 
be examining the Small Business Administration's Microloan 
Program, specifically, the SBA's Office of Inspector General's 
recent audit of the program. The Microloan Program was the 
created to help women, low-income citizens, veterans, and 
minority and entrepreneurs. The program's mission is to provide 
microloans, along with training and technical assistance to 
help give qualifying small businesses a boost to start up, stay 
open, and even to grow. This is how the program is supposed to 
work. SBA makes direct loans to intermediaries. These 
intermediaries then use the proceeds from the direct loans to 
make small short-term loans to eligible small businesses. 
Although the intermediaries can lend up to $50,000, the average 
microloan is $13,000. These intermediaries are non-profit 
community-based organizations with lending and business 
management experience. SBA's Office of Capital Access is 
responsible for overseeing the Microloan Program, specifically, 
the intermediaries that are the face of the program for small 
businesses. It is supposed to make sure that the intermediary 
allows only qualifying small businesses to participate in this 
program; to make sure that the intermediary's loans' files are 
accurate and complete; to make sure that the intermediary is 
following SBA's lending policies and procedures.
    Ultimately, SBA is supposed to make sure that the Microloan 
Program, a program there to help the smallest of the small 
guys, is actually fulfilling its purpose. According to a recent 
audit from the SBA's Office of Inspector General, however, the 
agency needs to improve its oversight of the Microloan Program. 
Two weeks ago, the Office of the Inspector General released a 
new audit of the Microloan program. Its last audit was in 2009.
    According to the recent audits, OIG determined that SBA is 
unable to measure whether the program is performing well. In 
fact, OIG found that SBA did not even implement all the 
recommendations from the 2009 audit, even though SBA said it 
would. That is not acceptable. SBA must do better.
    The Microloan Program is an important program to this 
Committee. And for that reason, strong oversight is needed. 
This oversight is needed to make sure the program is 
functioning as intended, and without fraud, waste, and abuse. 
We expect SBA to completely and fully implement the OIG's 
recommendations this time around. We appreciate the witnesses 
being here today and look forward to hearing their testimony. I 
now yield to our ranking member, Ms. Adams.
    Ms. ADAMS. Thank you, Mr. Chair, and thank you all for 
being here today, and we appreciate the time you have taken. In 
recent years, the nature of small business financing has 
evolved. No longer do many banks want to take on a business 
loan under $250,000, leaving much of the Nation's small 
employers empty-handed. SBA's Microloan program fulfills a 
critical need in the capital markets by serving entrepreneurs 
who are not served by the private sector or SBA 7(a) loan 
programs. The Microloan program is a key resource for startup, 
newly established and growing small businesses as well. It has 
provided millions of dollars in financing and technical 
assistance to small business and entrepreneurs since its 
inception in 1992 by providing loan programs to non-profit 
intermediaries who, in turn, lend funds to the smallest of 
small businesses. The program helps borrowers streamline their 
operations, grow to profitability, and create new jobs.
    This Committee has recognized growth in microlending. And 
by recently passing legislation increasing the intermediary 
loan limit, we have extended the reach of the program. Doing so 
enhances the ability of small firms to access much-needed 
capital. And so, as we enhance the program, it is invaluable to 
consider the program's performance at both the intermediary and 
agency levels. The Office of Inspector General has recently 
focused its attention on the SBA's management of the program. 
The report found a number of improvements were needed to 
measure performance and ensure the program's integrity. And a 
number of concerns were raised in regards to the reporting 
system and documentation of loans. So we take these issues very 
seriously, because it is our duty to guarantee the Microloan 
program performs at its best if we intend to see the success of 
entrepreneurs in our communities. So today's hearing will 
provide us with the opportunity to hear about the OIG's 
findings related to oversight and performance of the program.
    Overall, this Committee seeks to ensure that the Microloan 
program works with small business borrowers, and I look forward 
to hearing from our witnesses today and gaining their insights 
on how we can improve the program. And thank you, Mr. Chair. I 
yield back.
    Chairman KELLY. Thank you to our ranking member, Ms. Adams. 
And I now yield to the gentleman from Virginia, the chairman of 
Subcommittee on Economic Growth, Tax, and Capital Access, Mr. 
Brat.
    Mr. BRAT. All right. Our chairman did such a good job of 
summarizing the issues we are going to cover today, along with 
our ranking member, that, in the interest of efficiency, I am 
going to yield back and look forward to your testimony.
    Chairman KELLY. I now yield to the gentleman from 
Pennsylvania, the ranking member on the Subcommittee of 
Economic Growth, Tax, and Capital Access, Mr. Evans.
    Mr. EVANS. In that spirit that the gentleman just 
expressed, and my ranking member did such a great job, I am, 
too, going to yield back in efficiency and effectiveness. Thank 
you.
    Chairman KELLY. Thank you. And as you guys can see, we 
work, I think, more bipartisan on this Committee than any of 
the other committees I am on. And that is just a wonderful 
thing to have such great members. If Committee members have an 
opening statement prepared, I ask that they be submitted for 
the record. I would like to take a moment to explain the timing 
lights to you. And you guys are both veterans. You have 5 
minutes to deliver your testimony. The light will start out 
green. When you have 1 minute remaining, it will turn yellow. 
And finally, at the end of your 5 minutes, it will turn red. I 
ask that you try to adhere to the time limit.
    I now want to formally introduce our witnesses today. Our 
first witness is Mr. Hannibal ``Mike'' Ware. Mr. Ware serves as 
the Acting Inspector General for the Small Business 
Administration Office of the Inspector General. The OIG is 
responsible for the independent oversight of SBA's program and 
operations. The OIG conducted the audit that is the subject of 
today's hearing. We look forward to hearing Mr. Ware's 
testimony.
    And our second witness will be Mr. William Manger Mr. 
Manger is the Associate Administrator for the Office of Capital 
Access at the Small Business Administration. One of the 
programs Mr. Manger's office administers and oversees is the 
Microloan Program. Thank you for joining us today. And with 
that being said, Mr. Ware, you are recognized for 5 minutes.

