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











 OPERATING OR RULEMAKING? A REVIEW OF SBA'S OPAQUE STANDARD OPERATING 
                           PROCEDURES PROCESS

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

                                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
                            NOVEMBER 2, 2017

                               __________

       [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
				                         

            Small Business Committee Document Number 115-045
              Available via the GPO Website: www.fdsys.gov
              
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                     U.S. GOVERNMENT PUBLISHING OFFICE 
		 
27-321                    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

                                WITNESS

Mr. Joseph Loddo, Chief Operating Officer, United States Small 
  Business Administration, Washington, DC........................     3

                                APPENDIX

Prepared Statement:
    Mr. Joseph Loddo, Chief Operating Officer, United States 
      Small Business Administration, Washington, DC..............    14
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    None.

 
 OPERATING OR RULEMAKING? A REVIEW OF SBA'S OPAQUE STANDARD OPERATING 
                           PROCEDURES PROCESS

                              ----------                              


                       THURSDAY, NOVEMBER 2, 2017

                  House of Representatives,
               Committee on Small Business,
    Subcommittee on Investigations, Oversight, and 
                                       Regulations,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:33 a.m., in 
Room 2360, Rayburn House Office Building, Hon. Trent Kelly 
[chairman of the Subcommittee] presiding.
    Present: Representatives Kelly, Blum, Bacon, Norman, and 
Adams.
    Also Present: Representative Chabot.
    Chairman KELLY. I call this hearing to order.
    We are here today to examine the Small Business 
Administration's standard operating procedure process.
    According to SBA, standard operating procedures are 
permanent directives that set forth the policies or procedures 
relating to SBA programs or activities. What does this actually 
mean? It means that SOPs instruct SBA employees how to do their 
jobs; they help program participants understand their 
responsibilities; they clarify laws and regulations.
    But this Committee has been concerned for some time that 
the agency's SOPs are doing more than just that. Specifically, 
we are concerned that SBA is making legislative binding rules 
outside of the rulemaking process.
    The rulemaking process is governed by the Administrative 
Procedure Act, or APA, which sets forth the requirements 
agencies must meet when making rules and regulations. For 
example, agencies must provide notice to the public and allow 
time for public to comment. Agencies must then take into 
account these comments before finalizing a rule.
    But SBA is not required to go through these steps when 
developing its SOPs, and neither is any other agency. They are 
not required to solicit public input. And that is okay if what 
SBA or any other agency is developing are, in fact, standard 
operating procedures. But are they? Or are they developing 
rules that are binding on regulated entities?
    This Committee has been trying to find out. For the past 
several months, the Committee has attempted to get a briefing 
on the SBA's SOP process. We're still waiting.
    And then, just recently, SBA issued an information notice 
announcing the agency's intent to issue a revised SOP for 
lender and development company loan programs. The notice was 
issued on October 13th. This Committee was not alerted until a 
few days later even though the Committee had been asking for 
months about whether SBA was revising its SOP for lender and 
development company loan programs.
    During the Committee's hearing on May 17th this year, Mr. 
William Manger, the Associate Administrator for the Office of 
Capital Access, testified about the SOP rewrite that his office 
was currently undertaking. When the Committee followed up with 
the agency about this rewrite, it received little insight or 
explanation, which is problematic.
    And this is why the Committee has been seeking answers all 
