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FULL COMMITTEE HEARING ON

THE SMALL BUSINESS ADMINISTRATION’S

RESPONSE TO THE 2005 GULF COAST

HURRICANES

COMMITTEE ON SMALL BUSINESS 

UNITED STATES HOUSE OF 

REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

FEBRUARY 14, 2007

Serial Number 110-3

Printed for the use of the Committee on Small Business

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house 

HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

JUANITA MILLENDER-McDONALD, 

California 

WILLIAM JEFFERSON, Louisiana 

HEATH SHULER, North Carolina 

CHARLIE GONZA ́ LEZ, Texas 

RICK LARSEN, Washington 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

HENRY CUELLAR, Texas 

DAN LIPINSKI, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

BRUCE BRALEY, Iowa 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

STEVE CHABOT, Ohio, Ranking Member 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

STEVE KING, Iowa 

JEFF FORTENBERRY, Nebraska 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

DEAN HELLER, Nevada 

DAVID DAVIS, Tennessee 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio 

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KEVIN FITZPATRICK, Minority Staff Director

STANDING SUBCOMMITTEES 

Subcommittee on Finance and Tax

MELISSA BEAN, Illinois, Chairwoman 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

DEAN HELLER, Nevada, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

Subcommittee on Contracting and Technology

BRUCE BRALEY, IOWA, Chairman 

WILLIAM JEFFERSON, Louisiana 

HENRY CUELLAR, Texas 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

JOE SESTAK, Pennsylvania 

DAVID DAVIS, Tennessee, Ranking 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

MARY FALLIN, Oklahoma

(II) 

Subcommittee on Regulations, Health Care and Trade

CHARLES GONZA ́ LEZ, Texas, Chairman 

WILLIAM JEFFERSON, Louisiana 

RICK LARSEN, Washington 

DAN LIPINSKI, Illinois 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

JOE SESTAK, Pennsylvania 

LYNN WESTMORELAND, Georgia, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

MARILYN MUSGRAVE, Colorado 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

Subcommittee on Urban and Rural Entrepreneurship

HEATH SHULER, North Carolina, Chairman 

RICK LARSEN, Washington 

MICHAEL MICHAUD, Maine 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JEFF FORTENBERRY, Nebraska, Ranking 

ROSCOE BARTLETT, Maryland 

MARILYN MUSGRAVE, Colorado 

DEAN HELLER, Nevada 

DAVID DAVIS, Tennessee

Subcommittee on Investigations and Oversight

JASON ALTMIRE, PENNSYLVANIA, Chairman 

JUANITA MILLENDER-McDONALD, 

California 

CHARLIE GONZA ́ LEZ, Texas 

RAUL GRIJALVA, Arizona 

LOUIE GOHMERT, Texas, Ranking 

LYNN WESTMORELAND, Georgia

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page

Vela ́zquez, Hon. Nydia M. ....................................................................................... 1

Chabot, Hon. Steve .................................................................................................. 2

Braley, Hon. Bruce .................................................................................................. 3

Jefferson, Hon. William ........................................................................................... 4

WITNESSES 

PANEL I 

Melancon, Hon. Charles .......................................................................................... 5

Baker, Hon. Richard ................................................................................................ 36

PANEL II 

Preston, Hon. Steven C., Administrator, Small Business Administration ......... 8

Shear, William, Government Accountability Office .............................................. 10

PANEL III 

Francis, Edward G., On behalf of American Banker’s Association ..................... 39

Colosino, Donna, Small business owner, CRESCENT Power Systems ............... 41

McDonald, Bryan, Governor’s Office of Recovery and Renewal, State of Mississippi .................................................................................................................. 43

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 56

Chabot, Hon. Steve .................................................................................................. 57

Melancon, Hon. Charles .......................................................................................... 59

Baker, Hon. Richard ................................................................................................ 61

Braley, Hon. Bruce .................................................................................................. 63

Shuler, Hon. Heath .................................................................................................. 65

Preston, Hon. Steven C., Small Business Administration ................................... 66

Shear, William, Government Accountability Office .............................................. 72

Olivier, Hon. Michael, Secretary of Economic Development, State of Louisiana ..................................................................................................................... 86

Francis, Edward G., On behalf of American Banker’s Association ..................... 92

McDonald, Bryan, Governor’s Office of Recovery and Renewal, State of Mississippi .................................................................................................................. 105

Colosino, Donna, Small business owner, CRESCENT Power Systems ............... 111

Smith, Patricia, Small business owner PEMBA Lighting and Automation ....... 117

(V) 

(1)

FULL COMMITTEE HEARING ON THE SMALL 

BUSINESS ADMINISTRATION’S RESPONSE 

TO THE 2005 GULF COAST HURRICANES 

WEDNESDAY, FEBRUARY 14, 2007

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 10:00 a.m., in Room 

2360 Rayburn House Office Building, Hon. Nydia M. Vela ́zquez 

[Chairwoman of the Committee] presiding. 

Present: Representatives Vela ́zquez, Jefferson, Shuler, Gonza ́lez, 

Grijalva, Cuellar, Altmire, Braley, Ellsworth, Johnson, Sestak, 

Chabot, Akin, Gohmert, Heller, Davis, Fallin, Buchanan, and Jordan. 

OPENING STATEMENT OF CHAIRWOMAN VELA ́ ZQUEZ 

Chairwoman VELA ́ ZQUEZ. Well, I call this hearing to order. Today 

we are holding a hearing on the Small Business Administration response to the 2005 Gulf Coast hurricanes to review various aspects 

of the SBA response on disaster relief programs. 

The Committee will hear testimony and comments from members 

of the Gulf Coast region, two of our colleagues, the SBA administrator, Steven Preston; Mr. William Shear from the General Accounting Office; as well as representatives from other government 

agencies and members of the small business community from the 

region. 

Over a year and a half ago, this nation witnessed one of our 

country largest natural disasters, Hurricane Katrina. The impact 

was enormous. And one thing we all learned is that there is nothing more critical than assuring assistance is provided immediately 

and efficiently to all of those in need. 

Today’s hearing will examine the response of the Small Business 

Administration to Katrina, its system to effect the small businesses, and the current state of the SBA disaster loan program. 

In the aftermath of the Gulf Coast hurricanes, thousands of 

small businesses turned to the SBA for assistance. Many applications were stalled in an agency backlog that took months to process. Not only was there a buildup but a disbursement of funds was 

also significantly delayed. 

Those who were approved for loans often waited months to receive any funds. To date, of the 422,558 applications approved, only 

22 percent, 22 percent, have been fully funded. Clearly we have a 

2

long way to go to make sure small businesses in the Gulf Coast are 

up and running again. 

I want to make one thing clear this morning. The agency’s poor 

response to Katrina victims was not due to the severity of the 

storm or any unanticipated factors. The SBA failed Gulf Coast entrepreneurs due to poor planning, lack of training, and improper 

distribution of resources. This was unacceptable and cannot happen 

again. 

What I have appreciated about Administrator Preston is that he 

has recognized that changes must be made. Today we will review 

those changes. The goal must be to ensure SBA is prepared to provide a system the next time a disaster like Katrina occurs. 

The General Accounting Office report gives insight into where 

the agency is and what modifications have been made. As of today, 

the SBA has not fully implemented key elements of a disaster planning program, such as disaster simulation, office space requirement, and proper staffing. It is also unclear if the backlog problem 

has been corrected or if it will reoccur in future large-scale disasters. 

Today we will hear from small business owners and state officials who have seen firsthand the successes and failures under both 

the old and new systems. They will give their insight about the disaster program and what needs to be done so it better serves our 

nation’s small businesses. 

Small businesses are the largest job creators and spur economy 

growth. There is no question that the Gulf region is still rebuilding 

and that entrepreneurs will play a critical role in that process. 

If we want businesses to make a full recovery, then we must 

have a well-equipped disaster loan program. It is crucial that the 

federal government does not fail entrepreneurs the next time there 

is a disaster. 

I look forward to hearing the testimony of today’s witnesses. And 

now I recognize ranking member Chabot for his opening statement. 

OPENING STATEMENT OF MR. CHABOT 

Mr. CHABOT. Thank you very much, Chairwoman. And I want to 

thank Chairwoman Vela ́zquez for holding this important hearing. 

I also want to thank the witnesses that we will hear from shortly 

and look forward to their testimony as well. 

As has been well-documented, the unexpected nature and level of 

destruction caused by Hurricane Katrina was unprecedented. It is 

estimated that Hurricanes Katrina, Rita, and Wilma claimed 1,400 

lives and caused more than $80 billion in property damage. 

The Small Business Administration, the SBA, was tasked with 

the difficult job of providing disaster loans to the affected individuals and businesses throughout the Gulf Coast. In response to the 

hurricanes and their devastation, the SBA provided more than 

148,000 disaster assistance loans, totaling more than $9.7 billion in 

aid to the individuals and businesses devastated by these storms. 

After the storms had passed, it became clear that the SBA was 

processing the disaster loans far too slowly. An average loan application took 74 days to process, instead of the agency’s usual processing goal of about 3 weeks. The SBA severely underestimated the 

number of employees needed for this considerable task and failed 

3

to provide enough office space for its employees on site. Their recruiting and training of emergency employees also proved to be a 

considerable obstacle for the SBA. Lastly, the Small Business Administration failed to spread the word to the residents and business owners of the Gulf Coast that the agency was there to help 

them. 

Amid the chaos and devastation caused by the storms and the alphabet soup of federal agencies there to help, it was critically important for the SBA to vigorously communicate what the agency is 

and how it could help through the services it provides. 

Some homeowners and small business owners did not receive the 

help they could have because they were unaware of the help the 

SBA could have provided. That is just not acceptable. 

While no one can say that the federal government’s response to 

Hurricane Katrina is adequate, it is important to point out that the 

men and women in the SBA and the other agencies who went to 

the Gulf Coast faced an extremely difficult task under very challenging circumstances. This was one of the most powerful storms 

ever to hit our nation. And its destruction was compounded by the 

geographical uniqueness of New Orleans, the fact that it sits below 

sea level. 

The point of this hearing is not to assign blame for the inadequate response. That has already been done by others. We are 

here today to look for ways to ensure that in the unfortunate event 

of a future disaster, the SBA will be better prepared and equipped 

to respond to America’s need for help. 

I would like to commend Administrator Preston for the efforts he 

has made to significantly improve disaster loan processing. I am 

sure it isn’t lost on anyone here that the administrator was not 

serving in his current capacity during the Summer of 2005. That 

was a year and a half ago. And he has been on the job for about 

seven months. 

I would also like to thank our witnesses, who have traveled all 

the way from Louisiana and Mississippi, for taking the time to join 

us today. It is important to listen to the stories of those who sought 

help from the SBA in the aftermath of Katrina to determine how 

we may better improve the agency as we move forward. 

Again, I want to thank you, Chairwoman, for holding this important hearing. And I yield back the balance of my time. 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Chabot. 

And now I would like to recognize Mr. Braley for an opening 

statement. 

STATEMENT OF MR. BRALEY 

Mr. BRALEY. Thank you, Madam Chairwoman, Ranking Member 

Chabot. And thank you for holding this hearing. 

It is about time we take a hard, long look at this nation’s response to the Gulf Coast hurricanes, particularly focused on how 

small businesses have fared since then. We have a lot to learn. And 

hopefully today we will learn some of these things that will help 

us be better prepared next time. 

Tens of thousands of businesses were destroyed by the Gulf 

Coast hurricanes. And the economic damages have been estimated 

at well over $150 billion. That region’s small businesses have deVerDate 0ct 09 2002 11:04 Jan 11, 2008 Jkt 033615 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\33332.TXT LEANN
4

pended upon the Small Business Administration to help them regroup from this catastrophe. More than a year later, however, 

many of them are still dependent upon the Small Business Administration. In fact, many of them are still waiting in line at the SBA. 

That line needs to move a little faster. 

By looking at this country’s response to the big disasters, we can 

also gauge how effective we are at responding to the disasters of 

less magnitude. Where I am from in Iowa, we have ice storms, 

something you are a little familiar with today, flooding, and tornadoes. Thankfully, they have not reached Katrina proportions. However, these disasters are major to the people whose lives are impacted by them and the substantive impacts on the communities 

and the small businesses in those areas. And I want to make sure 

this administration is prepared. 

Today I look forward to hearing that the Small Business Administration recognizes its shortfalls from the Gulf Coast response, is 

learning some lessons, and is applying those lessons in its disaster 

response efforts nationwide. This country’s small businesses need 

to know that when disaster strikes, this administration will not 

abandon them. 

Thank you, Madam Chairwoman. And thank you to our speakers 

for enlightening us today. I yield back the balance of my time. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

The Chair asks if there is any other member who wishes to be 

recognized for an opening statement. 