STATEMENTS OF HANNIBAL ``MIKE'' WARE, ACTING INSPECTOR GENERAL, 
   UNITED STATES SMALL BUSINESS ADMINISTRATION; AND WILLIAM 
  MANGER, ASSOCIATE ADMINISTRATOR, OFFICE OF CAPITAL ACCESS, 
          UNITED STATES SMALL BUSINESS ADMINISTRATION

              STATEMENT OF HANNIBAL ``MIKE'' WARE

    Mr. WARE. Thank you very much, Chairman Kelly and Brat, 
Ranking Members Adams and Evans, and distinguished members of 
the Subcommittee. Thank you for the opportunity to be here 
today and for your continued support of the Office of Inspector 
General. We recently published the results of our audit of 
SBA's management of the Microloan program. And I am happy to 
discuss our findings with you today. The Microloan program 
assists women, low-income veteran, and minority entrepreneurs 
as well as other small businesses in need of financial 
assistance. Under the program, SBA makes direct loans to 
intermediaries that, in turn, use the proceeds to make small 
short-term loans, microloans, up to $50,000, to eligible small 
businesses. SBA also awards grants to intermediaries to provide 
training and technical assistance to microloan borrowers. From 
fiscal years 2014 to 2016, intermediaries closed 12,168 
microloans, totaling approximately $170 million.
    As background, we initiated this review in response to a 
request from the Senate Committees on Small Business and 
Entrepreneurship to audit the program. And for historical 
context, our office conducted prior reviews of the Microloan 
program in 2003, and again in 2009. The objectives of our 
current review were to determine whether SBA effectively 
implemented actions to improve oversight of the Microloan 
program and the extent that SBA oversight is sufficient to 
measure program performance and ensure program integrity. We 
found SBA management did not effectively implement all prior 
audit recommendations to improve oversight. Furthermore, SBA 
management did not conduct adequate program oversight to 
measure program performance and ensure program integrity.
    These internal control weaknesses were due to SBA not 
having an overall site visit plan, an adequate information 
system, available funding for system improvements, or clear 
standard operating procedures. Additionally, SBA management 
focused on output-based performance measures instead of outcome 
measures. In our review of the statistical sample of 52 
microloan files, we found that data contained in SBA's 
information system for 27 of the loans did not match the 
information included in the intermediaries' loan files.
    In addition, we found that intermediaries did not have 
sufficient documentation to support that it originated and 
closed 85 percent of the loans in accordance with SBA's 
requirements. As a result, SBA's ability to validate microloan 
data, conduct analyses across multiple programs and systems, 
and capture outcome-based measures was impaired. We found there 
was no way to ensure program integrity or measure program 
success. These internal controls over the Microloan program are 
critical as Congress considers expanding the program.
    On a positive note, we also found SBA did take some steps 
to improve its oversight of the Microloan program. Those steps 
include the following: They developed a justification to 
request funds for technology improvements; they conducted a 
time study to evaluate staff time spent on tasks in support of 
technology improvements; and they developed a module within the 
program information system for new loan requests analysis which 
replaced the use of spreadsheets.
    To keep this progress moving forward, we offered four 
recommendations to SBA to improve SBA's oversight of the 
Microloan program. We recommend that they continue efforts to 
improve their information system; develop a site visit plan to 
further monitor Microloan portfolio performance; update their 
SOPs to clarify requirements regarding evidence for use of 
proceeds and credit elsewhere; and update the Microloan 
reporting system manual to reflect current technology 
capabilities.
    SBA management agreed with the four recommendations, and 
our office will monitor these recommendations until we assess 
corrective action has been implemented. I am proud of the work 
performed by our auditors to provide to Congress timely insight 
into the Microloan program. Thank you once again for the 
opportunity to speak to you today, and I look forward to your 
questions.
    Chairman KELLY. Thank you, Inspector General Ware. And, Mr. 
Manger, you are now recognized for 5 minutes.