year, answers to questions such as: What prompts a decision to 
revise or write a new SOP? Who makes that decision? Does SBA 
consult with industry when revising or developing a new SOP? In 
what way and to what extent? If it is, does industry know that 
its input is considered? Does SBA ever consult with Congress on 
the SOP process? How long does the revision process take, on 
average? And how does SBA ensure that it is not engaging in 
rulemaking when revising or developing new SOPs?
    The Committee is hoping today's witness, SBA's Chief 
Operating Officer, Joseph Loddo, will be able to answer some of 
these questions.
    On the front end, the Committee requests that the SBA 
provide a briefing within the next 2 weeks on the current 
revision of the SOP 50, the Lending Program SOP. So we would 
make a formal request that we have a briefing in the next 2 
weeks on that.
    And, with that, I would like to thank Mr. Loddo for being 
willing to testify today on this topic.
    And I now yield to the ranking member, Ms. Adams.
    Ms. ADAMS. Thank you, Chairman Kelly, for convening today's 
hearing on this important issue.
    And, Mr. Loddo, thank you very much for being here.
    As the only agency in the Federal Government charged 
specifically with helping small businesses grow and succeed, 
the Small Business Administration is critical to our Nation's 
overall economic health. All of its functions serve to 
strengthen and preserve the entrepreneurial foundation of our 
economy.
    For small businesses to fully reap the benefits from these 
programs, it is important that SBA operate efficiently and 
effectively and invest taxpayer dollars wisely. As such, one of 
the most important roles of this Committee is conducting 
vigorous oversight of SBA and its activities so that we know 
that the agency is serving small businesses well.
    With those goals in mind, today's hearing will focus on the 
process that SBA uses for implementing its standard operating 
procedures. Considering that these documents set forth the 
policies and procedures related to the agency's programs and 
activities, it is critical that Congress be aware of how they 
are developed.
    Further, concerns have been raised from industry and by 
this Committee that SOPs have been issued in place of formal 
rulemaking. Following the Administrative Procedures Act by 
complying with the regulatory rulemaking process gives all 
stakeholders a chance to partake in important legal decisions. 
And so it is our duty to guarantee them that right and prevent 
the agency from bypassing important opportunities for comments 
from stakeholders and from the public.
    For example, SBA recently issued a Notice of Significant 
Changes to its SOP on the 7(a) and 504 programs; however, no 
formal notice or comment process took place. Similarly, the 
process for interaction and input from Congress on creation and 
revisions to SOPs remain in question.
    So today's hearing seeks to provide this Committee with 
clarity on SBA's SOP process and identify ways that it can be 
improved. So I look forward to hearing from our witness, and I 
thank you for your participation today.
    And, Mr. Chair, I yield back.
    Chairman KELLY. Thank you, Ms. Adams.
    And, as you can see, bipartisan. We just want a lot of 
transparency.
    And if the 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. You will have 5 minutes to deliver your testimony. We 
will be a little lenient with that today since you are the only 
witness. The light will start out as green. When you have 1 
minute remaining, the light will turn yellow. Finally, at the 
end of your 5 minutes, it will turn red. I ask that you try to 
adhere to it as close as possible, but understanding you are 
the only witness.
    I would now like to formally introduce our witness today. 
Mr. Joseph Loddo is the Chief Operating Officer at the Small 
Business Administration. In this role, Mr. Loddo works to 
improve overall agency performance by implementing innovative, 
effective, and more efficient processes through the agency. Mr. 
Loddo is a member of the Senior Executive Service, with 30 
years of experience in the Federal Government. Mr. Loddo also 
served as a captain in the United States Army.
    We welcome you today. I thank you for your service both to 
the Federal Government and in our military. And we look forward 
to your testimony as well. Thank you.