Mr. CHABOT. Madam Chairwoman? 

Chairwoman VELA ́ ZQUEZ. Yes? 

Mr. CHABOT. On our side, our members have indicated they 

would withhold any opening statements in order to get to the witnesses as soon as possible. 

Chairwoman VELA ́ ZQUEZ. Okay. Yes. Without objection, I will 

recognize the gentleman from Louisiana, Mr. Jefferson. 

STATEMENT OF MR. JEFFERSON 

Mr. JEFFERSON. Thank you, Madam Chair. I will be very brief in 

my remarks. 

I am very pleased to see my compare in arms here. Mr. Melancon 

is one because we fought a lonely battle down our way with the 

SBA and so many other federal agencies to get help to our people. 

I am sure Mr. Baker will show up here in a minute, but our districts adjoin each other. We have impaired in a common suffering. 

I have looked through the testimony, some of the testimony, that 

will be rendered today. And I will get to the questions about it a 

little later. But what has been most important to our people in the 

recovery is you are getting things done quickly and not looking at 

this as a normal set of circumstances or a normal disaster. This is 

one where when the SBA sits down and tries to figure out how it 

gets paid back, in looking at it in the normal way, it is awfully 

tough because you can’t decide. The customers aren’t there. You 

don’t know when they are going to return. It is hard to make projections. 

And, as you have said, Madam Chair, sometimes in this whole 

processing of things, we need to just say, ‘‘Well, it’s time to think 

about how we get grants down here to people, as opposed to how 

5

we make loans in the regular way.‘‘ We look for the normal indicia 

of ability to pay back. 

It is very tough if you are going to have recovery without any 

people there to get businesses set up so they can start working and 

get themselves back in shape and have the normal processes in 

place. 

We have been very concerned about the slow process of getting 

loans out. And I know it is going to be talked to you about the process of integrating various aspects of agencies’ work and relying on 

the private sector and all of that. But I think for us, all the rules 

about how we might make things work more efficiently is trumped 

by the idea of how do we get things done so that people can have 

a chance to recover. 

And so it is not just a matter of how we bring all the resources 

together and how we better apply them as how we actually get a 

product out, how we get things done, how we get people back in 

shape to come back to work, jobs to come back to the—and the 

other part of it, of course, is how we get our small business people 

as the major part of this recovery to make sure that they are the 

ones who are leading the recovery effort who are bringing back the 

employees who are making this thing work. 

So I look forward to the testimony of all of the witnesses today. 

And I thank you, Madam Chair, for letting me make brief remarks. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

And now I will recognize Congressman Melancon from Louisiana, 

who has worked closely with this Committee in addressing problems on the disaster assistant program. My colleague, you have five 

minutes for your testimony. 

STATEMENT OF THE HONORABLE CHARLIE MELANCON, 

CONGRESSMAN, U.S. HOUSE OF REPRESENTATIVES 

Mr. MELANCON. Good morning. Thank you, Chairwoman 

Vela ́zquez, Right Ranking Member Chabot. I want to thank you for 

the opportunity to speak about the SBA’s response to Hurricanes 

Rita and Katrina. 

My Congressional district spans the destructive path of both of 

these storms. Early in the morning of August 29th, 2005, Hurricane Katrina made landfall in South Plaquemines Parish. Subsequent levee breeches flooded much of Plaquemines and St. Bernard 

Parishes along with the City of New Orleans and the communities 

of Lafitte and Grand Isle. Less than one month later, Hurricane 

Rita made landfall in southwest Louisiana, with much of the coastal area already affected by Katrina receiving yet another unneeded 

and damaging blow, and then creating storm surges though all the 

coastal Louisiana parishes and into east Texas. 

Today’s hearing focuses on one of many facets of federal government failures, both before and after these storms. In the weeks and 

months following the storms, critical small business grant and loan 

assistance was delayed. Our economy continues to suffer as a result. 

We may never be able to pinpoint an exact number of jobs lost 

to the inaction or the lack of assistance. However, I have witnessed 

many instances where small business owners have been frustrated 

to the point of giving up on the SBA. And I hope that we can work 

6

together to change the negative perception that currently exists towards SBA’s programs and the entire federal response. 

As time moves on, we are beginning to quantify some of the 

missed opportunities following the 2005 hurricane season. For instance, 9 months after Katrina and Rita, in May of 2006, the SBA 

had disbursed only 14 percent of the $9.7 billion in loan dollars 

that were approved for disaster assistance. And even today, my 

numbers show that only 38 percent of the loan applications had 

been approved and funded. After Hurricane Andrew, over 60 percent were approved. 

Immediately following the storms, an understaffed, poorly managed, and poorly trained, particularly in customer service, administration effectively discouraged small business owners from applying 

for business or home loans. 

In December 2005, the backlog for loan verification and processing on average exceeded one and a half months. In most instances, the wait was much longer. Inadequate and inaccurate communication from SBA employees kept many customers from finishing applications. Many clients lost paper business records in the 

storms, creating an additional hurdle for SBA employees that were 

not able to adjust for these storm-inflicted realities. 

How do we make SBA better? One of the first issues that must 

be addressed is staffing. SBA’s unwillingness to immediately and 

effectively delegate responsibility to qualified lenders created a critical choke point in loan disbursements following the hurricanes. 

To address this issue, today I am joining with my colleague Congressman Richard Baker to introduce the Small Business Disaster 

Response and Loan Improvements Act of 2007. This legislation will 

improve upon the less successful gulf opportunity loan pilot program administered by the SBA. It would allow for larger maximum 

loan amounts and a more streamlined application process that will 

be administered by the SBA-approved lenders. 

Before staffing, Congress must take a close look at the laws and 

regulations that currently govern the SBA’s disaster loan programs. SBA’s unwillingness or inability to provide maximum flexibility in the administration of disaster loans continues to hamper 

recovery efforts in Louisiana, specifically homegrown and familyrun businesses, such as those in the shrimp industry that we have 

in south Louisiana. They often do not fit the mold of the current 

SBA loan. 

And in the resourceful, self-sufficient economy in south Louisiana, oftentimes the best and only mechanic or towboat for these 

shrimping vessels are the owners themselves and/or family members and fellow shrimpers. However, the SBA would not allow payments to family members or fellow shrimpers for the expense of removing the vessels from dry land. The SBA would loan the money 

for mechanical repair, hull repair, net repair, and acquire the needed fuel and supplies to begin the shrimping season, but it doesn’t 

do the owner much good if he or she can’t get the vessel back into 

the water. Community express loans should be allowed eligibility 

for commercial fishermen to go back to work. 

In addition, SBA’s current physical disaster loan program allows 

for a waiver of the $1.5 million loan limit. This waiver is reserved 

for businesses that are determined to be a major source of employVerDate 0ct 09 2002 11:04 Jan 11, 2008 Jkt 033615 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\33332.TXT LEANN
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ment before the disaster. However, in a disaster the magnitude of 

Katrina and Rita, the SBA should allow for waivers for businesses 

that will be a major source of employment following the storm. 

I am aware of instances where existing business owners could 

greatly expanded or refocus existing businesses to meet strong 

post-storm demand. However, because these opportunities did not 

fit the normal SBA disaster rules, they were turned away, causing 

untold hardship on many businesses and subsequent reemployment 

and the new employment losses. 

A final recommendation for making the current and future disaster recoveries better would be to provide more flexibility for loan 

use in conjunction with the Homeowners Assistance Grants. Homeowners in south Louisiana who took the initiative to apply for SBA 

loans following the hurricanes are now being penalized for this action. If these homeowners qualify for the Louisiana road home rebuilding grants, then they must use the road home money to pay 

down the SBA loan first. This leaves these storm victims with a 

larger financial burden that they would not have otherwise and no 

better off, if not worse off, than before they applied for the SBA 

loan. 

In closing, I want to thank you, Chairwoman Vela ́zquez and 

Ranking Member Chabot and the Committee, for the opportunity 

to testify this morning. I look forward to working with you and all 

of our other colleagues to enact common sense, meaningful reform 

to current SBA disaster loan programs. Thank you. 

[The prepared statement of Mr. Melancon may be found in the 

Appendix, on page 59.] 

Chairwoman VELA ́ ZQUEZ. I want to thank you for your testimony, 

your passion, and I just want for you to make sure that we do understand your pain and the human suffering in the Gulf Coast region. The intent of this Committee in today’s hearing is to see 

where we are, to make sure that this doesn’t happen again, and if 

there is a need to fix through legislative actions, we will do that. 

And we will continue to work with you to see that we can bring 

relief to the small business people that are suffering still in the 

Gulf Coast region. 

With that, I will ask if the members have any questions for— 

Mr. CHABOT. Madam Chairwoman? 

Chairwoman VELA ́ ZQUEZ. Yes? 

Mr. CHABOT. Just a brief comment. I think apparently Mr. Baker 

was affected by the inclement weather today and is on his way 

here but running late. It is good to see this work in a bipartisan 

manner, especially with those that have been it most directly, the 

folks in the area. So I would commend both of you for working together to put together legislation in a bipartisan manner that will 

help to assist the people who have suffered this terrible disaster in 

your area. 

I yield back. 

Chairwoman VELA ́ ZQUEZ. I guess that today is a reminder of 

Mother Nature. And this is why we have to make sure that we are 

ready for the event of any other future disaster. 

I would like to thank the Congressman. We will now proceed 

with the second panel. I will ask Mr. Steven Preston, AdminisVerDate 0ct 09 2002 11:04 Jan 11, 2008 Jkt 033615 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\33332.TXT LEANN
8

trator of SBA; Mr. William Shear, the Director of Financial Markets and Community Investment, to please take your seats. 

And, to the members, please, I want you to know that we have 

a third panel with witnesses who are coming here from the Gulf 

Coast region. And given the weather conditions and everything 

that they have gone through, I will ask for you to please stay here. 

And if you have any other commitments, please come back so that 

we could listen to their stories. 

Good morning, Mr. Preston and Mr. Shear. I would like to welcome the Administrator. And he will be recognized for five minutes 

for your testimony. And I just want for you to know that I have 

noticed the fact that you have been before this Committee twice 

this year. And I think that is the most of any other Administrator. 

Mr. PRESTON. Thank you very much. Would you like me to begin 

or Mr. Shear? Okay. Great. 

STATEMENT OF STEVEN C. PRESTON, ADMINISTRATOR. U.S. 

SMALL BUSINESS ADMINISTRATION; ACCOMPANIED BY WILLIAM B. SHEAR, DIRECTOR OF FINANCIAL MARKETS AND 

COMMUNITY INVESTMENT, GOVERNMENT ACCOUNTING OFFICE 

Mr. PRESTON. Good morning, Chairwoman Vela ́zquez, Ranking 

Member Chabot, other members of the Committee. Thank you for 

inviting me to discuss the GAO report and what the SBA has done 

to re-engineer our disaster assistance program. I would also like to 

thank Bill Shear and his team at GAO for the time and effort they 

put into this report. 

My written statement addresses GAO’s recommendations. SBA 

concurs with the primary recommendations in the report. We have 

already made some progress in addressing them. This morning I 

would like to talk a bit more about what we have done to re-engineer the disaster assistance program since Hurricanes Katrina, 

Rita, and Wilma hit the Gulf Coast. 

While we concur with the assessment of SBA’s past problems, I 

am here to tell you today that since last summer, we have made 

dramatic progress in reforming SBA’s disaster program and attained truly impressive results. 

Like so many other Americans, in 2005 I watched the images of 

what was happening in the Gulf. I prayed for the people. I sent 

funds. And I wished I could do more. And, sure enough, I got an 

opportunity to do that when I received the offer to come here to the 

SBA last summer. 

Since then, I have visited the region many times, meeting with 

disaster employees, business owners, homeowners, as well as state 

and local officials to hear about their experiences and understand 

their issues. 

Today 98 percent of the approved borrowers have received all of 

their money, some of their money, or chosen not to borrow. Of the 

7 billion in approved disaster loans that people have chosen to 

take, we have over $5 billion at work rebuilding homes and businesses in the Gulf. Approximately 2 billion in additional commitments are available to be disbursed to about 23,000 borrowers, 

20,000 of whom have begun receiving disbursements. Many of 

9

these people, we believe, are experiencing a number of outside challenges, resulting in delays in their ability to draw down funds. 

I came to the agency 11 months after Katrina. And in that time, 

the agency had processed over 420,000 loan applications and had 

worked very hard to address the unprecedented nature of this disaster by expanding capacity in three areas: information systems, 

people, and facilities. And while the loan approval process was 

largely completed, SBA at that point faced a very different challenge: closing loans and distributing funds. Over 120,000 borrowers 

were still in the process, representing over $7 billion worth of loan 

commitments. So we quickly dug into the issues to understand 

why. 