                  STATEMENT OF WILLIAM MANGER

    Mr. MANGER. Thank you, Chairman Kelly and Brat, and Ranking 
Member Adams and Evans, for the opportunity to testify before 
you today. I appreciate that this Committee has various 
champions of the Microloan program, and I know that today's 
hearing will focus us on how to make the program function and 
operate better. To do that, we need to take a hard look at the 
past and present IG recommendations. And in my capacity as the 
head of SBA's Office of Capital Access, I recognize that I need 
to drive those changes home. I view the IG report as a road map 
on how to strengthen and improve a program that many of you 
care so strongly about. We have a shared goal in wanting to 
spur economic investment and business opportunity in 
communities throughout this country. The IG report, through 
pointing out areas where SBA needs to do better, will enable us 
to further enhance our lending. To illustrate the reach of our 
Microloan program, I wanted to share some data. In fiscal year 
2017, the intermediaries in SBA's Microloan program lent $64 
million to over 4,700 businesses that were unable to get credit 
elsewhere. The average loan amount was close to $14,000. The 
number of jobs created or retained was close to 18,000.
    Those figures tell us we are on track, but further analysis 
also tells us we are being successful in reaching communities. 
In fiscal year 2017, microloans were only 4 percent of the 
SBA's total loan portfolio, but a full 40 percent of those 
loans went to startups, and 30 percent of microloans go to 
businesses in rural areas. This represents greater penetration 
than our other SBA loan programs.
    Finally, all small business owners that receive a Microloan 
from SBA receive technical assistance, which is critical for 
business survival. In fact, businesses that receive technical 
assistance are three times more likely to stay in business past 
year one than those that do not receive technical assistance.
    Mr. Chairman, this data shows us that we are on the right 
path. It affirms the members' interest apparent on this 
Committee and also the geographic reach to lending communities.
    So the question is--how do we do better? The IG report 
makes specific recommendations that we agree with. First, our 
data system is 25 years old, and desperately needs to be 
upgraded. When I came into my position in March, this was one 
of the first things I identified. We have now funded a review 
of the system which will lead to a specific recommendation for 
an upgrade in conjunction with Maria Roat, our Chief 
Information Officer at SBA. I want us to get a new system in 
place as soon as possible.
    Second, our SOP is currently being updated to provide 
better direction and guidance to both SBA staff and our 
intermediaries. We are in the process of creating a more 
thorough, on-site review plan of intermediaries, and we will 
continue training our SBA staff in the field and in 
headquarters to provide them better direction on their 
engagement with our intermediaries. Compliance is of utmost 
importance to maintain the integrity of the Microloan program. 
This program does so much.
    Let me share one entrepreneur's success story with you. 
John Palmer of Gardena, California, is an African-American 
disabled veteran who wanted to start a security business when 
he left the Army. He started Servexo, but after 3 years, needed 
capital to take a bold leap into a municipal contract. Because 
of extended credit, John could not secure traditional financing 
to grow his business. He went to a Small Business Development 
Center and was referred to a microlender, CDC Small Business 
Finance in California. They provided John with a $40,000 
microloan that allowed him to staff a new contract and purchase 
new employee uniforms. John also received technical assistance 
related to financial literacy. This led him to bill weekly 
instead of biweekly, which greatly improved his cash flow.
    This is one success story, but there many, many others. 
Lastly, I want to speak to a portion of the IG report that 
observes the necessity for better program integrity in view of 
legislation to bolster the Microloan program.
    We were pleased to work with the Committee on the Microloan 
bill that passed out of Committee and brought forward to the 
full House in July. We appreciate the continued interest and 
support of the program. And you have my commitment that we will 
make the changes necessary to achieve continued success. Thank 
you, Mr. Chairman. I look forward to your questions.
    Chairman KELLY. And I thank both of you witnesses for being 
here. I thank the ranking member for being here as part of this 
to have this important hearing. It matters to me that 30 
percent of the people who are financed are from rural areas. 
That is the type of area that I represent. It matters to me 
that these loans go to the people who need them most, which are 
our veterans and minorities in areas, whether it is for startup 
or whether it is for continuing and growing that business, that 
is very, very important.
    Mr. Manger, you have got a road map. I mean, the Office of 
Inspector General told you exactly what you need to do to do 
this thing right. And so, my hope is that the SBA will follow 
to the T those recommendations, or either dispute with this 
Committee, or the Office of Inspector General, what they don't 
agree with there. But otherwise, I think you have a road map to 
get this program right so that we make sure the right people 
are getting that. In your recent audit, Mr. Ware, your office 
found that the SBA did not implement all the recommendations 
from the 2009 audit. Specifically, which recommendations did 
they not implement?
    Mr. WARE. It is important to note that they definitely made 
attempts to implement the recommendation. We are saying they 
didn't effectively implement three of them. And the first one 
was recommendation 3 that dealt with actually going out and 
validating and verifying the data that is being reported by the 
intermediaries.
    So one of the ways that we asked them to do that was to 
bolster up their site visits, to get out there and back-check 
these things to see if the information is actually accurate. 
And when we looked, we found that more than half of the files 
that our auditors reviewed showed that the information had 
disparities. It just wasn't accurate. So we dug into the site 
visits and found that they didn't necessarily have a site visit 
plan in place that would ensure that all the intermediaries 
were covered, number one, or that it was in any kind of 
scheduled manner to ensure that there is continuity. So we 
asked them to shore that up.
    So that was the first one. And then recommendations 5 and 6 
both had to do with performance measures. So we know, and Mr. 
Manger and I spoke about the way that SBA does a lot of their 
performance measure, and it is more output-based than outcome-
based. And we are asking to have a greater lens into outcome-
based performance measures. So that could be done through their 
IT system as well.
    Like Mr. Manger said, it is very old. It is missing fields. 
There are just certain things that could be placed in there, 
because some of the data, quite honestly, is readily available. 
It is right there. It is just not being rolled up in any way 
that they could have a programwide view of the program to make 
program-wide-type decisions.
    Chairman KELLY. And thank you. And just as an old soldier 
and old commander, I know that, number one, we don't do well, 
those things that aren't measured. And so you have to have 
performance measures or something to measure against. And we 
also don't do well those things that aren't inspected. And 
inspected doesn't mean online. The things we follow up on and 
show the importance by visiting are the things that people do 
well. If you don't show up, they assume that you really didn't 
mean that they were important. Was your office surprised to 
learn, Mr. Ware, that they have not implemented the things that 
you had asked?
    Mr. WARE. I got to tell you, we were a little surprised 
that technical capabilities were not in place, mainly because 
we thought they were, quite honestly. After the 2009 one, we 
were provided with screenshots and with everything. And they 
had a contract in place to make these improvements. We actually 
thought they were done, but the contract, we found out later, 
fell apart, and that project went way.
    Chairman KELLY. Mr. Manger, now, how will SBA make sure 
that it actually implements these recommendations under your 
leadership?
    Mr. MANGER. Well, I am here to, again, drive this home. And 
I will ensure that the office and the staff in my office, we 
will pay very, very close attention to the IG report, the road 
map, as you said, sir. And we are going to implement it. We 
have already taken steps actually to implement some of the 
recommendations in the report by the IG. As we mentioned, we 
are actually funding now an evaluation with our Office of the 
Chief Information Officer, Maria Roat, to identify what is the 
best system to capture all of the information that we need to 
capture. And as Mr. Ware said, we want to capture, again, not 