  STATEMENT OF JOSEPH LODDO, CHIEF OPERATING OFFICER, UNITED 
     STATES SMALL BUSINESS ADMINISTRATION, WASHINGTON, D.C.

    Mr. LODDO. Thank you, Chairman Kelly and Ranking Member 
Adams, for the opportunity to testify today.
    First, let me say I understand the Committee's oversight 
role. As the Chief Operating Officer for the Small Business 
Administration, I share your interest in making sure that we 
operate as effectively and as efficiently as possible and that 
we examine our operational procedures to make sure we are 
achieving our collective goals.
    Today's hearing focuses on the agency's process for 
updating and revising standard operating procedures. These SOPs 
help to implement our program regulations and govern the 
operations of our respective program offices.
    Since becoming the Chief Operating Officer in January, I 
have enforced a consistent process for our SOPs. That process 
requires the head of each program office to annually review and 
certify the status of their SOPs.
    All new or revised SOPs must follow the SBA's clearance 
processes. First, program offices engage our Office of General 
Counsel. This step helps to determine if a revision or a change 
is best achieved through the SOP chain or through regulatory 
action. Next, we have a robust internal clearance process which 
involves all the programs and supporting offices. The internal 
clearance process provides an opportunity for thoughtful review 
of the documents and for discussions on any issues. As a last 
step, Administrator McMahon will approve all new or 
significantly revised SOPs.
    SBA's October update of the SOP for our business loan 
program provides a good example of this. We began an internal 
review process. We included and involved all the appropriate 
clearing offices. We performed a final check. Then we presented 
it to the Administrator for signature.
    On October 13, we released the information notice, which 
was also distributed through stakeholders and shared with this 
Committee. We are now in a period of receiving public comment 
and input through the end of this year. If any technical or 
other changes to the SOP are necessary in light of the comments 
we receive, we will revise the document before it becomes 
effective.
    Along those lines, our program offices in general solicit 
and receive input from program participants on an ongoing 
basis. We have an ongoing dialogue with our lenders and our 
external stakeholders. Our SOP updates are continually informed 
by this kind of engagement.
    Before turning to your questions, Mr. Chairman, let me wrap 
up by thanking you and members of the Committee for your 
commitment to the small-business community. On behalf of 
Administrator McMahon, we appreciate your support of our 
agency, and we look forward to continuing to work with you to 
fulfill our mission.
    Thank you.
    Chairman KELLY. Thank you very much for your testimony.
    I want to start out again and just say how important it 
is--we really want you guys to give us a briefing within the 
next 2 weeks on your new lending program SOP and the SOP 50.
    I come from a background, probably a little bit similar to 
yours, in the military, and we are SOP-driven. And that hasn't 
changed probably since we were captains, maybe at the same 
time.
    But SOP sometimes do much more than that. And I just want 
to make sure that we are not confusing regulations with SOPs. 
Because there is an outside influence. Even if it is intended 
only for internal, it also influences external. And just want 
to make sure that we are doing that.
    What is the purpose of the agency's SOP, and why do you 
have them?
    Mr. LODDO. Well, the purpose of the SOP is to provide 
guidance to the staff in terms of the day-to-day operations of 
that particular program area. It represents our official 
permanent policies and procedures for each of the agency 
programs. Program participants use the SOP to better understand 
their responsibilities under the program, and the SOP provides 
that guidance.
    Chairman KELLY. Now, how does the SBA, specifically under 
you--how do you ensure that you are not engaging in rulemaking 
when you revise an SOP or develop a new one?
    Mr. LODDO. When a program office is prepared to make a 
presentation in terms of a new SOP, we strongly suggest that it 
goes to the Office of General Counsel, where they make a 
determination as to whether this is an SOP or a regulatory 
change. If it is an SOP, then we have a clearance process that 
it would go through. If it is a regulatory change, it would 
follow the traditional regulatory process. So it is a decision 
made by the Office of General Counsel.
    Chairman KELLY. That is very good. So you basically have an 
external audit proceeding that General Counsel looks at that, 
as opposed to you guys determining what is a rule and what is 
an SOP.
    Mr. LODDO. Right. That decision rests was the Office of 
General Counsel.
    Chairman KELLY. Very good.
    And do regulations trump SOPs?
    Mr. LODDO. Absolutely.
    Chairman KELLY. Okay.
    Now, going back, what prompts a decision to revise or 
rewrite an SOP, and who makes that decision?
    Mr. LODDO. Well, the program office is responsible for the 
standard operating procedures for that program. So the program 
official would make that decision as to if it is necessary for 
a revision to the standard operating procedures, then approach 
the Office of General Counsel.
    Chairman KELLY. And, on average, how long does it take to 