First we listened to our customers. Next we listened to our employees to get their perspective. And then we dug deep into the 

operational processes, where we found a number of issues leading 

to high error rates, steep backlogs, and decision-making bottlenecks. 

With this information, we began to re-engineer the program to 

address them. We invested thousands of man-hours and launched 

a new process that was complex to implement but simple to conceive. We called over 90,000 borrowers to do 2 things: introduce a 

new process where they would have a single relationship manager 

to help them to complete paperwork accurately, eliminate confusion, eliminate rework and frustration, and to ensure that we understood their status so that we could provide the right kind of 

support. 

We also moved 1,300 staff and changed our entire work flow 

from a production line with inadequate coordination between different functions to 15-person integrated teams, where each function 

is represented with authority and competency to make decisions, 

ensure accountability, and manage for results. 

This outreach enabled us to build a database to track the issues 

our customers have and to address them better. One thing this 

database showed us is that our customers were having difficulties 

obtaining records from their local clerks’ offices. So SBA placed employees in the Records Office in Orleans Parish, and we have 

reached out to other parishes and counties across the region, offering the same support. 

Because we now have regular conversations with our customers, 

we can also informally poll our case managers on their issues. Our 

people have become an advocate for the borrowers that they serve. 

And we are now able to connect a loan and a document to a face 

and a story. 

One of the major challenges surmounted in this process was our 

loan modification process. This summer we had a backlog of 50 to 

80 thousand loan modifications, with an average age of over 70 

days. This was a major cause of delays in disbursements. Today, 

with about 4,000 modifications in process, the average age of the 

backlog is 8 days. 

We are seeing benefit of the new processes in the more recent 

disasters, where we see 98 percent of our loan approvals being completed within 14 to 16 days, which I have been seeing most recently 

after my trip last week to Florida taking place as well. 

10

Do we still have hurdles? Absolutely. We are still improving the 

process. I still hear directly from customers. I give my e-mail in 

public forums all the time. So I know directly. But the feedback 

we’re getting from local leaders; legislators; employees; and, most 

importantly, the disaster victims we are striving to serve has been 

very positive. 

We continue to focus on better training for our employees so they 

can serve better. We continue to improve the IT infrastructure. We 

have put metrics and mechanisms in place to identify issues and 

address them as they arrive. But, most importantly, we have put 

methods in place for greater interaction with our customers. 

In the coming months, our efforts are going to be focused on a 

number of activities: first, ensuring that we are responding and 

providing the states with information to support their grant programs; second, completing the process reengineering and continuing to improve automation to ensure that it is fully in place for 

future disasters; third, finalizing surge plans so that we have clear, 

well-documented road maps and implementation models in place 

based on the size and the nature of the catastrophe; and, finally, 

exploring ways to work with the private sector to provide more efficient and effective support in certain circumstances. 

The 2005 hurricanes overwhelmed disaster response at all levels. 

Certainly we were no exception. Our people worked very hard, 

often around the clock, to try to help the disaster victims whose 

lives were torn apart. But these are not the same people who have 

since fixed the process and are today enabling the SBA to play its 

role in rebuilding the Gulf and improving our ability to respond in 

the future. And I am very thankful for their dedication and their 

resolve. 

Thank you. 

[The prepared statement of Mr. Preston may be found in the Appendix, on page 66.] 

Chairwoman VELA ́ ZQUEZ. Thank you Administrator. 

And now we will recognize Mr. Shear. He will be presenting the 

report from the General Accounting Office. Mr. Shear is the Director of Financial Markets and Community Investment from the Government Accountability Office. Welcome. 

STATEMENT OF WILLIAM B. SHEAR, DIRECTOR OF FINANCIAL 

MARKETS AND COMMUNITY INVESTMENT, GOVERNMENT 

ACCOUNTING OFFICE 

Mr. SHEAR. Thank you. Madam Chairwoman, Representative 

Chabot, members of the Committee, it is a pleasure to be here this 

morning to discuss SBA’s response to the 2005 Gulf Coast hurricanes. 

My testimony is based on two reports that we issued under the 

Comptroller General’s authority. The first report, which was release in July 2006, discussed SBA’s plan for and implementation of 

the disaster credit management system called DCMS, which the 

agency uses to process disaster loan applications. 

The second report, which is being released today, discusses SBA’s 

disaster planning for other logistical areas, such as hiring and 

training a capable workforce and acquiring necessary office space. 

11

As we all know too well, the Gulf Coast hurricanes were truly 

catastrophic. They resulted in extensive property damage, human 

suffering, and loss of life. SBA’s Office of Disaster Assistance 

makes loans to households to repair or replace damaged homes and 

personal property and for businesses to help with physical damage 

and economic losses. SBA faced unprecedented demand for its disaster loan services as a result of the hurricanes. 

Today I will discuss first challenges SBA experienced in providing victims of the Gulf Coast hurricanes with timely assistance; 

second, factors that contributed to these challenges; and, third, 

steps SBA has taken since the Gulf Coast hurricanes to enhance 

its disaster preparedness. 

In summary, we identified several system and logistical challenges that SBA experienced in responding to the Gulf Coast hurricanes that undermine the agency’s ability to provide timely disaster assistance to victims. For example the limited capacity of 

DCMS restricted the number of staff who could access the system 

at any one time to process disaster loan applications. 

In addition, SBA staff who could access DCMS initially encountered multiple system outages and slow response times in completing loan processing tasks. As of late May 2006, SBA processed 

disaster loan applications on average in about 74 days, compared 

with its goal of within 21 days. 

While the large volume of disaster loan applications at SBA we 

see clearly affected its capacity to provide timely disaster assistance to victims, we found that the absence of a comprehensive 

planning process beforehand limited the agency’s initial response. 

For example, in designing the capacity of DCMS, SBA primarily 

relied on historical data, such as the number of loan applications 

that the agency received after the 1994 Northridge, California 

earthquake. 

SBA did not consider disaster scenarios that were more severe or 

used the information available from disaster simulations or catastrophe models used by insurance companies to estimate disaster 

losses. SBA also did not adequately monitor the performance of a 

DCMS contractor or completely stress test the system prior to its 

implementation. Moreover, SBA did not engage in comprehensive 

disaster planning prior to the Gulf Coast hurricanes for other 

logistical areas, such as workforce planning or space acquisition. 

As discussed by the SBA administrator, in the aftermath of the 

Gulf Coast hurricanes, SBA has planned or initiated several measures that SBA, the administrator, and other SBA officials said 

would enhance the agency’s capacity to respond to future disasters. 

For example, SBA has completed an expansion of DCMS’ user capacity to support a minimum of 8,000 concurrent users as compared with just 1,500 for the Gulf Coast hurricanes. 

We have made recommendations to SBA in both our July 2006 

report and in a report we are issuing today. For example, we recommended that SBA, one, reassess DCMS’ maximum user capacity 

in light of lessons learned from the Gulf Coast hurricanes, information available from catastrophe with modeling firms and disaster 

simulations, and related cost considerations; two, strengthen its 

DCMS contractor oversight and further stress test the system; 

three, analyze the disaster loan process and identify ways to more 

12

efficiently process loan applications, including an evaluation of the 

feasibility of implementing a secure Internet-based application feature for home loan applicants; and, four, develop time frames for 

complete and key elements of its disaster management plan. 

We are encouraged by SBA’s agreement with these recommendations. We hope that the agency can move forward to develop and 

implement a comprehensive disaster management plan that will 

help SBA respond to future disasters. 

It is an honor to present our work before this Committee. I would 

be happy to answer any questions from Committee members. 

[The prepared statement of Mr. Shear may be found in the Appendix, on page 72.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Shear. 

Katrina and Rita, both of them were monumental disasters. 

There is no doubt in our minds. And it netted a monumental response from the federal government, particularly the disaster loan 

program. 

Mr. Shear, given everything that you have reviewed in creating 

your report and in reference to what the SBA has done in response 

to the General Accounting Office recommendations, are you comfortable that the SBA is now prepared to meet the challenges of another disaster on the scale of the 2005 Gulf Coast hurricanes? 

Mr. SHEAR. There are two parts to my answer to your question. 

One would be a matter of as we referred to disaster simulations 

and catastrophe risk modeling, that one of the first steps that is 

needed is an evaluation of the risk exposure of the agency in terms 

of meeting its needs to disasters. We are not quite sure how the 

agency is going to use those tools and the lessons from the Gulf 

Coast hurricanes to evaluate its risk exposure. 

The second part to my answer is that if it is a matter of having 

the capacity to meet another series of Gulf Coast hurricanes, we 

know they have expanded their capacity to DCMS and they have 

initiated some other steps. 

The answer is a little bit that we don’t know yet. It is kind of 

too early for us to know yet as far as whether they have stress tested DCMS and taken other actions to ensure that they could meet 

the challenges of another catastrophe of this magnitude. 

Chairwoman VELA ́ ZQUEZ. Mr. Shear, is your answer a no? 

Mr. SHEAR. The answer is that we are not sure. We are not sure 

if there was another hurricane or another disaster of this magnitude. And so the answer is we are not sure on that. 

As I say, the first part is we think a fuller risk kind of evaluation 

of risk exposure is needed. 

Chairwoman VELA ́ ZQUEZ. Okay. Thank you. 

Mr. Shear, again, we have heard how the SBA has implemented 

changes to improve its disaster assistance programs. Some of these 

changes have come as a result of your recommendations while others were initiated by SBA. To what extent are these changes premised or predicated on a comprehensive assessment of the agency’s 

risks, including a disaster? 

Mr. SHEAR. Okay. I will add to what I called my first part to the 

first question. It is not clear to us based on our interactions with 

SBA. And they have raised questions a number of times, ‘‘How 

could we use catastrophe risk models? How could we use disaster 

13

simulations?’’ And it has been a constructive dialogue, but, nonetheless, we are not quite sure how far along the agency is in really 

evaluating its exposure to its risk. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Preston, I would like you to provide me with specific time 

frames for when the SBA will have implemented the following elements: formed a comprehensive written disaster plan that integrates the agency’s needs in a variety of disaster situations with 

the results of disaster simulations and catastrophic modeling; completed cross-training agency staff to provide backup support for the 

disaster assistance function; completed stress testing to the DCMS 

system at maximum use or capacity. What is your time frame 

when these key elements of a disaster plan will be completed? 

Mr. PRESTON. Well, you and I have not discussed this previously. 

So I think we should work together to determine those time lines. 

Now, let me tell you we have had conversations about the need 

for time lines. This agency in certainly the six months, seven 

months I have been here manages extensively with time lines. We 

could have never achieved these results without daily time lines on 

achievables in every aspect of our operation. 

We are currently—and this is in support of GAO’s comment—

evaluating time lines for putting in place a much broader integrated play book. The protocols exist internally. The institutional 

knowledge, especially after the last year and a half, exist internally. What we are doing now is going through the process of working through getting it documented and having something that will 

serve us in three or four years. 

Chairwoman VELA ́ ZQUEZ. Mr. Preston, my concern right now is 

that we are six months into the next hurricane season, summer. 

And based on your answer, then we can conclude that you still do 

not have a written plan, disaster plan, based on the key elements 

that were recommended by the General Accounting Office. 

Mr. PRESTON. What I would tell you is we have an ability to respond to disasters today, whether they be hurricanes or earthquakes, like never before. We have a system capacity that is about 

four times what we needed for Hurricane Katrina. And indications 

are that it could expand beyond that. 

We have facilities in place right now. We have an extremely 

large existing workforce, recently trained workforce, that is no 

longer with us that we could bring back in, and reserve corps. We 

have relationships throughout the federal government that are dramatically improved. And our coordination has improved. 

Now, what I don’t have is all of that documented in a play book 

for you. If something hit tomorrow— 

Chairwoman VELA ́ ZQUEZ. Well, it is not only for us. It is just for 

your agency and for everyone. We saw. And we were here. We saw 

the disarray of the agency, the confusion, not only in the Gulf 

Coast region, where people were suffering and lost their properties 

and didn’t know where to go and then the disarray that was going 

on at the agency because DCMS wasn’t working at capacity because the training of the people was not in place because you didn’t 

have the manpower on the ground in the region. 

It is not only a plan for us, the Committee. It is a plan for the 

agency to be effective. And it is the plan that has to be predicated 

14

on the simulations and the kind of needs based on whatever scale 

of disaster we will be confronted. 

When you mention now that you are going to have 8,000 capacity 

on the DCMS, what do you base that number on? 

Mr. PRESTON. Extensive stress testing by IBM, who is the contractor. And the stress testing that they did to the system went up 

to the 8,000 level. And it had indicated that there was significant 

additional capacity above that. 

Chairwoman VELA ́ ZQUEZ. Mr. Shear, do you really think that 

8,000 will handle a large-scale disaster? 