just outputs, but outcomes. And we are going to do a whole new 
system to replace the 25-year old system, and we are going to 
try and do that, as I said, as soon as possible. We also have 
taken steps to change the language in the SOP. My office has 
already started to work on that. Again, with Mr. Ware and the 
inspector general's recommendations, we are changing the 
language in the SOP to make it clear and readily identifiable 
by the lending intermediaries, our staff, field staff, so 
everyone knows what is necessary to be in compliance.
    Chairman KELLY. Okay. And I am going to go just a little 
over, but I will tell you, it goes back to we measure--we do 
well what people measure. You need to have timelines, if you 
don't, of when these things are going to be completed. If you 
do not have timelines and it is just when we get to it, people 
will not complete it. And with that, I have overextended my 
time, and I yield to the ranking member, Ms. Adams.
    Ms. ADAMS. Thank you, Mr. Chair, and thank you, gentlemen, 
for your testimony.
    Mr. Ware, in fiscal year 2016, the Microloan program was 
responsible for the creation of nearly 18,000 jobs. 47 percent 
of microloans went to minority entrepreneurs, and 45 percent of 
borrowers were women entrepreneurs. To what extent should 
factors such as job creation and borrower type be included as 
measures of the program's success?
    Mr. WARE. That is a good question, actually. Actually, our 
office believes that that is at the crux of what should be 
measured, because if we want to know for certain that the 
program is meeting its intended purpose, those are exactly the 
type of performance measures that are more outcome-based that 
we have been discussing with the Small Business Administration.
    Ms. ADAMS. Right. I understand that intermediaries may 
utilize the Microloan program and the Community Advantage 
program simultaneously for one small business borrower. So with 
your recommendation on data collection in mind, can you 
elaborate on how SBA can ensure that its programs, particularly 
when being combined, can each meet their intended purposes?
    Mr. WARE. That was one of the things we found in the report 
that might--was not being tracked in a way that could roll out 
programwide to determine what is the impact of having the 
programs combined, what is really going on, because those 
programs we found during the audit that sometimes they 
combined, and it causes more--higher fee to the borrower and 
things like that.
    So the intermediaries were saying that we are doing this to 
make it easier for the lender, which might be the case if you 
look at it from their standpoint. But we also think that, Hey, 
this is also adding a different cost to the borrower. But we 
still believe that SBA needs to be better--have better 
oversight over that, especially when you are combining the 
programs.
    Ms. ADAMS. Okay. Thank you. Mr. Manger, SBA has promoted 
creating a continuum of access to capital. The OIG report noted 
that some intermediaries were not reporting whether small 
businesses were still in operation. What measures are in place 
to track the development of small businesses in the Microloan 
program such that they could avail themselves, if eligible, to 
additional SBA loans?
    Mr. MANGER. Thank you very much. We are putting in place 
identifiable markers so that we can track someone who receives 
a small business loan through a microlender. In fact, we have 
done some analysis already since I came aboard in March, and we 
are able to tell you that over 8 percent of those that received 
a microloan through the SBA have come back and received a 
larger loan through one of our other loan programs. So we do 
have hard evidence that shows the continuum, and we would like, 
again, to have people eventually not even need the SBA, we 
would like them to be able to get loans conventionally. That is 
our ultimate goal. And we are working towards that goal.
    But we need to--and you are correct and the inspector 
general is correct--we need to have identifiable markers to be 
able to track businesses into the future. With the 504 program, 
as you may know, we do track at least 2 years of the continued 
job creation by that business. We need to do that and even more 
with the microlender program so that it is the strongest 
program that we can have.
    Ms. ADAMS. Yeah. Thank you. So to what extent do you 
attribute the discrepancies that the OIG found between the data 
in SBA's information system and the data in the intermediary 
loan files?
    Mr. MANGER. So a lot of that can be explained, and we did 
talk to the IG about this. A lot of that can be explained by 
the fact that much of the information that is initially 
recorded is done in the application. What really should be 
looked at is the credit memo that follows the application, the 
credit memo and then the information that is in the system is 
actually consistent. Sometimes someone puts in an application 
that they are going to create four jobs. And then when they 
talk further and they get more technical assistance, they say, 
actually, it is going to end up being three jobs. And then when 
we do the final loan disbursement or the lending intermediary 
does that, it shows that there were three jobs created. So it 
is consistent with the credit memo. It is not always consistent 
with the application. And we did point this out to the OIG.
    Ms. ADAMS. So consistency and coordination, then?
    Mr. MANGER. Correct.
    Ms. ADAMS. Very good. Thank you, sir. Yield back, Mr. 
Chair.
    Chairman KELLY. Thank you, Ms. Adams. And I now yield to 
Mr. Brat.
    Mr. BRAT. Thank you all for being with us today. I just 
have a question in terms of the Office of Inspector General. I 
think you have done us a good service in, first of all, 
checking into programs, making their--serving our interests, 
and et cetera. But most of what I saw and the types of metrics 
you put in place just kind of assure at the managerial type of 
level that the program will be implemented in a good way.
    And beyond that--I mean, what we are really concerned about 
is that small business loans are being administered to people 
and they are having some effect as well. And so, if you could 
both just say a word on that, right? I mean, you have given us 
some good examples. I am not critical. I want these loans; I 
want economic growth. I taught economics for 20 years, so it is 
all good, right? I love it. But the anecdotal stuff doesn't cut 
it for me. And even if you got a metric. You said, I think, you 
know, we got, you said, tech assistance. And the firms that 
take that have three times the survival. That could just be 
casual correlation, right? It could be that the bigger firms 
that survive have access to, you know, midlevel managers or as 
one manager, that can take advantage of assistance where the 
small guy can't.
    I mean, we want to see kind of real evidence, right? Not 
just, Hey, we think, you know, three times this, and they are 
better over here. You know, is that a fluke? I mean, if you run 
a regression and you control for some things, right? Like, my 
daughter is in high school doing this stuff with a control 
group, right? I mean, do we have some assurance that these 
programs are bearing fruit in terms of economic growth and 
helping business? And I would like to see that in the report as 
well. Just yield to hear your response.
    Mr. MANGER. So as I mentioned, the microloans that were 
made last year, we have on record that they created 18,000 
jobs. If you look at our statistics based on different groups, 
we outperform every group with this program as opposed to our 
other SBA lending programs. For example, the percentages of 
loans in this program that went to African-Americans this past 
year was almost 33 percent. That is a third. That is a much 
higher number than with our other SBA lending programs. The 
numbers for the last 5 years, the loans to Hispanics was over 
21 percent, and to women it was almost half.
    We are reaching people that we do not reach with our other 
programs. The lending intermediaries are on the ground in 
communities--in rural communities, making those loans, a lot of 
the times with a high-touch character rationale. And they are 
making loans to people who would not--I mean, case after case, 
they have said we cannot get the money. They have gone back 
repeatedly to banks and cannot get loans.
    This program provides them that access to capital. They do 
not have to max out credit cards. They are not going to an 
online lender that is going to charge huge interest rates to 
them. Our interest rates are reasonable. This program is 
successful. And we just want to strengthen it and make sure 
that it is doing the right thing for the American people.
    Mr. WARE. What you are saying is part of what we are 
driving at. And SBA, I think in 2011, after that 2009 report, 
they got with the consultant. And I am drawing a blank. I was 
sitting here trying my best to come up with that consultant 
that I knew right up until I sat in this seat a second ago. And 
that consultant had some of the same concerns and put forth 
some recommendations that were very much in line with what we 
had done.
    But one of the things they put out there is they were 