revise or rewrite an SOP?
    Mr. LODDO. Thank you for that question.
    What we strongly encourage is that the program office do 
some pre-vetting with the Office of General Counsel and any 
impacted office with a particular SOP. Once they have arrived 
then it is following the path for standard operating 
procedures, the process is at maximum 30 days, unless 
requesting for an extension.
    The hope is, as a result of the pre-vetting of the proposed 
SOP, that it can go through the different offices that are 
required for concurrence or non-concurrence on that particular 
SOP. It can be done and usually is done dynamically, not 
sequentially. So it is not one office, then the next office. It 
is all offices get the clearance document, they get to review 
it, and they have within 30 days to respond back to our 
ExecSec, in terms of their comments.
    Chairman KELLY. And I just want to--we want to work with 
the SBA. I understand we are oversight, but we want to work 
with you. And the more transparent you guys are and the more 
accessible and easy to access and the more information you 
provide, generally that becomes better. I know that from the 
military and serving with soldiers. When you are hiding 
something, even it is not bad, I think it is bad.
    It is the same way with any organization. I worked in 
retail, and my boss, the general merchandising manager, when he 
would come walk through my area, he would say, ``You know, 
always make sure your aisles, all the clothes are aligned and 
they look good, because if it pops on the aisle, I am not going 
to walk inside and see the clearance rack. But if it is messed 
up on the aisle, I am going to dig in every clearance rack you 
have because I assume everything else is messed up.''
    And it as the same way with this, Mr. Loddo. And I think 
you all can do a whole lot better job of making sure that when 
we send requests, whether it is from staff or the actual 
Members, that you comply with that. And I think it will make 
our relationship that much better.
    And, with that, I yield to Ms. Adams.
    Mr. LODDO. I would just like to make an observation.
    First, you bring back fond memories.
    But, in addition to that, it is really important for us to 
have strong communications, and certainly with this Committee. 
With that strong communication, we can get the coordination and 
the commitment to be able really to produce some desired 
results that we both want.
    Ms. ADAMS. Great. Well, thank you very much.
    Mr. Loddo, we have heard from the 7(a) lending industry 
that, often, key guidance for the program is implemented by SOP 
rather than by regulation. So how would you respond to that?
    Mr. LODDO. Well, I would suggest that we have reached out 
to the industry in several different ways.
    On August 21, 2017, we had a 66-page document that outlined 
the response from all of the lenders. We did the informational 
notice on October 13.
    And, we are giving lenders, as well as the Committee, the 
opportunity to comment up until January 1, with the idea that 
these are the changes we are proposing and, if there are any 
technical changes that we need to make, we are certainly 
willing to do that.
    We all have the same interest, which is to be fair to all 
concerned. And we want to make sure this program continues to 
be highlighted as one of the best programs at the Small 
Business Administration.
    Ms. ADAMS. Okay. So did you say that these 66 pages 
constitute the changes--all of the changes? Do you have that 
many?
    Mr. LODDO. These represent changes in parts 109, 115, and 
120 that have been incorporated into the issuance of the SOP 
that is out for comment right now.
    We actually believe that this is a good way to go, in terms 
of asking the community and the stakeholders to comment, build 
out what we have learned from those comments, build out the 
SOP, put it back out to the community and to the stakeholders 
as to, ``Here is what we are proposing for the SOP. We are 
asking for your comments from October, November, to the end of 
December so we can make any additional modifications.''
    Ms. ADAMS. Okay. So that is, like, 90 days to----
    Mr. LODDO. Yes.
    Ms. ADAMS. Okay.
    So how, if at all, does SBA engage congressional committees 
as it develops or updates SOPs and other agency guidance? And 
what improvements do you think could be made to this process?
    Mr. LODDO. Well, certainly, any communications would go to 
our Office of Congressional and Legislative Affairs. I think 
all of our program offices are willing to meet with the 
Committee at the earliest possible time in order to be able to 
increase the communication, the cooperation, and the 
coordination that we need both from the Committee as well as 
from SBA to improve our programs.
    Ms. ADAMS. Okay.
    So, during the annual certification, you noted in your 
testimony that 44 SOPs had either been revised or retired since 
the end of the fiscal year 2016.
    Have you completed the certification for 2017? And to what 
extent do you expect further significant changes in the status 
of SOPs? And you may have answered some of that.
    Mr. LODDO. Well, we did the certification process in 
January of 2017. We had all the program offices give us the 
date when they expected a revision or if there was not to be a 
revision.
    It is a dynamic process. Thirteen have been revised since 
then; two have been deleted. And others are what I would call 
in process, because any change to the SOP has to go through 