Mr. SHEAR. There is a trade-off between capacity and how much 

we have to worry about could the SBA serve victims of another 

major disaster? The question becomes, well, SBA is in a better position now, certainly, with 8,000, than it was before. It is relative. 

Whether it could meet its goal of 21 days to process loan applications, it would be hard to say. 

In terms of the 8,000, I certainly am encouraged if, in fact, IBM 

has done the stress testing to ensure that there are 8,000 concurrent users. But this has to be a part of a broader framework of not 

only risk evaluation but how do the different tools fit together. The 

reserve corps, office space, and other elements of technology really 

have to fit together to see, you know, how that 8,000 would play 

out in that broader framework. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. PRESTON. Can I comment on that just for a second? Madam 

Chair, I am not as concerned about the 8,000. The 8,000 with 2 

shifts would give us 16,000 users. And in that center, we never had 

even 3,000. 

The issue I think is exactly what Mr. Shear mentioned, which is 

expanding the people, expanding the other issues. And, as I have 

told people, I am pretty comfortable today based on the expansive 

situation that we have in place. We are very well-prepared today. 

My concern is three or four years from now. 

And if the agency shrinks in size, if our facilities shrink in size, 

and then we have to ramp again like we did last year, that is what 

we need to focus on. 

Chairwoman VELA ́ ZQUEZ. Well, let me just say—and I am going 

to make this statement and then move to Mr. Chabot—if 8,000 is 

good enough, then why do you still have unprocessed applications 

to this day? 

Mr. Chabot? 

Mr. CHABOT. Thank you very much, Madam Chairwoman. 

Mr. Preston, as I mentioned in my opening statement, you are 

in a difficult position obviously because you have only been at the 

SBA now for about seven months. And this happened a year and 

a half ago. So you are essentially trying to fix someone else’s problem. So it is a difficult situation. 

But let me ask you first, has the DCMS system been tested at 

its 8,000-user capacity? And is the majority’s concern about a fullblown test well-founded? 

Mr. PRESTON. DCMS has been tested. And I would be confident 

that it can handle that and potentially additional, which is significantly beyond Katrina. 

15

I would also like to say, just to your opening comment, that I 

know I am coming after the event, but that is one of the reasons 

I am here. And it is my privilege to serve. 

Mr. CHABOT. Thank you. 

Next, what coordination did the SBA have with other agencies, 

like FEMA or state and local governments? 

Mr. PRESTON. Well, the day after Katrina, our district director 

had set up office in the state capitol. We had people very quickly. 

Most of our people had lost their homes coming back to work. We 

were meeting with small businesses very soon after that. 

We have consistently had I think fairly extensive coordination 

with agencies, both federal and local. And where we have had problems with that coordination, up front we did have some issues in 

getting the applications from FEMA. There were some issues that 

caused a lot of applications to come to us that probably shouldn’t 

have. And we have worked through those issues with FEMA so 

that it won’t happen again. 

Other than that, I think our coordination has been pretty extensive and continues to be. 

Mr. CHABOT. Thank you. 

Ten billion dollars in loans were approved, but how many were 

canceled? And how many loans are actually to be disbursed? 

Mr. PRESTON. Okay. 3.7 billion loans have been canceled or reduced. These are people who get insurance payments, so they no 

longer need or are allowed to get the loans under the federal law; 

grants; they have access to private resources. And that is very 

much in line with other disasters we have seen. 

About 5.1 billion has actually been disbursed. That last 1.9 is 

what remains to be disbursed. These are people we are ready to 

disburse funds to. And in many cases, these people are not ready 

to move forward. They don’t have insurance in some cases. They 

can’t get access to records. They have not chosen to move back into 

their neighborhoods in some cases, for reasons that all of you are 

familiar with. 

So when we look at our backlogs and we look at our time lines, 

we are for the most part being very responsive to those people. 

Mr. CHABOT. Can you tell me what the approval rate for the four 

2004 Florida hurricanes was? 

Mr. PRESTON. I don’t have that exact percentage for you. It was 

32 percent. I am sorry. I just got it. 

Mr. CHABOT. Thank you. 

Mr. PRESTON. I knew it was significantly lower than the current 

hurricane, than the 2005. 

Mr. CHABOT. Right. And isn’t your approval rate largely affected 

by the financial demographics of the area? 

Mr. PRESTON. Very much so. This was in line with the 

Northridge earthquake. It is much higher than the 2004. It is lower 

than Hurricane Andrew, for example. It very much has to do with 

demographics. 

Mr. CHABOT. Thank you. 

Mr. Shear, let me turn to you for a couple of questions. Should 

the SBA consider contracting out disaster loan processing to other 

entities as they supplement to its own office? And would the SBA 

16

have the capability of providing oversight to private loan processing 

contractors while still performing disaster loan processing itself? 

Mr. SHEAR. It is really an excellent question. And I will answer 

it based on the work I am testifying on today and other work we 

have done at SBA. In this work, we do not evaluate the efficacy of 

such of including private sector partners, namely financial institutions. So we didn’t look at that avenue in this work. 

I will just make an observation based on a lot of work we have 

conducted over the last decade dealing with SBA’s Office of Capital 

Access if that we had many concerns going back with oversight of 

lenders, loan monitoring, and the tools that SBA had when it delegated authority to private sector lenders. And SBA has made great 

improvements over the last decade in that arena. 

And what I would hope is that if SBA is again, as I think the 

agency is planning to do to partner with private sector lenders that 

they will be very cognizant of the oversight structure you need 

when you have private sector lenders that are able to basically become a distribution mechanism for government guarantees. 

Mr. CHABOT. Thank you. My final question, Mr. Shear, has the 

SBA been at all defensive in dealing with the GAO or have they 

been forthcoming about their inadequacies and willing to change to 

ensure an improved response for the next catastrophic disaster? 

Mr. SHEAR. It is a difficult question to answer because it is kind 

of like it is all relative as far as different agencies. One thing I will 

say is that the interaction currently—and I am glad to be here with 

Administrator Preston—is that it has been a very constructive engagement in terms of interaction of us providing information from 

our evaluations that might be helpful in helping SBA get to the 

next level of coming up with a comprehensive plan and implementing our recommendations. 

So I would certainly say that it has been very constructive. I 

know behind me Herb Mitchell, who through this whole trying period has been in charge of the Office of Disaster Assistance, has already been very cordial, very professional, and very constructive in 

our relationship with each other. 

So it has been positive, what we call constructive engagement. 

Mr. CHABOT. Thank you. So what I hear you saying is it is improving? 

Mr. SHEAR. It has improved. And I think it certainly has the elements of what we call constructive engagement. 

Mr. CHABOT. Thank you very much. I yield back. 

Chairwoman VELA ́ ZQUEZ. Now the Chair will recognize Mr. Jefferson for five minutes. 

Mr. JEFFERSON. Thank you, Madam Chair Lady.

There is so much to talk about here. I thank you for the work 

you have done. And I know it is a big job. Mr. Preston, I guess, 

or either one of you — I don’t know which I should ask this. There 

is a — we are very concerned about the training that people had 

who came down to make loan decisions.

We have a very limited staff, as I pointed out last week. We went 

in the last six years from 30 people down to 9 people. We don’t 

17

have a loan director. We don’t have information to direct and a few 

other very key people.

Yet, when the SBA disaster relief people came down, they were 

to be trained by our small office. After that, the office had no real 

interaction with them. They went on their way.

Have you looked at the impact on the efficacy of this whole process by — this goes back to how folks may be better trained and 

how our office offices may better integrate with the dispensation of 

that work, as opposed to just kind of saying, ‘‘Hi,‘‘ ‘‘Good-bye,‘‘ a little training, and they go away? How do we make this thing get a 

small business hometown kind of a feel to it, as opposed to what 

we have this time around? 

Mr. PRESTON. Yes. This was an issue that came up shortly after 

I came into the agency. We had an off-site with all of our leadership. And we are very close to completing a plan to have much better integration between the district offices and the people that 

come in from outside the area to help process loans.

The other issue that you address — and this is something that 

is being driven by people in those district offices based on what 

they think needs to happen. So we are getting that feedback from 

the field.

The other issue you mentioned, which was a big challenge we 

had, was training. We had to ramp up very quickly. And there 

were challenges on the training side. There are just no two ways 

about it.

And the way that we are dealing with that is two ways. Number 

one, we are expanding the number of people in our reserve corps 

that are kept up to date in training. They don’t work for us. They 

come in several days a year for training. And then when they get 

deployed, they are up to speed.

The other thing as part of this field engagement plan is we are 

beginning to look at how to train people in the districts more effectively because they don’t always have the training they need to 

help those people. So we are hitting it from both angles. 

Mr. JEFFERSON. How many people are in the pipeline now? 

Mr. PRESTON. already in the operation today we have about 

2,200, which is still very large. We have a reserve corps of another 

750, which is these continually trained people. And then we probably have close to another 1,000 who are no longer with us who 

have recently been trained. 

Mr. JEFFERSON. I know I don’t have much time. On the turndown rate, I mean, everything else having been looked at, the big 

issue is, how do folks get loans approved? And folks, 98 percent of 

those approved have gotten their money, but how many were 

turned down of the ones who applied? Have you looked at how we 

can improve in this area because that is really where the rubber 

meets the road there. 

18

Mr. PRESTON. Yes. It is a challenge because we are a lending institution. Ultimately we want to make sure that we work with people to be able to repay.

The thing I would mention is we have very low interest rates, 

right now under three percent. And we can go out 30 years, which 

generally means for a life-sized loan, a borrower is going to have 

70 to 80 percent lower monthly payments. And so we do still look 

for those people to be able to make that level of monthly payments 

because we don’t want them to take on debt that they can’t repay. 

So what I would tell you is — 

Mr. JEFFERSON. What was the turn-down rate in our storm? Do 

you know — 

Mr. PRESTON. The decline rate in your storm was 55 percent. The 

approval rate was 45. 

Mr. JEFFERSON. Did it apply with homeowners and businesses 

equally or was it more in one? 

Mr. PRESTON. Homeowner was about 44 or 43 percent. Businesses, which are many fewer, was a good bit over 50 percent. 

Mr. JEFFERSON. What was the major reason for the turn-downs 

if you can just categorize it in some sort of a way? 

Mr. PRESTON. The major reasons for the turn-down would have 

been credit history and ability to repay. 

Mr. JEFFERSON. Now, the ability to repay, how did you judge that 

in this storm? 

Mr. PRESTON. We look at ability to repay based on where they 

have been historically. If they have been impaired by the storm or 

are going to take a period of time to get back to work, we generally 

do not take that into account. We give people leeway for that. 

Mr. JEFFERSON. Well, the big complaint has been that people are 

saying that it is going to take a long time to get back on their feet, 

a long time to get folks back home. And the agency is saying, 

‘‘Well, we don’t know if you are going to be able to make it.‘‘

It has nothing to do with credit history and that sort of thing. 

It has to do with the toughness of making a decision about how 

successful the business is going to be going forward given the nature of the disaster. And that is something that is a problem for 

us. 

The last thing is, if I might, Madam Chair Lady, the banks. 

Many banks were clamoring to get involved here to help get these 

loans out. They were local banks. You talk about the idea of getting 

a face with an application and making sure that people are treated, 

you know, with courtesy and with understanding. Banks are there 

ready to do this. Many have already been approved by the SBA as 

banks they work with every day. Yet, they couldn’t get fully involved. 

Why don’t you look at some way you can meet these concerns Mr. 

Shear expressed about how these banks could be monitored better 

and then put them in the business of helping you get these loans 

out, helping to make approvals? 

Because years ago, 1,000 years ago, I served on a bank board. 

The questions used to always come up this way. When everything 

else was equal, you would ask somebody around the table, ‘‘Do you 

19

know this person?‘‘ And that would be the basis many times of 

making the decision. 

If somebody said, ‘‘Yeah, I know such and such and such, know 

a little bit about what he is doing,‘‘ it would make some sense. This 

thing gets sort of moved from what is happening down on the 

ground until you really don’t get decisions out of it. And I just want 

to know if we can’t use our banks more effectively. 

Chairwoman VELA ́ ZQUEZ. Time expired. Now I recognize Mr. Buchanan for five minutes. 

Mr. BUCHANAN. Thank you, Madam Chair. 

Let me mention being the only member here on this Committee 

from Florida and also being very much a part of the Gulf Coast. 

And my wife was up at Katrina with our church. So we are very 

sensitive to what is going on there. 

We had eight hurricanes in two years. And obviously I am very 

concerned about, you know, anything that borders the Gulf Coast 

or any of the coastal communities. 

Also, my experience last year I was Chairman of the Florida 

Chamber and a board member. We had in our chamber 137,000 

businesses. Ninety percent of those businesses were 50 employees 

or less and created 90 percent of the jobs in Florida. 