talking about getting to a performance metric that deals with 
overall impact, absent some of the things that you mentioned 
like, well, did those that were successful have access to the 
other programs. It was Aspen Institute. Thank you. I am here, 
like, the Archer Institute? Okay. The Aspen Institute. And one 
of the things they recommended, and I believe that at the time, 
SBA thought it was expensive, was that you actually speak to 
the people who are benefiting from the program to find out if 
it is actually working. Why were you successful? And that way 
you could dig in much deeper into determining, wait, is this--
are you isolated in this instance because you had a little bit 
more charisma, or was it because of this and that? So I still 
think that that Aspen Institute study had a lot of merit. I am 
not sure if you saw it. But it has a lot of merit, and that was 
one of their recommendations.
    Mr. BRAT. Thank you.
    Chairman KELLY. I would like to thank and recognize the 
chairman of the full Committee, Chairman Chabot from Ohio, 
for--he is in now. And with that being said, I recognize Mr. 
Evans for 5 minutes.
    Mr. EVANS. Thank you, Mr. Chairman.
    Mr. Manger, I want to go back to something you said when 
you talked about the shared goals. And I want to go back to the 
part about what is application on jobs and actually what 
happens. I think I heard you say sometime when people apply on 
paper, they may have a number of 6, but when it actually comes 
up to 3. You sort of said that, right?
    Mr. MANGER. Yes. There are many times when the application 
does not have the same information that is then contained in 
the credit memo which is used, actually, just before the loan 
is funded.
    Mr. EVANS. Correct. And what I guess I am trying to 
understand, the actual number you have is 18,000 jobs that you 
said have been created from this particular program, is what 
you have said.
    Mr. MANGER. That is correct, in fiscal year 2017.
    Mr. EVANS. Right. So in other words, what I see, one is 
sort of like the projected and actual. That is what I am 
hearing you say?
    Mr. MANGER. Yeah. That number is the number that was 
captured by the intermediaries that was put into our system.
    Mr. EVANS. So it is the actual----
    Mr. MANGER. That is the actual.
    Mr. EVANS.--versus what was projected?
    Mr. MANGER. Yes. I mean, what was in the application is not 
captured here. This is actual----
    Mr. EVANS. But it could have been higher?
    Mr. MANGER. It could have been, that is correct.
    Mr. EVANS. It could have been higher. Right. So what I want 
you to do is could you walk us through the process of applying 
for a microloan? I want to just understand how that process 
works.
    Mr. MANGER. Sure. Well, in the instance that I gave you, a 
small business entrepreneur was referred to a microlender. 
Microlenders are--we have 150 that are using our program today, 
approximately. They go into the microlender. The microlender 
sits down with them. And then, as you know, Congressman, a very 
important component of receiving one of these loans is the 
technical assistance. They must, as of today, get 25 percent of 
the technical assistance up front before they receive the loan. 
And it is many times when they are sitting down with the 
lending intermediary who is going to make the loan to them, 
that they understand what is necessary to have a sound business 
plan, and what it is going to take for them to be able to fund 
that loan, and then operate once they receive that loan.
    So a lot of the information, again, you know, on the 
initial application then is different. But then the lending 
intermediary sits down with the potential borrower, puts 
together a credit memo. They then--the intermediary funds the 
loan with the money that is loaned to them through the SBA. The 
lending intermediary makes that loan. And they have, on 
average, 3 years to repay that loan. But the SBA allows them, 
in fact, to repay that loan up to 6 years.
    Then once that business is funded, as current statute 
requires, 75 percent of the technical assistance must be 
applied again after they receive the loan to make sure that the 
business is going to get up and running and growing as it is 
supposed to.
    Mr. EVANS. I need to do this so I can get through real 
quick. The question I am leading into is does the Office of 
Capital Access ever get funding and staffing? Because if you 
have done 18,000, I am just kind of curious, is there a need to 
be more staffing, rearrange a budget and--that could be many 
more job opportunities, businesses grow?
    Mr. MANGER. No. Honestly, I think our office is really 
adequately staffed for the amount of lending that we are doing. 
Again, we are making a loan to the 150 microlenders that are 
out there. It is the microlenders, who then, in turn, make the 
loans to the small business entrepreneurs. So we are not 
directly involved at the loan level to the small business 
owner. We are there working with the 150 microlenders that are 
in our program today.
    Mr. EVANS. One other thing I want to jump into. You said a 
shared goal that one day there wouldn't be a need for SBA, a 
Microloan program.
    Mr. MANGER. I am saying that we would like to see small 
business owners grow a business so strong and become so 
economically viable that they do not need to come back and use 
the SBA; that they are able to access capital directly through 
the conventional marketplace. That is correct.
    Mr. EVANS. What is your sense on the percentage of 
companies that you are dealing with that are in that position 
that, in a sense, kind of grow out of needing the Microloan 
program?
    Mr. MANGER. You know, I don't think I have an exact number 
for that. I could certainly get back to you on that. But we are 
addressing a need that is clearly evident out there for these 
small loans that are very impactful. And the lending 
intermediaries play a major role, again, in making sure that 
these businesses get the technical assistance they need and 
then the capital they need to start a strong business and we 
are hoping that all the businesses then become strong enough, 
again, that they graduate from the SBA.
    Mr. EVANS. I yield back. Thank you, Mr. Chairman.
    Chairman KELLY. The gentleman yields back. I now recognize 
Mr. Bacon for 5 minutes.
    Mr. BACON. Thank you, Mr. Chairman. And thank you gentlemen 
for coming back. Mr. Ware, if you could talk a little about 
site visits. I just want to make sure I understand what they 
are. If I interpret it right, it is the higher headquarters go 
out to visit smaller units?
    Mr. WARE. No.
    Mr. BACON. What are they?
    Mr. WARE. So the district offices actually go out to do the 
site visits where they are, to the intermediaries in those 
States.
    Mr. BACON. So what is the intermediary, then?
    Mr. WARE. An intermediary is who the SBA gives--well, they 
apply--they are their non-profits that apply to SBA to get the 
money necessary to make the loans to the----
    Mr. BACON. So they actually do the loaning--the loans out? 
Got it.
    Mr. WARE. Yes.
    Mr. BACON. Okay. So it is farther down the food chain than 
what I was thinking.
    So why is it important that SBA have a site visit plan and 
assemble the data from its visits? And is that directed from 
the top and tells the middle offices how to do it?
    Mr. WARE. Yes. Well, let me explain: So absent the plan, 
what happens, you have the district offices going out there, 
and they are doing site visits. But there is no overarching 
plan that says this is how we are supposed to do it. And then 
the information doesn't roll up to the top to be able to have a 
programwide view as to what is being found in the site visits.
    So let's say you find--if Wisconsin, I guess, is finding 
that one thing is happening that is regular, that is wrong all 
the time that they are doing, whether it is credit elsewhere, 
how to review it, or anything else, and it is being done that 
way also in Nevada, and it is being done in these other places. 
Right now the information is piecemeal from the site visits, 
and part of us being able to see that we have a problem in the 
program, that we probably need to put something in the system 
to address.
    Mr. BACON. So it is important that the folks at the top 
standardize the reporting processes, how you do it, and format 
it in a certain way so the data can be shared better?
    Mr. WARE. Right. Well, I think that, for the most part, 
that is being done. We are just asking them to make sure that 
they can have a programwide lens by having these folks roll up 
this information, and everybody be playing from the same 
playbook.
    Mr. BACON. Right. So it makes sense to me, because we did 
the same thing in the Air Force. We inspect, but we determine 
at the top how those inspections should look or those visits. 
So it is standardized. And you can take those lessons learned. 
My question to Mr. Manger, if I may, part of this audit, did 
your office have regular communications with the 
intermediaries? It sounds like you did, it just wasn't 
standardized.
    Mr. MANGER. Yes, that is correct. And, actually, this gets 
to another point that is very important to note. You know, 
actually, several years ago, I was the Associate Administrator 