this process. And it is a very dynamic process, given what we 
do and how we do it.
    Ms. ADAMS. Thank you, sir.
    Mr. Chair, I yield back.
    Chairman KELLY. I thank the ranking member from North 
Carolina, Ms. Adams.
    It is great to be on this Committee. I can tell you, we 
work well together on Subcommittees and full Committee as a 
whole, both in a bipartisan way. And so I thank her again.
    And, with that, I yield to the gentleman from South 
Carolina, Mr. Norman.
    Mr. NORMAN. Thank you, Mr. Loddo. I appreciate you coming 
today.
    I am in the real estate business. We have dealt with the 
SBA. And I guess some of the complaints or comments that I 
heard from lenders were that changes were made midstream. A 
company would get a loan going, and then the requirements 
changed. How would you answer that?
    Mr. LODDO. Well, first, I don't want to pick an argument 
that the lenders that you were talking with, but on August 21 
we sent, through the Federal Register, all the comments that we 
received from our external stakeholders, to include lenders, as 
to the changes that related to SOP 50-10. So we have that 
communication going on.
    I would urge that lender to work with SBA so that they are 
fully informed about what we are doing, when we are doing it, 
and our plans in terms of going forward. It is really important 
that we get the feedback from all of our lenders, our external 
stakeholders, so that we make a better product for our Nation's 
small-business community.
    Mr. NORMAN. A lot of them are reluctant--and you could 
see--they are reluctant to, not criticize, but offer, I guess, 
constructive criticism, because in their minds it could make it 
harder as they go down the line as another project comes up.
    Walk me through the process on when those comments are sent 
in. How do you answer those comments, the ones that are adopted 
versus the ones that are not adopted?
    Mr. LODDO. In the notice that was in the----
    Mr. NORMAN. Yes.
    Mr. LODDO.--Federal Register, we state what the comment was 
and we state what the response was.
    I can assure you that if somebody is making a negative 
comment we are not holding that individual in terms of reprisal 
in any sort. That is not who we are; that is not how we 
operate. So the idea is that we want the input, both positive 
and negative. That is the only way we can improve this program 
or any of the programs that we have.
    And it is upon us to review what is being suggested, 
understand what is being suggested; if we don't understand it, 
ask; and come up with, in light of all the different responses 
we have, a better program. That is our intent. We welcome the 
entire participation from the lending communities and the 
associations attached to those lenders.
    Mr. NORMAN. Well, that is encouraging. And I urge you to 
keep that going, because you all provide a vital service. And a 
lot of times, those that you are serving and making the loan to 
are not that well-versed in the regulations, and it is almost a 
process, you have to walk them through it.
    Are all of these posted online after the fact?
    Mr. LODDO. Yes. All of the SOPs are posted online.
    Mr. NORMAN. Okay.
    Mr. LODDO. And the comments, obviously, are in the Federal 
Register. They are available for anyone to see.
    Mr. NORMAN. Well, you provide a valuable service, so I 
encourage you to keep the transparency, as Congressman Kelly 
mentioned, because it is a vital service that you--you provide 
a good need.
    One other question. When you make a loan, does the SBA take 
a first or a second position?
    Mr. LODDO. Well, in the 7(a) program, we actually don't 
make a loan. We guarantee the loan. The lender makes the loan--
--
    Mr. NORMAN. Right.
    Mr. LODDO.--and we guarantee the loan.
    As it relates to collateral, the bank is traditionally 
making those requirements. We do not make a loan because of 
collateral. We are really a cash-flow lender, so we are really 
looking at the management and the cash flow of the business and 
less about the collateral. The lender is looking to us for our 
guarantee, because that is gold in terms of worst-case 
scenarios.
    Mr. NORMAN. And your guarantee percentages are what?
    Mr. LODDO. Oh, they are different depending on what 
program. From 50 percent up to 85 percent, I believe.
    Mr. NORMAN. Is 85 the max?
    Mr. LODDO. No. I think in the International Trade Program 
we go up to 90 percent.
    Mr. NORMAN. Ninety. Okay. Thank you, sir.
    Mr. LODDO. You are welcome. And thank you for your kind 
words about the Small Business Administration and its 
importance.
    Chairman KELLY. Does the gentleman yield back?
    Mr. NORMAN. Yes, I yield back.
    Chairman KELLY. I now recognize the gentleman from Iowa, 
Mr. Blum, for 5 minutes.
    Mr. BLUM. Thank you, Mr. Chairman.
    And thank you, Mr.--is it ``Loddo''?
    Mr. LODDO. ``Loddo,'' yes.
    Mr. BLUM.--Loddo, for being here today.
    How long have you been the Chief Operating Officer? Is that 
correct?
    Mr. LODDO. Yes, I am the Chief Operating Officer.
    Mr. BLUM. And how long has that been?
    Mr. LODDO. January of 2017. Prior to that, I was the Deputy 
Chief Operating Officer.
    Mr. BLUM. And how long was that?
    Mr. LODDO. About 2 years.
    Mr. BLUM. As I have been on this Committee now for almost a 
year, it seems to be a recurring theme that SBA--and I will say 
in the past--has been mismanaged. I am not sure if that is true 
or not. I would just like to--I know it is not exactly on topic 