So I guess my question is really a couple of things, really one of 

capacity. Thank God we didn’t have many storms last year, but we 

had this tornado caused about $80 million worth of damage just 

outside of Orlando a few days ago. Normally we don’t get those 

that time of the year, but it is capacity. 

What is the underwriting criteria during SBA normal loans 

somewhere else, in Montana or somewhere, compared to when you 

have a disaster? And then my question is you might get the funding. How do you have the capacity to process those loans. You 

know, Florida is 18 million people. I am just looking at it from that 

standpoint. You look at the whole Gulf Coast. So it is a capacity 

issue I would like to know and underwriting criteria as well. 

And then the next thing is you have offices in Jacksonville and 

Miami. I would like to know how those offices are functioning and 

how well are they staffed because, as someone mentioned, we are 

coming back to hurricane season June 1, but ideally most of the 

hurricanes seem to hit in August and September. 

Thank you. 

Mr. PRESTON. In terms of capacity, let me just tell you, as I mentioned, I was down last week surveying the tornado damage. Those 

loans are being approved within a week or two. We have gotten 

very good feedback from the area. Obviously, as devastating as that 

was, it is not a Katrina. Just I wanted to mention that. 

Capacity comes in a number of ways, but it is primarily having 

the systems in place that can handle the volume, having the people, and having the facilities, and then having the integration with 

other agencies where you need to kind of interact with them. I 

think the Chairwoman was articulate in kind of describing kind of 

the broader elements of that. 

On the credit side, when we do typical small business loans, we 

are not actually making the loan. The bank makes the loan, and 

we guarantee it. So the bank issues the credit criteria. They can 

20

dip deeper into the credit pool with our guarantee, which goes anywhere between 50 and 85 percent. So they generally do go deeper. 

In the disaster loan program, I would tell you we go very deep. 

And we look specifically at an ability to repay on a loan that is generally going to have a much smaller monthly payment. And we are 

really trying to press, push as hard as we can because we are trying to help people get back to work or get their homes back or 

whatever. So you would see us dig deeper in that program than we 

typically would. 

Now, with respect to your question about Jacksonville and 

Miami, we think those offices are functioning well, but what I 

would tell you is in hurricane season, where we really get the most 

support—and this gets back a little bit to Congressman Jefferson’s 

comment—is people coming from outside setting up multiple 

sites—we have five sites right now in the Orlando area, some in 

tents, some retirement centers. That is where most of the local 

horsepower comes to help people. 

The district offices work with them on media and outreach and 

getting in touch with local chambers and that kind of thing, but a 

lot of the horsepower comes from outside the state when a disaster 

like that happens. I shouldn’t say ‘‘outside the state’’ because we 

have so many reservists in Florida they are generally from inside 

the state, but they are not in those two district offices. 

Mr. BUCHANAN. I guess one thing I wanted to understand is in 

a normal loan underwriting by the SBA compared to a disaster situation, what is the timing difference normally between those two 

situations? 

Mr. PRESTON. The credit criteria or the time to get the loan? 

Mr. BUCHANAN. Well, time someone comes in and makes the request to the time where they get the money. 

Mr. PRESTON. Right now 98 percent of our loans are being approved within 14 days for homeowners and 16 days for businesses. 

We put out there a goal of 21 days, but internally we manage to 

do a tighter goal. In Florida, many of those are happening right 

now and under a week. 

Mr. BUCHANAN. Thank you. 

Chairwoman VELA ́ ZQUEZ. Recognize Mr. Shuler for five minutes. 

Mr. SHULER. Thank you, Madam Chairwoman. 

Mr. Preston, thank you so much again for coming back and 

speaking in front of the panel again. We can look back at all of the 

decisions that were made in the past, if you will, the armchair 

quarterback decisions that we could possibly make of the decisions 

that were both wrong, lack of resources, but, going forward, what 

area of the agency do you feel has the largest room for improvement and/or the resources that are needed in order to accomplish 

the next major disaster that we could possibly have and looking 

forward, instead of looking back so often, as we do, we can certainly see in front of us by looking forward, instead of looking in 

the rear-view mirror, but we can certainly learn from the decisions 

that were made in the past. 

What areas do you feel that would deserve the most room for improvement or the resources or the obstacles to overcome? 

21

Mr. PRESTON. I think what we need to do is—you know, we are 

talking a lot about today. I think what we need to do is talk about 

three or four years from now in addition. 

And I am concerned about the fact that today we have over 2,000 

people in this operation, expansive facilities. A lot of people have 

been recently trained. But if over the next 3 to 5 years this operation winnows down to 800 people again or 1,000 and we have another catastrophe, we will need to look at a ramp-up again. Today 

ramp is less of an issue because we have a lot of trained people. 

And so what we need to do in the coming months is say, ‘‘What 

does that ramp look like? How do you get people quickly trained? 

How do you get facilities quickly? And also,’’ to Mr. Jefferson’s comment, ‘‘how do you engage banks potentially to come in and help 

out when our capacity gets maxed out? And what as a government 

should we be doing internally? And what should we be doing with 

the private sector?’’ That I think is the longer-term issue that we 

need to address. And it is very important for us to work closely 

with this body in determining that. But that is where I see kind 

of where we still have a fair amount of work to do. 

Chairwoman VELA ́ ZQUEZ. The Chair will recognize Ms. Fallin for 

five minutes. 

Ms. FALLIN. Thank you, Ms. Chairwoman. I appreciate that and 

Ranking Member. 

And Administrator Preston, I appreciate you coming today. I 

know you took over during a very difficult time and are trying to 

do your very best to make this agency work to its best possible. 

And I also appreciate the fact that this is my first time in Congress 

and I have seen you twice. So you have been pretty bold to come 

before this Committee two different times. 

I had the opportunity to serve 12 years as Lieutenant Governor 

of Oklahoma. And we had several different major catastrophes in 

Oklahoma with the Murrah Federal Building bombing, in which we 

had a lot of small businesses that were hurt. And, of course, we 

had some major tornadoes that came through Oklahoma. And I will 

tell you that during my years as Lieutenant Governor, the SBA has 

been very responsive to our small business community in the past 

to step forward. 

And specifically I would call them the day of the disaster. And 

they would meet with me that day. And we would be out at a press 

conference the next day talking about what Oklahoma would do 

with the SBA to help our small businesses get back on track. 

You know, sometimes in government, we do things to help business. Sometimes we do things to hurt business. My question to you 

today is, do you see anything from your past experience in working 

through a major catastrophe that we do in Congress that hampers 

you in your role at the SBA or processing allowances or any room 

for flexibility waivers? Is there anything that we can do? Are there 

any laws that we have put in place that impede you and your agency from serving the public to the best of their ability? 

Mr. PRESTON. Thank you. I think this body has been pretty responsive. And much of that responsiveness preceded me. But the 

nature of disasters is unpredictable. And I know the funding of 

them is kind of episodic. And this body has come through with supVerDate 0ct 09 2002 11:04 Jan 11, 2008 Jkt 033615 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\33332.TXT LEANN
22

plemental funding when the agency has needed it, which has been 

very important. 

Also, I think increasingly this body has been helpful in thinking 

about ways to get that support outside the agency through private 

sector support. And we did reach out to the private sector to an extent with some of our operations last year. And now I think we will 

be reaching out to talk to the bank sector as well. 

What I would say is to the extent that we can continue to have 

a constructive dialogue and that we can continue to look creatively 

at how best to handle a disaster that hits with a fury in a scale 

that is just something—you know, it is very difficult to have 4,000 

people on your staff when you need 800 or 600 all the time but ultimately if something like that hits you need 4,000. So what I would 

ask for is to have a constructive ongoing dialogue to come up with 

creative responses. And that is really all I can ask. 

Ms. FALLIN. Ms. Chairman, if I can just further? I would like to 

encourage you. I know in Oklahoma during our disasters, we always turned to the private sector, too, to help us because going 

from 800 to 4,000, as you suggested, is something that is quite a 

challenge. But any way that you could work with the private sector, especially the loans, as we have discussed earlier in processing 

things or identifying even private sector people that could help in 

time of a crisis— 

Mr. PRESTON. Yes. 

Ms. FALLIN. —to get your work done would be helpful. 

Mr. PRESTON. Thank you. 

Chairwoman VELA ́ ZQUEZ. Mr. Braley? 

Mr. BRALEY. Thank you, Madam Chairwoman. 

Mr. Preston, thank you for returning and answering questions 

for us here today on these very important subjects. When I was 

talking to Congressman Melancon out in the hallway between a 

new panel taking its seat, one of the concerns he brought to my attention was the reverse direction that technology moved in as a 

part of the processing of these loan applications. 

And as someone who in my business depended extensively on 

technology in my daily work to be able to provide services to the 

people that I represented in an efficient manner, one of the things 

that was disturbing to me about his comments was that we were 

going from a system that was designed to allow for the fast and 

orderly processing of loan applications back to a paper form of loan 

application processing, where people were filling out applications in 

pencil. 

One of the things that impacts that is the agency’s ability to provide access to technology in the midst of a disaster. And I am wondering whether your analysis of some of the failings of your predecessor and the administration as a whole during this crisis led you 

to any conclusions about how the Small Business Administration 

can provide greater access to technology in a crisis situation to the 

small business owners who are in desperate need of loan processing 

in a timely fashion. 

Mr. PRESTON. Yes. Well, certainly, in fact, it is in our early budget, and we are working on it right now. I think over time an online 

application will be very important for us. 

23

I will tell you straightforward I reallocated all of our IT resources 

in disaster to focus on a lot of the deeper systems issues we had 

because, as you have heard from Mr. Shear’s report and other comments, we had a new system that was implemented just before this 

storm. And there are just bugs to work out. And we needed to get 

that thing operational. 

We are focused on getting an online application in place which 

we think will dramatically simplify people’s ability to fill it out, our 

ability to get data input, and our ability to be efficient responders. 

But you are right. It is a very important point and one that we are 

focused on. 

Mr. BRALEY. One of the components of the GAO report talking 

about recommended changes, which apparently the agency is embracing, is with this new contractor dealing with technical support, 

software changes, and hardware upgrades. I would be interested in 

knowing your thoughts about how your agency approaches the concept of hardware. 

As someone who has never had a desktop computer in my life 

and who when I had the opportunity to purchase my computer for 

my office here in Congress was able to get a notebook computer 

with remote dial-up that can allow me to access the Internet anywhere any time with battery power, have you factored that into 

your agency’s planning on the types of technology that will be more 

beneficial— 

Mr. PRESTON. Yes. 

Mr. BRALEY. —in crisis management and response to the type of 

problems we have been talking about here today? 

Mr. PRESTON. Yes, absolutely. You know, a great example of that 

is—and let me just say these systems problems had to do with 

major servers. And they were a different kind of system than 

laptops. But on the laptop side this past year, we worked very hard 

to upgrade the infrastructure in our district offices. 

So those district offices now have personal computers that would 

be able to work in most cases remotely if we needed somebody, for 

example, in Oklahoma to help people in New Orleans. And so upgrading those components of hardware will be important in us 

going forward and being able to provide a much more creative response to large disasters. 

Mr. BRALEY. As part of the loan application processing, did the 

SBA provide kiosks or other types of remote access to technology 

in these disaster-stricken areas, where people did not have access 

to their existing technology systems? 

Mr. PRESTON. What we did is we had about 120 sites that people 

could come to meet with loan counselors to go through all of their 

documentation to give help filling out all of their forms. It was a 

very extensive effort in the field. And we still have a handful of 

those offices in place where people come in to ask questions. 

Frequently what we find is people very understandably are distraught. This is a somewhat complicated process getting another 

home loan. And by having on-site locations where people can go to 

and sit with a counselor is very, very helpful. 

Mr. BRALEY. Thank you. 

Mr. Shear, I am looking specifically at page 8 of your remarks 

dealing with SBA steps that have been taken to prepare better for 

24

future disasters. So much of the first portion of that section of your 

report deals with the areas of technology and contracting, which 

happens to be the subcommittee I am chairing on this Committee. 

Do you have any suggestions for further oversight that need to 

be done to address some of the concerns that have been identified 

and make sure that the SBA is moving forward in a direction of 

responsive management of those issues so that we are not back 

here in the future discussing them? 

Mr. SHEAR. I greatly appreciate that question. One of the roles 

we often play is when we are asked to go back and look at what 

progress has an agency made. And I hope what is clear from not 

only page 8 of the statement but from our testimony, we think 

technology can be a large part of the solution, assessment of the 

risk exposure. 

But one of the situations here that was very different than when 

you have localized flooding or weather problems is the size of the 

disaster and how do you come up with a scaleable plan. And there 

can be certain efficiencies when you deal with very large catastrophes that can be addressed. 