for Field Operations. Field Operations plays a big role in 
carrying out the site visits, because it is actually the staff 
in the district offices, as the inspector general just said, 
that actually carries out the site visits. So we have to be 
completely coordinated with the district offices.
    When I came back aboard the SBA in March of this year, I 
spoke to the Administrator and said we need to do some training 
with the field staff, specifically the lender relations 
specialist, to make sure they are doing what we need in 
headquarters for them to do in carrying out some of these site 
visits.
    In fact, in September, we had an on-site meeting with all 
the lender relations specialists from across the country for 2 
days out near Dulles Airport, and we went over this with them. 
They now are on board and we are mandating annual site visits 
of every microlender in the program; they will be doing that. 
The staff in the headquarters office will also be following up 
with that. I think once we have that in place, we do have a 
checklist already; we can refine it a little bit further. But I 
think within, you know, this fiscal year, we are going to have 
a very good system in place to ensure that the site visits and 
the reporting is done effectively.
    Mr. BACON. Okay. Thank you. One last question for you, Mr. 
Manger. So you had the inspection results, 2017, from the 
inspector general. And you already said this, but I just want 
to verify, make sure I got it right. You found their findings 
on target, not overly cumbersome? Should be applied?
    Mr. MANGER. We agreed with their findings. I mean, 
honestly, the biggest problem is the 25-year-old system that we 
are working off of. That needs to be updated, without question. 
I identified that when I first came on board before I even knew 
the inspector general was looking at it. As I said, we have 
already funded a study with our Chief Information Officer to 
get the right system in place. We are hoping to do that as soon 
as possible, and we are working to that goal. I found out there 
were issues with the SOP and I immediately started working with 
our legal team to update the SOP. In terms of the site plan we 
have already done some training with the field staff. We are 
going to work on that. So we have adopted, really, the IG's 
recommendations. We agree with them, and we are moving forward 
to make sure the integrity of the program is intact.
    Mr. BACON. Thank you very much to both of you. I yield 
back.
    Chairman KELLY. The gentleman yields back. I now yield 3 
minutes to Ms. Murphy.
    Mrs. MURPHY. Thank you, Mr. Chairman, for holding today's 
hearing. I am very pleased to have worked with this Committee 
to pass H.R. 2056, the Microloan Modernization Act, in the 
House. It is an important bill that I think will help ensure 
the program keeps up with the increased demand for 
microlending. I also want to note that the bill recognizes the 
need for increased oversight by requiring GAO to conduct a 
thorough evaluation of the program.
    As we look to the potential Senate passage of the bill, 
this hearing comes at a particularly fortuitous time. My first 
question is for Mr. Manger. As you know, under current law, an 
intermediary can use no more than 25 percent of its Microloan 
technical assistance grant to provide preloan assistance, that 
is, assistance to perspective microloan borrower as opposed to 
an approved microloan borrower.
    Microloan intermediaries have long regarded the 25 percent 
cap as an arbitrary requirement that limits their ability to 
design support services that address the specific needs of 
borrowers and get more perspective borrowers loan-ready. Given 
these concerns, H.R. 2056, as amended, would increase the cap 
to 50 percent. Could you provide your thoughts on the current 
25/75 rule and the proposed change to 50/50?
    Mr. MANGER. Sure. We are in completely in favor of that 
change. And we want to also thank Congressman Bacon for his 
amendment.
    We think that it makes much more sense to lift some of 
those restrictions; the 25 percent restriction on the 
intermediaries for the up-front training. We also realize, and 
there is evidence to prove this, that loans are made and 
businesses are more successful when the up-front training is 
greater. And so we are in complete favor of increasing the up-
front training prior to receipt of the loan; shifting to the 
50/50 split, we think that is the right way to go. We 
appreciate the House for putting that forward and look forward 
working with the Senate to get that passed into law.
    Mrs. MURPHY. Great. Thank you. And one quick question. 
According to the agency's fiscal year 2018 congressional budget 
justification, microlending has seen an increased demand, and 
the number of small businesses assisted by the program was up 
by 23 percent in fiscal year 2016. Is the SBA prepared to meet 
the increased demand going forward? And what additional 
resources may be needed?
    Mr. MANGER. I think we are perfectly poised to address the 
need and the demand in 2018. In fact, if we get this system in 
place, we will be able to create greater efficiencies in our 
office, and I think we will be perfectly well-suited to address 
the increased demand.
    Mrs. MURPHY. Great. Thank you. And I yield back.
    Chairman KELLY. The gentlewoman yields back. I now 
recognize Mr. Blum for 3 minutes.
    Mr. BLUM. Thank you, Chairman Kelly, and thank you to the 
panelists for being here today I would also like to recognize 
the ranking member, Ms. Adams, who is standing up there, on her 
hat today. Very nice. Very nice. We are not here to question 
the effectiveness of the need for the Microloan programs. We 
are here to question the management by the SBA of these 
programs. Mr. Manger, how long have you been in your position?
    Mr. MANGER. Since March of this year.
    Mr. BLUM. Okay. I am reading here that the OIG did an 
audit. 52 microloans. They did an audit, a statistical sample. 
I was on a bank audit committee, so I know enough about this to 
be dangerous. Twenty-seven loans are not matched the 
information included in the intermediary's loan files. Thirty-
two loan files did not have adequate evidence that the proceeds 
were used for the stated purpose, 32 of them. Twenty loans did 
not have adequate support that the borrower could not get 
credit elsewhere that is required. Thirteen loan files show 
that the intermediary charged interest rates above SBA 
requirements. And seven loan files show the intermediary 
charged fees above SBA requirements.
    Now, I know if the bank that I was on the board of got this 
type of audit information, we would be in serious trouble by 
the Federal Reserve. My question is, what happened to these 
intermediaries? What happens to these people when they do not 
follow our rules as stated by the OIG? Mr. Manger.
    Mr. MANGER. You raise a very good point, Congressman. Since 
I have come aboard, we have taken action. In the last 2 1/2 
years, even longer than I have been there, we have the Ofice of 
Economic Opportunity, which oversees the Microloan program 
within my office working now very closely with my Office of 
Credit Risk Management.
    Mr. BLUM. What happens to these intermediaries? Are they 
terminated?
    Mr. MANGER. I will tell you, Congressman, we did actually 
just terminate a microlender----
    Mr. BLUM. One?
    Mr. MANGER.--in the last 2 months.
    Mr. BLUM. Clearly, there is--over 50 percent of the 52 
analyzed had issues. 50 percent. One has been terminated?
    Mr. MANGER. Yes. But if you also look at the number of 
loans that were checked, that was less than 1 percent of the 
loans made by the Microloan program.
    Mr. BLUM. It is a statistical sample, though. You can't 
tell me with any reasonable accuracy that 50 percent of them 
are not in error, of the total loan portfolio. So this is a 
statistical sample. 50 percent or more were in error. These 
intermediaries should be terminated.
    Mr. MANGER. And as I said, we just terminated one, and I am 
working to look at doing that with another one. So I am taking 
action, sir, since I arrived in March.
    Mr. BLUM. And I have every confidence now in the SBA with 
Linda McMahon at the top of it. And you are new to your job, so 
I will give you the benefit of the doubt. But they need to be 
held accountable.
    Mr. MANGER. Absolutely.
    Mr. BLUM. I yield back my time.
    Chairman KELLY. The gentleman yields back.
    As this hearing comes to a close, I want to, again, thank 
both of our witnesses for their testimony today. The Microloan 
Program is important to this Committee and important to small 
businesses. For those reasons, we encourage the SBA to take 
heed of the OIG's audit report and improve its oversight. Doing 
so will ensure the program fulfills its purpose. Going forward, 
we are eager to learn how SBA is implementing the OIG's 
recommendations. The Committee expects to be updated on the 
progress SBA is making on the OIG's recommendations. Thank you. 
I ask unanimous consent that members have 5 legislative days to 
submit statements and supporting materials for the record.
    Without objection, so ordered. We are adjourned.
    [Whereupon, at 2:49 p.m., the Subcommittee was adjourned.]
    