with standard operating procedures, but give me your thoughts 
on that. There has been issues, let's put it that way.
    Mr. LODDO. Yeah.
    Mr. BLUM. And just give me your thoughts.
    Mr. LODDO. Well, I think the Office of Inspector General is 
the one that gives a very insightful view in terms of the 
management challenges facing the agency, the most serious 
management challenges. I think we have eight that they have 
identified last year. We have made major progress.
    In terms of the management, as you know, we have had a 
change of administration, so that always creates a little bit 
of apprehension and turmoil. But our work, in terms of that 
transition, it has been viewed as a model in terms of the other 
Federal agencies, because one of the things that we were able 
to do was rely very heavily on the Senior Executive Service to 
work with the beachhead team that was arriving to make the 
transition very successful for the Small Business 
Administration.
    Mr. BLUM. What is the Senior Executive Service, you said?
    Mr. LODDO. Yes.
    Mr. BLUM. What is that?
    Mr. LODDO. That is what I believe to be, and I think most 
would believe to be, the elite group of senior leaders in the 
Small Business Administration. Normally, grade levels go grades 
basically 1 through 15. Above that is the Senior Executive 
Service.
    And I am not sure of the amount of senior executives across 
the Federal Government. Inside SBA, we have two groups: career 
and political. The career group totals about 26 individuals, 
and the political group can only be 25 percent of that group.
    But it is the senior-most people knowledgeable about the 
program areas within the Small Business Administration.
    Mr. BLUM. You mentioned the biggest management challenges. 
You referenced that. What are those? Give me the top two or 
three, in your estimation.
    Mr. LODDO. Well, first our CIO office, has made tremendous 
progress in terms of where we are, which lends itself to the 
question you originally raised, to where we are now. For 
example, we had eight CIOs in about 5 years, which--that type 
of continuance management is havoc. We have Maria Roat, who has 
testified before this Committee and has shown that she has 
built the foundation for us to really have an enterprise 
solution.
    That is one of the management challenges. Another, of 
course, is the Office of Human Resources, Office of Capital 
Access. Certainly, the Office of Government Contracting and 
Business Development.
    In particular, we have had one management challenge that 
has been red forever, red being no progress, and that is a 
definition of ``economic disadvantage.'' Fortunately, at the 
end of last year, we were able to enter into a contract for an 
independent assessment as to what constitutes economic 
disadvantage. We should have the results of that contract 
midyear, which will redefine the bottom level for economic 
disadvantage for programs like the 8(a) Business Development 
Program.
    Mr. BLUM. Do we measure a lot of things in the SBA? I am a 
businessman. I know that which you measure will improve on.
    Mr. LODDO. Exactly. And we measure almost----
    Mr. BLUM. We have measurements in----
    Mr. LODDO. In fact, one of the projects----
    Mr. BLUM. I am speaking relative to the performance of 
managers in their departments.
    Mr. LODDO. Well, two parts to that answer. One is that we 
have the Administrator's priorities, and they cascade all the 
way down to the individual person in terms of their performance 
plan.
    And in their performance plan, we have what is called 
results-driven, and we outline what a level 5 is, what a level 
4, what a level 3, or a 2, or a 1. Level 5 means that you are 
outstanding in your work, so we outline exactly what you have 
to do in order to be a level 5 performer, level 4, level 3.
    And we also require supervisors to meet with their staff on 
a quarterly basis, and not do it by email but face-to-face when 
possible, to explain where they should be applauded and where 
they need some reinforcement, in order to--we are trying to get 
everybody to be a level 5 but based off of the criteria, not a 
pass-through, with a 5 or a 4.
    Mr. BLUM. What grade would you give the overall management 
of SBA?
    Mr. LODDO. The current management of the Small Business 
Administration?
    Mr. BLUM. Yeah. What grade would you give it?
    Mr. LODDO. Pardon me?
    Mr. BLUM. What grade would you give it, A to F?
    Mr. LODDO. I would give Administrator McMahon grade level 
5--outstanding, holding everybody accountable, particularly on 
the performance side. She has told----
    Mr. BLUM. I have confidence in her. How about everyone--how 
about management below her?
    Mr. LODDO. Well, that is why I am the chair of the 
Performance Review Board. All those senior executives, their 
performance statement is in front of us, along with their 
statement of accomplishment, along with their rating official. 
And we, as an independent body, view the grade level being 
given by the rating official and the comments made by the 
individual senior executive as well as the comments made by the 
reviewing official. And we determine the recommendation to the 
Administrator in terms of the grade level that that person 
should get, whether it is a 5 or downgraded to a 4 or 
downgraded to a 3 or a 2 or a 1.
    Mr. BLUM. I am sure Administrator McMahon will be happy you 
gave her a 5.
    I yield back the time I do not have.
    Chairman KELLY. The gentleman's time has expired.