And even the problems with saying how many loan processing 

people do you need, to what degree do you have to be transferring 

from a paper system into an automated system back into a paper 

system, all the things that occurred over this period. If you are 

really trying to reach with the largest disasters, even an Internettype function, which reduces the amount of paperwork, you know, 

they were scanning in documents, things like that, this can be a 

big part of the solution. And it would be something that certainly 

we would be more than pleased to have serve this Committee and 

your subcommittee if you asked us to in terms of following up on 

these initiatives. 

Mr. BRALEY. Thank you. I yield back the balance of my time. 

Chairwoman VELA ́ ZQUEZ. Mr. Gohmert? 

Mr. GOHMERT. Thank you, Madam Chairman. And I do appreciate you all being here and testifying. 

I would like to follow up on something that came up earlier. And 

that is with regard to the approval rates for applications for assistance from the 2005 Gulf Coast hurricanes. You had mentioned, Mr. 

Preston, that the approval rate was around 45 percent. I was wondering since we had different states hit, we had, of course, Louisiana, Alabama, Mississippi, and then my own state in east Texas, 

do you know what those approval rates were as broken down by 

states? 

Mr. PRESTON. I don’t have those breakouts here, but we have 

those internally. And I could provide those to you. 

Mr. GOHMERT. I am just trying to get to what would be a major 

reason for having, say, under Hurricane Andrew a 60 percent approval rate compared to a 45 percent rate of the 2005 hurricanes. 

Do you have any idea why there was such a disparity in those 

rates? 

Mr. PRESTON. Well, it would most likely be a different ability to 

repay on the part of the borrower, different demographics. 

Mr. GOHMERT. So you feel like there are more deadbeat borrowers in these areas needing assistance than perhaps after Andrew? 

25

Mr. PRESTON. First of all, I certainly wouldn’t use a term like 

that. And the other thing that I think is important to understand 

is many of these people who come to us have to come through us 

before they can get a FEMA grant. Okay? So they have to come 

through our process. Many of them don’t even want a loan. So I 

think that is important. Okay? 

So they come to our process before we send them to FEMA. In 

some cases, if they can’t repay, our view is we should not saddle 

somebody with a very large piece of debt that they can’t repay. Just 

that is— 

Mr. GOHMERT. That goes without saying, but sure. You are not 

assisting them if you are loaning them money that is just going to 

take them into— 

Mr. PRESTON. That is right. And if you are lending them the 

money that is substantially easier to repay, as I said, we will go 

out 30 years. We have very low interest rates. Often this is 70 to 

80 percent below a typical amortization. 

Mr. GOHMERT. Right. But, here again, those are the same concerns you would have had, not you personally but the indefinite 

you, speaking of this, with Andrew. 

Mr. PRESTON. Also in Andrew, the amounts were much lower. 

They were significantly lower. The loan amounts were significantly 

lower, which generally means people had much more insurance or 

the damage wasn’t as much. 

Mr. GOHMERT. Okay. That is helpful. 

Well, I am also curious. You know, we are aware that so much 

of the damage in Louisiana was caused by the levee flooding. And 

so much of the area adversely affected so tragically was actually 

below floodplain. I didn’t know if that might have been a factor because I know in east Texas when a river floods, we get all of these 

federal agents running in and saying, ‘‘This is now wetlands. You 

can’t build. You can’t do anything on it.’’ 

I didn’t hear anybody running into New Orleans and saying, 

‘‘These are all now duct blinds. And you are not going to be able 

to rebuild or improve.’’ Did that come into consideration at all, 

areas that may be in flood plains? 

Mr. PRESTON. The biggest issue with respect to floodplain areas 

I think really relates to the 23,000 people we still have in the process, which is are they ready to rebuild? Have they gotten building 

permits? 

Generally people have guidance on this, but I know there are a 

couple of areas where people are concerned that the elevation requirements may raise, I think in two zip codes right now. So there 

are people that are withholding decisions based on some of those 

issues, but that does not come into the credit decision. 

Mr. GOHMERT. When you say there are still 23,000 people in the 

system, are these 23,000 applicants still waiting for action? 

Mr. PRESTON. These 23,000 applicants, 20,000 of whom have already begun receiving disbursements. We are waiting in most cases 

for feedback from them on how they want to proceed. 

Mr. GOHMERT. So 20,000 have gotten letters saying— 

Mr. PRESTON. They don’t get letters. We talk to them. 

Mr. GOHMERT. Okay. 

26

Mr. PRESTON. They get letters, you know, obviously documenting 

these things. 

Mr. GOHMERT. So according to your files, the ball is in their 

court? You are waiting for them to respond? 

Mr. PRESTON. I have a record on every one of those 23,000 people 

that shows what we are waiting for or what they are waiting for. 

This is a new process we kicked off five months ago so that we 

know status. I have got data that shows me all of that. 

Generally what is happening is many people are waiting to decide what to do. What you have to understand is we provide people 

reconstruction loans. If somebody hasn’t started reconstructing 

their home because they can’t find a contractor, they haven’t decided to move back in, or whatever reason, we are not providing 

the money unless they have got a use for that money. 

Mr. GOHMERT. All right. Thank you. And I do acknowledge and 

realize you were not in this current position when the hurricanes 

hit. A lot of cars have seat warmers. Apparently yours was really 

hot when you came into it, but we appreciate your work. 

Mr. PRESTON. Also I do want to highlight, though, that the people in this department that were in the seat at that point are the 

same ones who have worked to re-engineer this process and take 

it forward. And they have stuck through it. We have people who 

have been in this operation many years who will help take it forward. I think they have learned a lot, and they have grown a lot. 

Mr. GOHMERT. Thank you. And thank you, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. Mr. Gonza ́lez? 

Mr. GONZA ́LEZ. Thank you very much, Madam Chairwoman. And 

welcome back, Administrator Preston. We do appreciate the effort 

that you display. Thank you, Mr. Shear, in, of course, the fine work 

that you do. 

I am just going to have a couple of observations and try to figure 

out what we are really dealing with here today in some of the testimony that is anticipated later today. 

It seems to me Mr. Shear and from your viewpoint that there is 

no agency or department in the federal government that has received a passing grade for the manner in which they responded to 

Katrina and Rita. Is that a fair statement? I mean, if you look at 

FEMA. I mean, just go down the list. Do you know of any that basically passed the test in adequate response? 

Mr. SHEAR. We have devoted a very large effort to looking at 

Hurricane Katrina and the aftermath involving multiple agencies. 

So we at GAO are looking across the board. And certainly there are 

shortcomings in leadership and execution involving a number of 

agencies, including FEMA, including the Small Business Administration. 

We have a report we call a capping report that we kind of issued 

halfway through this work last summer where we do know some 

of the kind of better practices of agencies that were well-equipped 

to adjust to the demands created by Hurricane Katrina: The Coast 

Guard, Social Security to some degree, even as federal workers the 

financial center that issues our paycheck, that they were able to 

make adjustments based on really sound strategic planning to respond. So we do have some examples, but we certainly have many 

27

examples of what didn’t work well in responding to Hurricane 

Katrina. 

Mr. GONZA ́LEZ. And I appreciate the guidance that you give us 

because many times it does have to come from outside the agency 

or the department, but much of this, of course, is just the very 

scope of Katrina, something that has never been experienced or 

nearly never experienced in the United States. And I want to be 

fair to SBA and everyone else. 

So we have yesterday, when the disaster struck. We weren’t prepared. We didn’t perform well. And you have today. And I would 

like to focus on somewhat today. 

We are going to her testimony later. And the way that some of 

this testimony will go, I am sure, are personal experiences and the 

frustration. This testimony is based on careful notes that I kept 

throughout this long and painful process. We are talking about the 

loan process. So I hope that I will be able to listen to that testimony and not be called to another hearing. 

But, Mr. Preston, you have brought out a very important point. 

And I think we all should be very sensitive to it, whether it is SBA 

or any other department or agency. And that is you are concerned 

three or four years down the road. We have to distinguish and be 

able to identify that which you need on a permanent basis so that 

you will be able to again, as you say, ramp up, enhance, or whatever, to meet the immediate needs of a particular disaster. 

Things can’t be as they were in the past. Of course, you can’t be 

at the capacity that you presently find yourselves for the obvious 

reasons because we are working through responding to this disaster. 

Once you get that caseload through, obviously you will ramp 

down, but you are pointing out that you as an administrator of 

SBA would like to plan prospectively and figure out what you need 

on a permanent basis that will enable you to ramp up easily, quickly, and efficiently. Is that correct? 

Mr. PRESTON. That is correct. 

Mr. GONZA ́LEZ. And I want to tell you that I don’t think there 

is anyone on this Committee that will not join that effort and that 

we appreciate the sensitivity that you are bringing to that. 

Now, I know many things went wrong and hopefully that we will 

learn from them. Right now it is really not about fixing the blame. 

I think President Clinton would say, ‘‘Let’s fix the problem first. 

Then we will fix the blame later. And we will have plenty of time 

for that.’’ 

But, again, I just appreciate the efforts that both of you have 

demonstrated. And I would hope that we can work together so that 

when we hear the testimony from the other witnesses that were 

personally touched by this disaster, that we won’t have a repeat 

performance in the future. 

Thank you. And I yield back. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

And Mr. Akin? 

Mr. AKIN. Thank you, Madam Chair. 

In a separate hearing in a different committee, GAO mentioned, 

among other things, that what they had found was that they had 

identified 22,000 people who had cheated the government out of 

28

money relative to Katrina. These they said were the dumb ones. 

These are the ones that photocopied their driver’s license when 

they sent in the bogus claim. People didn’t even live in the area. 

That elevated my blood pressure a little bit. Then when I asked 

them off the record, ‘‘What do you think will happen to most of 

them?’’ they said, ‘‘Oh, they will keep the money and get away with 

it.’’ 

I guess my question is, in terms of the loans and the aspects that 

we are talking about in this Committee, are we putting into place 

practices so that we are just not wasting government money and 

allowing criminals to take advantage of the good-heartedness of 

Americans trying to take care of people who have been hurt? Because if I had anything to do with it, I would put every one of those 

suckers in jail for five years. Louie says I am being a little bit soft, 

but, anyway— 

[Laughter.] 

Mr. PRESTON. Would you like either? 

Mr. AKIN. Either one, both. I have got enough time. You can both 

answer probably. 

Mr. PRESTON. I think what I would say is it is probably a lot 

more difficult to engage in fraud in a process like ours because we 

have loss employees going to homes. We do title searches on property. We require a significant amount of documentation, like you 

would on any home financing. 

So I think the challenge we have had historically is a different 

one, which is how do you take a relatively complex process, requires a lot of documentation, and simplify it for people. So although fraud does exist, it is not nearly as prevalent in other processes that wouldn’t require as much documentation and oversight. 

Mr. SHEAR. I would echo that when we do a program evaluation, 

such as the ones that we did here, there are certain flags we look 

for. Do we have to bring in our investigators that really look for 

fraud investigation? And those flags then go up in this program. 

And I think it is the nature of the program, as Mr. Preston said, 

that caused us to not worry about it. It is more prevalent with 

grant programs. 

And so our resources, including our investigators, who really investigate in a different fashion, forensic investigators in our program evaluators, have focuses on FEMA and other grant programs. 

Mr. AKIN. It would just seem naturally in that people have to 

pay back. The people that are looking for just taking money and 

don’t want to have to pay anything back, they are going to go to 

other places probably. So you don’t have too much trouble in that 

area, then. 

Mr. SHEAR. No. 

Mr. AKIN. Thank you very much. Thank you, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. Mr. Altmire? 

Mr. ALTMIRE. Thank you for being here. Mr. Preston, this is the 

second time I think in a couple of weeks. Thank you for coming before us. 

And we have talked at length—and we are going to with the next 

panel as well—about all the problems. And we know what those 

are. I just want to say that I do have a comfort level with Mr. Preston and Mr. Shear that you understand the problems that took 

29

place and that you want to remedy that and make sure that it 

doesn’t happen again. 

So my first question would be, because this Committee is going 

to continue to take a look at this situation and my Subcommittee 

on Oversight and Investigation is going to continue to take a look 

at it, how can we work together productively to: a) take care of everything that has happened in the past and resolve those issues 

but to make sure in the future that nothing like this ever happens 

again? 

Mr. SHEAR. Okay. I will go ahead. I hope what becomes apparent 

from the testimony and our two reports is that we are very factbased. We were looking at what happened in response to the Gulf 

Coast hurricanes. 

But much of our attention, especially in the latter stages, even 

before the July report was issued, is what lessons can be learned 

from this. How can we work going forward? How can we be prospective in terms of thinking that we shouldn’t let this happen 

again? How can we as an agency better prepare SBA and the Congress to serve victims of very major catastrophes, such as the one 

that we posed with? So I think that process is occurring and it is 

a matter of time will tell as far as how well that process works. 

I am encouraged by what has been evolving as of late in terms 

of our interaction with the Small Business Administration. 