    
    
    
                            A P P E N D I X



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                              INTRODUCTION


    Chairman Kelly and Brat, Ranking Members Adams and Evans, 
and distinguished members of the Subcommittees, thank you for 
the opportunity to be here today and for your continued support 
of the Office of Inspector General (OIG). We recently published 
the results of our audit of the Small Business Administration's 
(SBA's) management of the Microloan Program. I am happy to 
discuss our findings with you today.

                               OIG'S ROLE


    OIG was established within SBA by statute to promote 
economy, efficiency, and effectiveness and to deter and detect 
waste, fraud, abuse, and mismanagement in the Agency's programs 
and operations. During fiscal year (FY) 2016, OIG achieved 
nearly $145 million in monetary recoveries and savings--an 
almost sevenfold return on investment relative to our FY 2016 
operating budget--and made 81 recommendations for improving 
SBA's operations and reducing fraud and unnecessary losses in 
the Agency's programs. Already in FY 2017, through March 31, 
2017, OIG achieved monetary recoveries and savings of over $22 
million.

    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 on 
Integrity and Efficiency. In addition, we coordinate with the 
Government Accountability Office to avoid duplicating Federal 
audits. We also establish criteria to ensure that the non-
Federal auditors that OIG uses (typically, certified public 
accountant firms) comply with Federal audit standards.

           OIG'S FINDINGS PERTAINING TO THE MICROLOAN PROGRAM


    OIG report 17-19, titled Audit of SBA's Microloan Program, 
presents the results of our audit of SBA's Microloan Program. 
The Microloan Program assists women, low-income, veteran, and 
minority entrepreneurs, as well as other small businesses in 
need of financial assistance. Under the program, SBA makes 
direct loans to intermediaries that, in turn, use the proceeds 
to make small short-term loans (microloans) up to $50,000 to 
eligible small businesses. SBA also awards grants to 
intermediaries to provide training and technical assistance to 
microloan borrowers. From FYs 2014 to 2016, intermediaries 
closed 12,168 microloans totaling approximately $170 million.

    Our objectives were to determine (1) whether SBA 
effectively implemented actions to improve oversight of the 
Microloan Program and (2) the extent that SBA oversight is 
sufficient to measure program performance and ensure program 
integrity.

    What OIG Found

    OIG last conducted an audit of SBA's Microloan Program in 
2009 and made several recommendations to SBA to improve its 
program oversight.\1\ However, SBA management did not 
effectively implement all prior audit recommendations to 
improve oversight. Furthermore, SBA management did not conduct 
adequate program oversight to measure program performance and 
ensure program integrity. These internal control weaknesses 
were due to SBA not having an overall site visit plan, an 
adequate information system, available funding for system 
improvements, or clear Standard Operating Procedures (SOPs). 
Additionally, SBA management focused on output-based 
performance measures instead of outcome measures.
---------------------------------------------------------------------------
    \1\ ROM 10-10, SBA's Administration of the Microloan Program under 
the Recovery Act

    In our review of a statistical sample of 52 microloan 
files, we found that data contained in SBA's information system 
for 27 of the loans did not match the information included in 
the intermediaries' loan files. In addition, we found that 
intermediaries did not have sufficient documentation to support 
that it originated and closed 44 of the 52 microloans, or 85 
percent, totaling approximately $910,000, in accordance with 
SBA's requirements. These deficiencies affect the reliability 
of the data reported to SBA by the intermediaries. When 
projecting these findings to the microloan population, we 
estimated that intermediaries did not have adequate 
documentation for at least 9,196 microloans approved from FY 
---------------------------------------------------------------------------
2014 to FY 2016 for approximately $137 million.

    As a result, SBA's ability to validate microloan data, 
conduct analyses across multiple programs and systems, and 
capture outcome-based measures was impaired, and there was no 
way to ensure program integrity or measure program success. 
These internal controls over the Microloan Program are critical 
as Congress considers expanding the program.

    It is important to note that during the period of the 
current audit, SBA took steps to improve its oversight of the 
Microloan Program. Those steps included the following:

           Developed a justification to request funds 
        for technology improvements.

           Conducted a time study to evaluate staff 
        time spent on tasks in support of technology 
        improvements.