    I now recognize the ranking member, Ms. Adams, again for 5 
minutes or a little longer if she needs.
    Ms. ADAMS. Thank you, Mr. Chair. I don't think I will need 
that much time. But, as a former teacher of 40 years, a 
professor, it seems like your whole class passed, did well, 
huh? That is good.
    So let me ask you, you know, we have heard concerns from 
7(a) lenders regarding the requirement for a 10-percent equity 
injection for some small-business borrowers, as well as, 
spelled out in a newly issued SOP, we understand lenders may 
request a carveout, such as for low- to moderate-income small-
business borrowers.
    So do you anticipate authorizing these kinds of requests? 
And how would a decision be made regarding them?
    Mr. LODDO. As I mentioned before, the bank is the lender, 
and we guarantee the loan program. From our point of view, each 
individual loan is viewed separately in terms of its cash flow 
and its management. So I would have to defer to the program 
manager in terms of anything that would be macro, and that may 
require an SOP or a regulatory change.
    Ms. ADAMS. So do you have situations where, if certain 
requirements aren't met, that you give them an opportunity to 
do that? Or how does that work?
    Mr. LODDO. Well, for example----
    Ms. ADAMS. Is it one shot?
    Mr. LODDO. I think we are very fortunate, the Small 
Business Administration, to have the entire economic toolbox to 
offer the Nation's small-business community. For example, our 
entrepreneurial development offers counseling through the Small 
Business Development Center, SCORE, Women's Business Center, 
online, 24/7.
    Here is an example of how it works in our Disaster Loan 
Program, where disaster survivors are under stress when they 
are seeking a loan. Whether we approve it or not, they are 
under stress, given the environment that they have inherited 
because of that particular disaster. Whether we approve the 
loan or whether we decline the loan, we provide to them local 
technical assistance in terms of their business plan or 
whatever help that they may need. So, if they were not approved 
for a loan, we are telling them to go to the SBDC, to SCORE, to 
the Women's Business Center, work out what we said was a 
shortfall, and come back to us with reapplying.
    Many times, many times, we are able to approve the loan 
because of the technical assistance we have provided through 
our resource partners. That is how the synergy works with our 
programs. We all have something to offer, together, to the 
Nation's small-business community.
    Ms. ADAMS. Okay. Well, that sounds like a pretty good 
process. And so you have a pretty good return rate? In other 
words, they come back, and then they may even get the loan. Do 
you do any kind of followup to see, I mean, that you may have 
lost some folks? In other words, you sent them----
    Mr. LODDO. Yeah. Well, unlike the 7(a)----
    Ms. ADAMS.--to talk to the Small Business Center or 
wherever, and they did not come back. Do you do any followup 
or----
    Mr. LODDO. Well, thank you for that question because that 
is really important, because there is a big difference between, 
for example, the disaster program and the 7(a) and 504. 
Remember I talked about guaranteeing the loan in the 7(a)?
    Ms. ADAMS. Uh-huh.
    Mr. LODDO. In the disaster program, we are the Nation's 
bank. We are the banker. And we are making a direct loan to the 
disaster survivor. And once that loan is made, and then we are 
responsible for servicing that loan as well as, worst-case 
scenario, the liquidation of the loan. So we are monitoring 
that loan from the very day that it is approved for its life.
    Ms. ADAMS. Okay. All right. Thank you, sir.
    I yield back, Mr. Chair.
    Chairman KELLY. Mr. Loddo, I thank you again for your time 
here in front of the Committee. I thank you for being forthwith 
with this.
    I go back--I can't remember if it was law school or 
somewhere I worked somewhere--but I remember reading a book 
about getting to ``yes,'' you know. And our SBA ought to kind 
of be driven by that. And I don't remember all the details of 
the book, but it means we shouldn't look for reasons to turn 
people down. We should look for either getting them in that 
program or, if that is not the right program because they don't 
qualify, letting them know what is available.
    And I think we in government need to do that a whole lot 
better, especially the more bureaucratic you get, we need to 
get to ``yes'' instead of looking for reasons not to do as much 
work. I think that we've got the right attitude with the SBA. I 
encourage the SBA, as an overall business, to be more 
transparent. That is why we are asking for these things, 
because we want to be your partner and we want to be helpful.
    I thank our ranking member, Ms. Adams, for her insight.
    And as this hearing comes to an end, I want to again thank 
you for your testimony.
    This Committee works hard to find ways to ease the burden 
of regulations on small businesses across industries and across 
our country. That is why this issue is important to us. We want 
to make sure SBA and other agencies are not rulemaking through 
their standard operating procedures.
    The Committee expects SBA to keep us informed of the SOP 
process as well as any future SOP rewrites and revisions.
    I thank you again for your testimony.
    And, with that, this hearing is adjourned.
    [Whereupon, at 11:10 a.m., the subcommittee was adjourned.]