Mr. PRESTON. What I would say is I am encouraged by the dialogue. I have full confidence that this Committee under Chairwoman Vela ́zquez’s leadership will stay heavily engaged with us on 

these issues, which I think is a very good thing. And so it really 

is I think maintaining that dialogue, understanding what we are 

trying to get to here. 

I think the Committee has already acknowledged kind of where 

we are trying to go. But, you know, I feel very good about the support and engagement of this group in getting us to the right place. 

Mr. ALTMIRE. And I do want to say again that I do get the sense 

that you definitely are sincere in that and you do want to work 

with us. And I would just say we return that and we do want to 

work together and hopefully improve this moving forward. 

The one other issue, in the GAO report, it says that the SBA had 

not effectively planned for the space requirements that would be 

warranted by a large-scale disaster and had not developed a longterm strategy to help ensure that it could acquire necessary and 

suitable space in the case of an emergency, which leads to the 

question—I am sure you have given this some thought—what is 

the SBA’s plan to acquire necessary and suitable space in the event 

that a large-scale disaster disables the agency’s primary processing 

facilities in Fort Worth? 

Mr. PRESTON. Right. We have significant additional space right 

now relative to our requirement. And as we look to reduce that 

space based on the current capacity, we are working closely with 

GSA to institute sort of an expansion capability. And those are discussions we are having right now. 

Chairwoman VELA ́ ZQUEZ. Mr. Sestak? 

Mr. SESTAK. Thank you very much. 

Mr. Preston, thanks for your time. I wanted to ask, it appears 

as though the demand that was so overwhelming had a lot to do 

30

with, as you had brought up, capacity. So my question is—and to 

some degree, I know you have addressed it—the difficulty is predicting the capacity that is needed for the future. What are the factors that you used or are using in order to predict the needed capacity for the future? 

Mr. PRESTON. Yes. I think there are a couple of different predictive tools that are relevant here. Once a disaster hits, we need 

to be able to very quickly implement a staffing and a facilities plan 

that would enable us to handle an anticipated scale. 

We have internal models that look at that. And generally we do 

a pretty good job of anticipating the volume that comes out of that. 

What I would tell you is underneath that, it is much more critical 

to ensure that you have the underlying processes and the systems, 

etcetera, etcetera, to enable you to meet that scale. 

So one piece is predictive. The second piece is implementation. 

The underlying implementation is critical. 

Mr. SESTAK. The reason I asked is it seems to me that you have 

a different philosophical approach than what GAO has asked you 

to do, I think. They felt that the two primary things that needed 

to be done as you go into the future were good planning based on 

simulation. They also said that you needed time frames laid out for 

producing this. 

When you read your testimony, it is not that you are dismissive 

of that, but you make a very strong statement, like you just did, 

that while addressing these issues, those two overall, planning, 

predicting for the future, as you just said, they help improve SBA’s 

preparedness. 

And then you turn immediately to the underlying processes that 

when something happens, are we ready? And you do have those 

models that predict that the characteristics of this ongoing disaster 

is this, so we need to do that. 

It seems to me—and the hardest thing that I ever saw to do after 

31 years in the military—what really hurts the most is that difference in the philosophical approach is you are backing away, it 

appears, from the predictive side. You looked into the insurance 

models, for instance, and seemed to dismiss them because they are 

based on 100-year types of occurrences. And, yet, that is what 

FEMA uses, 100 years and 500 years predictive, to come up with 

what flood plains are. And you can’t get FEMA’s loans unless sometimes you go through Small Business first in a disaster. 

And so philosophically my concern is while you are able to go 

through your testimony and see how much you have improved 

based upon what happened in Katrina, is that what you should be 

planning upon in the future? 

And so my real concern, sir, is that you have kind of nodded at 

GAO’s predictive modeling and said, ‘‘I am going to gear up when 

it happens because I now know I can gear up to 2,200 employees 

for disaster of which 750 are my reserve disaster core’’ and, yet, 

there is really no predictive planning for the future on this. 

Mr. PRESTON. Let me address that. I think what GAO came up 

with is a very important set of issues in planning. And I think 

when we talk about surge plan, what we need to be able to do is 

specifically with the kind of models that the GAO report suggests 

is be able to say—you know, Katrina was somewhat over 400,000 

31

applications—what could happen to bring a million people to our 

doorstep? And we have already begun looking at insurance models. 

We have talked with a number of other outside modeling groups 

to look at their model. We are having discussions with FEMA. So 

I apologize if in any way I seem dismissive of that because I think 

it would be very important for this conversation for us all to be 

able to say, ‘‘What does it mean to be able to surge to X? And does 

that meet the need in any kind of eventuality or are we agreeing 

that it wouldn’t?’’ 

So I concur with GAO’s recommendation there. And we already 

are beginning to investigate those types of external modeling. 

Mr. SESTAK. Have you put money into that modeling? I mean, 

modeling is pretty expensive. 

Mr. PRESTON. We haven’t— 

Mr. SESTAK. I just know from the ones I have done in the military. I mean, I know you are talking. But if this is so important 

and GAO’s recommendation is so important, are there millions of 

dollars placed or hundreds of thousands or something against, I 

mean, actually besides talking doing and investing in the right 

models? 

Mr. PRESTON. Well, obviously this recommendation is relatively 

recent. And we’re already getting out there and talking to people. 

So what I would tell you is no, we have not invested money in it. 

But I think there are many others. As you mentioned before, 

FEMA looks at things. I think we need to understand what is out 

there, what is the cost, should we be leveraging what other people 

in the federal government do. 

I am not sure that this kind of predictive modeling is the kind 

of thing that changes every month and requires a tremendous 

amount of rework all the time. I think it’s the kind of thing where 

when you look at the potential events that could happen out there 

and get your head around that, you get a pretty good sense of the 

operation you are going to have to build. 

Mr. SESTAK. You also just mentioned working with others. And 

in your testimony, you have mentioned how you are reaching out 

to locales in other areas. What cities specifically now, major U.S. 

cities, have you sat down with in order to enhance your coordination? 

Mr. PRESTON. Well, we have 68 district offices that are— 

Mr. SESTAK. Yes, sir. But, I mean, is there a new concerted type 

of effort that has now taken on to enhance the locale since that was 

critiqued pretty harshly in the sense of what happened in Katrina? 

Mr. PRESTON. Well, my view is we did a good job of that in 

Katrina. So if that was heavily critiqued, I know there were some 

issues. But I think generally the people in our district offices are 

very close to local leaders, local development authorities. They have 

very consistent relationships with them. 

Now, what has happened—and I think this may have preceded 

your entrance here. 

Mr. SESTAK. I am sorry. 

Mr. PRESTON. No, no. I just want to repeat it. 

—is what we have done—and we are in the final stages of working through this—is worked through a model to integrate those district offices because they have such good local coordination more efVerDate 0ct 09 2002 11:04 Jan 11, 2008 Jkt 033615 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\33332.TXT LEANN
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fectively with our disaster people when they get on site. And this 

is a comment that Mr. Jefferson had earlier. 

So what I would say we have done is because we have that good 

local presence and good connectivity, we need to leverage that better when disaster goes into those areas. 

Mr. SESTAK. My last question is, in your business intelligence 

tools, you have mentioned about the expanded use of performance 

metrics. What are they? 

Mr. PRESTON. The expanded use of performance metrics have a 

lot to do with looking at what is happening in our operations, getting deeper into looking at cycle times so we understand, you know, 

what aspects of the operation are backing up or not backing up, 

having much deeper data on all of the individuals. 

For example, we would never have known to put people in a 

records office if we hadn’t seen data that indicated that people we 

having a hard time getting their records done because there was 

such a backlog. 

Chairwoman VELA ́ ZQUEZ. Time is up. 

Mr. PRESTON. I am sorry. 

Chairwoman VELA ́ ZQUEZ. All right. 

Mr. SESTAK. Thank you. 

Chairwoman VELA ́ ZQUEZ. We have other members here. But before I proceed in recognizing Mr. Jefferson, Mr. Chabot, if they 

have any other questions, I just would like to ask Mr. Shear what 

is your reaction to Mr. Preston’s answer to Mr. Sestak regarding 

the agency investing in disaster simulation and disaster modeling? 

Mr. SHEAR. It is a very important point. And we are very conscious of the cost of investing in that. But part of what we observed 

in our work over the period at SBA was non-attention to even what 

is available in the public domain that could be implemented in a 

pretty practical and straightforward way. But part of what we are 

looking for in a plan is to what degree can you leverage those resources? So we have certain ideas about how those resources can 

be leveraged. And it is a question of come up with a plan for a comprehensive assessment. 

I want to make one observation on this because I think it is a 

very important one. I think what is clear is that a lot of attention 

has been paid to a very important issue, which is let’s try to resolve 

issues associated with service to the Gulf Coast hurricane victims. 

I mean, our hearts go out for those who have suffered through 

this. And certainly SBA and others should be trying to reach those 

victims. And certain improvements have been initiated to improve 

that. But I hope that there is a real emphasis on what do we do 

over the long haul going forward. 

I just want to make one more observation. It has to do with some 

of the transformation plans that have been around SBA. Many of 

the transformation plans have a focus on the 7(a) and other major 

business programs that they have where over time, due to technology and changes in the marketplace, there has been greater centralization of a lot of resources. And the idea is that we are trying 

to get rid of redundancies. 

But one of the most important things I think to recognize for all 

of us is that disaster planning involves contingencies. It involves in 

some case what you could say, backup facilities. They entail a cost. 

33

We are not calling for SBA to waste money. But at the same token, 

there has to be a recognition that you need to go through some cost 

to be prepared. And I think that so the framework, the thought 

process for disaster planning and for how to run a disaster program 

I think has to be different than SBA’s overall operation. 

Chairwoman VELA ́ ZQUEZ. In the investigation that you conducted 

based on the budget submission of the administration for the SBA, 

do you consider that the resources are there for the long-term disaster preparedness plan? 

Mr. SHEAR. Okay. You will get a grin out of me because we 

haven’t evaluated the budget submission to see whether we think 

it would be sufficient, but one of the things we are looking for is 

the idea is come up with a plan which is effective. We want a costeffective means, but we want SBA to be able to recognize and have 

resources in place or at least contingencies in place that also entail 

some costs to try to position itself for not just the next hurricane 

season or the next earthquake but looking down, as Mr. Preston 

has referred to, what happens if a few years from now the reserve 

corps decline, as they did after 9/11. We are looking for that sort 

of approach. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Chabot? 

Mr. CHABOT. Madam Chair, in the interest of getting to Mr. 

Baker and the witnesses that have come all the way from Louisiana and Mississippi, if we have any additional questions, we will 

submit them in writing. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

I will recognize Mr. Jefferson for two minutes. 

Mr. JEFFERSON. Yes, ma’am. God knows I don’t want to be disrespectful to the folks who came from Louisiana nor Mr. Baker, but 

I just want to ask this one thing. It will take a half second. The 

SBA has insinuated in this process because we can turn here by 

recovery, as opposed to the traditional lending programs the SBA 

has. And there are certain things that are going on now which are 

inflexible. I want to just ask you about looking at these from the 

point of view of flexibility that will help to facilitate the recovery. 

One, Mr. Melancon mentioned earlier, the road home program. 

If you get a grant from road home, you automatically must pay off 

the SBA loan. Okay. Not so? 

Mr. PRESTON. No. 

Mr. JEFFERSON. But the second one is this. On the subordination 

issue, we have had folks down there who had equity in their homes 

before the storm. They go out and get an SBA loan. 

They get the house fixed up using that and insurance, plus using 

other things. Now they get it re-appraised, and they have some equity there. They want to borrow money to go reestablish a business, let’s say. And when they do that, they go back. The SBA says, 

‘‘You can’t subordinate unless you pay off the loan.’’ That retards 

the idea of recovery, and it makes it more difficult. 

I just wanted you to think about— 

Mr. PRESTON. Thank you. 

Mr. JEFFERSON. —these issues of flexibility so that people can 

have a real chance to get back on their feet and get their businesses back, stood up, as opposed to just having a hard and fast 

34

rule that says, ‘‘If you have a refinancing and you take cash out, 

you must pay off the SBA loan, as opposed to being able to invest 

it in your business and get that back, up and going.’’ 

So those are the issues I am really concerned about, these issues 

of flexibility. That would put a sound decision we made to a recovery. 

Mr. PRESTON. Thank you. I would love to get with your team, 

Congressman. I meant to take you through the road home situation 

because I think there is a lot more to that. And I will also look into 

this other issue. 

Chairwoman VELA ́ ZQUEZ. Okay. I recognize that there are witnesses who came all the way from the Gulf Coast, but it is not 

every day that we have the administrator here. And we need to ask 

the questions that needed to be asked so that we prevent or avoid 

another situation where we will have to have not one more hearing 

but two or three or four. I wish that the situation that we witnessed in the Gulf Coast region doesn’t occur again. And that is 

why we need to take the time to ask the questions. 