           Developed a module within the program 
        information system for new loan request analysis which 
        replaced the use of spreadsheets.

    OIG Recommendations

    To improve SBA's oversight of the Microloan Program, we 
recommended the Associate Administrator for the Office of 
Capital Access (1) continue efforts to improve the information 
system for effective monitoring of the Microloan Program, (2) 
develop a site visit plan to further monitor microloan 
portfolio performance, (3) update SOP 52 00A to clarify 
requirements regarding evidence for use of proceeds and credit 
elsewhere, and (4) update the microloan reporting system manual 
to reflect current technology capabilities.

    Agency Response

    SBA management agreed with the four recommendations offered 
by OIG. Specifically, SBA plans to study and recommend 
solutions to replace its microloan information system. SBA also 
will develop a comprehensive site visit review program and will 
update SOP 52 00A to clarify requirements regarding evidence 
for use of proceeds and credit elsewhere. Additionally, SBA 
will update the microloan reporting system user's manual to 
reflect current technology capabilities.

                               CONCLUSION


    The Microloan Program's mission is to integrate microlevel 
financing with training and technical assistance for start-up, 
newly established, existing, and growing small businesses. 
Improvements are needed in SBA's oversight to validate 
microloan data, conduct analyses across multiple programs and 
systems, and capture outcome-based measures. Furthermore, 
because Congress introduced two bills to expand the program, 
adequate oversight is necessary to sufficiently measure program 
performance and ensure the integrity of the program. The 
exceptions we identified on the microloans demonstrate that SBA 
must continue to improve its oversight to ensure the program is 
meeting its intended purpose. When projecting our findings in 
the 44 microloans to the microloan population, we estimate that 
at least 9,196 of 12,157 microloans, totaling $137 million, had 
deficiencies.

    I am proud of the work performed by our auditors to shine 
the light on the Microloan Program, appreciating it is timely 
in context of the congressional debate to expand participation 
in the program. As noted in the Congressional Research 
Service's report titled Small Business Administration 7(a) Loan 
Guaranty Program, dated September 15, 2017, inadequate 
performance metrics are a persisting concern with SBA's lending 
programs. OIG believes the recommendations offered in this 
report will strengthen the management of the Microloan Program 
and ultimately, facilitate a capacity and analyze date in a 
manner that SBA can effectively measure performance of the 
program.

    OIG will continue to provide independent, objective 
oversight to improve the integrity, accountability, and 
performance of the SBA and its programs for the benefit of the 
American people. Our focus is to keep SBA leadership, our 
congressional stakeholders, and the public currently and fully 
informed about the problems and deficiencies in the programs as 
identified through our work. We value our relationship with 
these Subcommittees, the Committee on Small Business, and the 
Congress at large, and we look forward to working together to 
address identified risks and the most pressing management 
challenges facing SBA.


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    Thank you Chairman Kelly, Ranking Member Adams, and the 
entire Subcommittee for the opportunity to testify before you 
today. It's great to be back here once again and to have the 
ability to speak with you further about the Office of Capital 
Access' Microloan Program.

    I am grateful for the dialogue that we've seen between the 
Office of Capital Access and the members of this Committee and 
your staff. It is incredibly important to the SBA and the 
American taxpayer that all of our lending programs are running 
as efficiency and effectively as possible. In that pursuit, we 
always value the feedback and input of this Committee when it 
comes to helping entrepreneurs access capital across our great 
country. We also appreciate the role the Office of Inspector 
General plays in ensuring that programs are successfully 
managed.

    Administrator McMahon and the Office of Capital Access are 
very focused on providing smaller dollar loans to small 
business borrowers. Under Administrator McMahon's leadership, 
there has been responsible growth in all of our lending 
programs this year, including our Microloan Program. 
Administrator McMahon understands the importance of these loans 
and the life changing impact they can have for so many of our 
nation's entrepreneurs and their communities. The SBA's 
Microloan Program offers small dollar loans to businesses that 
banks are simply unable to make. As we've seen for years, the 
program has been incredibly successful in filling a need. For 
example, in Fiscal Year 2017, the Microloan Program provided 
small dollar loans with a reasonable interest rate to 4,708 
small businesses.

    As the Associate Administrator of the SBA's Office of 
Capital Access, I am one hundred percent committed to upholding 
the integrity of all of our loan programs and making sure that 
they are run properly with maximum accountability to this 
Committee and the American people. We do believe the Microloan 
Program is being administered appropriately, but there is of 
course always room for improvement.

    As many of you know, in this program the SBA makes loans to 
not-for-profit lending intermediaries who then make microloans 
to small businesses for up to $50,000. However, the program has 
an average loan size of just $13,800. Year-over-year, we have 
seen a 5% increase in these loans which have created and/or 
retained an estimated 17,500 American jobs. Another interesting 
fact is that over 8% of our microloan recipients have gone on 
to receive larger loans from the SBA. This is incredibly 
encouraging and we would definitely like to see this number 
continue to increase.

    In the coming weeks the Office of Capital Access will also 
be implementing new collaborative efforts with our Office of 
Field Operations to increase the number of these loans in both 
inner cities and rural areas. We view this initiative and 
others such as the recent launch of our Lender Match program as 
valuable tools in providing access to capital for entrepreneurs 
looking to attain the American dream.

    It is incredibly encouraging to see the impact that the 
Microloan Program has had for so many American small business 
owners. This program is a way for aspiring and existing small 
business owners to access capital at a reasonable rate, 
especially when you compare it to maxing out multiple credit 
cards at much higher interest rates. I'd also like to note that 
historically the Microloan Program has had a less than 2% loss 
rate. Keeping that number as low as possible is incredibly 
important for us at the SBA.

    In regards to the recent Inspector General's audit of the 
Microloan Program, the SBA has agreed to implement the 
recommendations and has already begun working on enhancements 
to its on-site reviews by district office staff. We are also 
working on a project to evaluate system alternatives to 
modernize our Microloan lending and reporting system.

    Lastly, the Office of Capital Access is committed to 
providing enhanced training to our lending intermediaries and 
the Office of Economic Opportunity has already provided two 
webinar trainings on how to properly document the ``credit 
elsewhere'' test. The SBA is committed to implementing the 
suggestions put forth in the Inspector General's most recent 
audit. We believe we are well on our way to improving our 
program and making it that much better for our nation's small 
business owners and the American taxpayers.

    Thank you again for this opportunity to discuss the 
Microloan Program and I look forward to answering any questions 
you may have.


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