                            A P P E N D I X


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman Kelly, Ranking Member Adams, and other 
distinguished members of this Committee. Thank you for inviting 
me here to speak with you today. My name is Joe Loddo. I am the 
Chief Operating Officer of the US Small Business Administration 
(SBA). I am here to today to discuss the SBA's process for 
writing, reviewing, and updating Standard Operating Procedures 
(SOPs). SOPs are used to issue Agency policy, the procedures 
for carrying out Agency policy, the assignment of 
responsibility for duties, and other purposes.

    SOPs are official written communications that initiate or 
govern action, conduct, procedure or policy, or relay 
information to multiple parties, inside or outside the Agency. 
As the COO, the responsibility for maintaining Agency records, 
including SOPs, falls under my purview. SBA has a strong 
Directive Management system, which controls the issuance, 
revision and cancellation of all Agency SOPs.

    SOPs are essential guiding documents at the SBA. The SOPs 
serve as the policies and procedures for both customer facing 
and internal operations. They provide the guidance necessary to 
make decisions and ensure compliance with relevant regulations 
and statutes. The Administrator approves and signs all SOPs.

    In FY 2015, GAO recommended that SBA should set time frames 
for periodically reviewing and updating its SOPs as 
appropriate. Further, GAO found that a number of our SOPs were 
outdated and did not reflect program and operational changes. 
At the time, SBA noted that 74 of our 165 SOPs needed to be 
revised; 31 needed to be cancelled; and 60 required no 
revision. An additional 9 new SOPs needed to be issued.

    To be responsive to GAO, and to comply with our internal 
annual SOP certification requirement, SBA program office4s have 
undertaken a complete review of all SOPs and we have 
implemented a process to ensure that all are updated in a 
timely fashion. A cross-sectional team was created to review 
and revise our written procedures (known as our ``SOP on 
SOPs'') for issuing and maintaining agency directives, 
including SOPs. The Office of Inspector General reviewed the 
revision, as did all SBA program offices. The revised 
procedures were issued on August 26, 2016.

    Since becoming COO in January 2017, I have mandated a 
consistent process for updating, revising, or cancelling SOPs. 
In the past 10 months, 13 SOPs have been revised, 1 has been 
canceled, and 4 new ones have been created. We continue to work 
to ensure that our guidance documents are always up to date, 
and I am committed to meeting that objective.

    Currently, the head of each office is required to annually 
certify in writing as to the status of current SOPs issued by 
his/her office. The office head is required to review the 
relevant SOPs and certify to me, for each SOP, that the SOP: 
(a) does not require any revision; (b) is currently being 
revised; or (c) is being canceled. If the SOP is to be revised 
or canceled, the office head must provide an expected 
completion date. I hold each office accountable to this 
timeline.

    During the annual certification in January 2016, program 
offices identified 19 SOPs that were obsolete and 25 SOPs that 
needed significant revisions. All 44 have been either revised 
or retired since the end of FY 2016. Going forward, program 
offices that identify SOPs as needing revision will be required 
to report on the status of that revision. Either through 
revision, consolidation or cancellation, SBA has reduced its 
number of SOPs from the GAO reported 165 to the current 148.

    All new or revised SOPs must follow the SBA's clearance 
procedures--with the Administrator approving all new or 
significantly revised SOPs. Prior to presentation to the 
Administrator, all such documents are cleared concurrently by 
at least five mandatory clearing offices (including the Office 
of General Counsel, the Office of the Chief Financial Officer 
and my office) and any affected program offices. We encourage 
pre-vetting among the affected program offices and the Office 
of General Counsel. It is through the pre-vetting and clearance 
processes that authorities for the SOPs are identified and 
compliance3 ensured.

    SBA takes its records management and SOP process very 
seriously. Efficient and effective program delivery cannot 
happen without an organized method of documenting policies and 
procedures. Administrator McMahon is holding every senior 
manager accountable for results and expects to see them. I 
fully support and share her view. Thank you very much for the 
invitation to testify and I welcome your questions.

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