And some of the witnesses that were coming from the Gulf Coast 

region because of the weather didn’t make it. And so I am going 

to be asking a question based on some of the written testimony. 

And that will be my last question. But also, Mr. Preston, I will be 

submitting written questions to you. 

One of the primary benefits, Mr. Preston, that you described for 

the improved disaster program is increased accountability. And, despite these efforts, we have heard from disaster victims who are 

here today that these benefits haven’t materialized under the case 

management model. What will you do to address this problem and 

improve accountability? 

Mr. PRESTON. Okay. Well, I, as I do in all of these cases, try to 

understand what the underlying issue is. But accountability I think 

has been increased dramatically. And I don’t think we could have 

ever achieved the results that we did without much greater accountability. 

Now, with dealing with these numbers of people, obviously it is 

a new process. As I mentioned in my testimony, we’re not perfect 

yet. And I give out my e-mails. I get those e-mails from people directly. I follow up on every one of them. And I see what those problems are. So we continue to have them. But accountability in this 

program is dramatically higher. And I don’t think we could have 

ever shown these results without that. 

Chairwoman VELA ́ ZQUEZ. Mr. Shear, any reaction to the case 

management model that they have? 

Mr. SHEAR. I am sorry. We haven’t evaluated it. 

Chairwoman VELA ́ ZQUEZ. Well, we are going to hear from some 

other witnesses that they are still being passed from one case manger to the next, the documents still have been lost, that they have 

been submitting and resubmitting those documentation. And, yet, 

they do not get an answer. 

Mr. PRESTON. Let me address something. I have held public forums in the Gulf. I was with 70 borrowers from the New Orleans 

area a couple of months ago, public forum, open mike. Come and 

tell me exactly everything you are doing wrong. 

35

Believe me, I talk with people on the phone. I correspond with 

them. There are still going to be issues. And there is no doubt 

within 23,000 people you will find people that aren’t happy that we 

have not dealt with appropriately because somebody wasn’t trained 

well or we didn’t have somebody on the phone that was effective. 

The other thing that we are going to find is we have begun 

shrinking our operations because we have handled so much of the 

demand. So some of these case managers are leaving and we are 

handing them over to new case managers. And there are cases 

where that hand-off isn’t as effective as it should be. 

So I have no doubt you will be able to find people, but I will tell 

you by the meetings I have had—I have talked to many local leaders—we are getting an overwhelmingly positive response from people and people that we wouldn’t necessarily expect to get those responses from. 

Chairwoman VELA ́ ZQUEZ. Well, I want to thank both gentlemen. 

And I will ask Mr. Preston that some of you will stay here so that 

they could listen to the witnesses’ testimony. And now I just want 

to welcome our colleague Congressman Richard Baker. 

STATEMENT OF THE HONORABLE RICHARD BAKER, 

CONGRESSMAN, U.S. HOUSE OF REPRESENTATIVES 

Mr. BAKER. Thank you, Madam Chair. I appreciate the Committee’s courtesy in allowing me to be able to make brief remarks. I 

know Mr. Melancon appeared here earlier in the day. 

Just a quick infomercial about Katrina’s response and community rebirth in light of comments I have heard from members. If 

you were to imagine every person in this room represented a 

household and that the morning after the storm you were to come 

into this room and everything is gone, not just a question of the 

house, it is a question of the car, you know, the pets, the grocery 

store, the school, the policemen, the firemen. 

In Mr. Melancon’s district, there was a community of 67,000 people that 6 months after the storm had 212 operating utility meters, 

67,000 people gone. So the magnitude of this is really beyond anyone’s comprehension. 

And I don’t personally fault government entities for their failure 

to respond in the most efficient manner possible, but it does 

present this Committee and this Congress with opportunities to do 

the thorough examination that you are engaged in. And for that, 

I am very appreciative. 

I would like to point out that in the case of rebuilding, the road 

home that has been made reference to this morning is a very troubled road home. I am now calling it home alone. The reason is that 

as of last week, there were 501 closings for a disbursement of $31 

million or an average payout of $62,000 for a program that is funded by this Congress at the level of $7.5 billion. 

We now have an almost $2 billion additionally for hazard mitigation funding, which is to take property out of commerce and to preclude rebuilding on those sites forever. Not a dime has been spent. 

We have a total of $9.5 billion, of which 31 million has been put 

into the hands of individuals. If you are wondering why nothing is 

happening, that is a good place to start. 

36

But even, Madam Chair, if you had the money and you lived in 

your neighborhood and Mr. Chabot and Mr. Jefferson were your 

neighbors and you did not know what their plan was to return, 

would you actually spend your disposable income on that house in 

that desolated neighborhood not knowing what the future economic 

value would ultimately be? Many people are simply not choosing to 

come back. 

As the administrator indicated, there are 23,000 people looking 

to decide what to do on their SBA loan for which they may have 

been approved. They can’t come back until there is a systemic resolution to this problem. 

Today the funding is made available to individuals. And individuals make decisions about whether they should come back to a 

community for which they do not know if there will be a school for 

their child or a policeman to respond. That is a recovery which is, 

at best, on very weak legs. 

I come this morning to join with Mr. Melancon on a bill that has 

been introduced in the Senate that I think would greatly aid the 

resolution of SBA lending assistance. There exists now a preferred 

lender program with qualified banks, which I am sure the Committee is aware of, where we hand off as an SBA to the banker the 

right to make expedited loan decisions and the bank has the right 

to extend the government guarantee without the government formally being involved in the process prior to closure. That is based 

on a relationship the bank has built successfully with the SBA. 

The bill we are proposing models after that program very similarly in that it allows the SBA to pre-clear approved banks to be 

able to make loans to disaster victims without the necessity of having to go through a burdensome or lengthy SBA pre-approval process. I think it would make great sense. It would avert the problem 

that many of my colleagues have about ratcheting up employee levels to an unwarranted amount and not having a concurrent disaster that justifies the presence of those employees. 

Where will the next disaster fall? We don’t know. Does it make 

sense to have a lot of people in the Gulf and, yet, we are worried 

about an earthquake in California? How do we deploy? That is one 

thing, unfortunately, nobody has the ability to predict. 

However, what we do know, in the State of Louisiana, 90 percent 

of the businesses employ less than 30 people. Louisiana is a tourism, arts, crafts, personal services type of employing entity. And 

those people all have relationships with some form of the bank customer. And so by deploying the banker to be able to be the emergency responder subject to oversight and supervision of the SBA 

seems to make a lot of strategic sense to me. And in most cases, 

the banker has a better understanding of that ability to repay than 

a newly trained SBA employee, who may not have been on the job 

30 days prior to arrival in the city to respond to the emergency. 

Getting people, as Mr. Jefferson said, who know each other to 

make judgments about creditworthiness is a far superior methodology than to a government-imposed, very expensive, often inefficient, and certainly very lengthy process that doesn’t give us the 

response that we would all like to see. 

So I strongly recommend the approach. Certainly there are areas 

where the Committee may choose to modify slightly. We were back 

37

and forth on whether or not the fees should be artificially set. We 

know on the home loan bank side, where lending occurs through 

that system, that there is a capped amount of fees the bank can 

make. A strong argument has been made by the banking community that it should be a negotiated item depending on the terms of 

the event in which you are engaged. 

Don’t forget that in the midst of our devastation, we lost the 

banks, too. And the only way that we had the capacity to engage 

in financial services was through automatic teller machines or via 

the Internet through remote locations. And so institutions which 

were entirely domiciled within the region of the disaster were without service, period. That created enormous problems for people in 

rural communities who only had that banking relationship. 

We strongly recommend the Committee’s consideration of the approach. And I would be happy to answer any questions the Committee may have. 

[The prepared statement of Mr. Baker may be found in the Appendix, on page 61.] 

Chairwoman VELA ́ ZQUEZ. Mr. Chabot? 

Mr. CHABOT. Thank you, Madam Chair. 

I would just like to commend the gentleman and his colleague 

who testified earlier because we are seeing two gentlemen who are 

from the area who have seen this firsthand and they have come up 

with a bipartisan solution. It doesn’t mean it is a perfect plan, but 

this Committee will look at it. And I want to commend you for 

bringing this forward. 

Mr. BAKER. Thank you, sir. 

Mr. CHABOT. Thank you for testifying. 

Chairwoman VELA ́ ZQUEZ. Do you have any more? 

Mr. JEFFERSON. I just want to commend Mr. Baker, too, for the 

efforts that he has made going back to the last session, when we 

had the Baker bill here that had the idea of bringing back communities as you brought housing because people can’t live in places 

without communities. And I appreciate his observations, and I appreciate the efforts he is making to extend his work. Thank you. 

Chairwoman VELA ́ ZQUEZ. Mr. Gonza ́lez? 

Mr. GONZA ́LEZ. Just briefly. Again, thank you for your patience. 

And, of course, for those who may not be aware, Congressman 

Baker is a highly regarded and esteemed member of Financial 

Services. And he knows what he is talking about. 

Just as a member to member, when things go wrong and a federal agency or department is not responding, we get those calls. 

What has been your experience from individuals in the area that 

have expressed their concerns, complaints with SBA, if any? 

Mr. BAKER. A very high level of frustration. And I can honestly 

say, though, in defense of the SBA, it is not a singular complaint 

about a particular agency. People are mad about everything. It is 

not Democrat/Republican. It is not federal, state, or local. If you 

say, ‘‘I am from the government,’’ you don’t get any further before 

they give you an earful. 

And they have every right to be feeling that way. When you go 

back to the numbers that I outlined at the beginning aimed at 

housing and how small, infinitesimally small, percentage of dollars 

have actually been put into the hands of people, you can underVerDate 0ct 09 2002 11:04 Jan 11, 2008 Jkt 033615 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\33332.TXT LEANN
38

stand if you are sitting there with debris still on your lot living in 

a trailer, which, by the way, that is another whole chapter of our 

lives, it is certainly a very depressing outlook for people who are 

trapped in a seven or eight hundred-person trailer park with no 

prospect of going back to a job which used to exist with no alternative training to get education or skills to go off in another direction. 

And this is true whether you would be fairly well to do or whether you are poor. I had a distinguished senior member of an architectural partnership sitting in my Baton Rouge office just weeks 

ago. He is now living in a rental property north of the City of New 

Orleans in a very rural community. All of his receivables for work 

that was in process are not being paid because you can’t go out and 

sue somebody because their business is gone, their plans to rebuild 

are over. All of his employees have disbursed. 

It is truly an amazing set of circumstances to think that almost 

two years after the effect of landfall in this country, we still view 

significant ruins. I don’t know if there will be historic ruins or 

something that will be turned about in a short period of time, but 

this goes to the core of questioning how this government works. 

And certainly what we pay or what the people who lived and 

worked in Orleans and the surrounding areas paid in the way of 

taxes, what were they waiting to rely on when devastation occurred? And there is great room for improvement at all levels. 

I don’t make this comment specific to SBA. I just think there has 

got to be a better way to handle the extraordinary amount of 

money you have made available with the best of intentions to help 

people recover and seeing what we now have in front of us. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. GONZA ́LEZ. Thank you very much. And thank you for your 

service. Thank you, sir. 

Chairwoman VELA ́ ZQUEZ. I want to thank you and commend you 

for all your efforts, your passion, and your concern. This is just not 

about the Gulf Coast region. This is how can we best be prepared 

to assist small businesses when a natural disaster strikes again. 

We will be looking at legislation. One of the concerns that I have 

is how affordable those types of loans will be for victims who have 

lost everything. 

Mr. BAKER. Madam Chairman, I appreciate your attention and 

interest. My grave concern is that going forward we simply cannot 

let this happen in another community and have a similar outcome. 

Any way I may be of service I certainly want to be. Thank you. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

And now I would ask the third panel to please take your seat: 

Mr. Edward Francis; Donna Colosino; and Mr. Bryan McDonald. 

Good afternoon to all of you. Welcome. And thank you for your patience. 

I will introduce Mr. Edward Francis. He is the Chief Operating 

Officer of the Hancock Holding Company in Gulfport, Mississippi. 

Hancock Holding Company, established in 1899, is a certified SBA 

lender that was itself impacted by Hurricane Katrina with the loss 

of its headquarters and several other businesses that were impacted through its lending programs. Mr. Francis is here today on 

behalf of the American Bankers Association. 

39

Then we have with us Ms. Donna Colosino, who along with her 

husband owns CRESCENT Power Systems. They sell electrical 

power generation equipment to large industrial clients in three 

states. The Colosinos’ business property and documentation were 

destroyed after the 17 street levees in New Orleans broke. They 

are trying to secure an SBA loan to repair their facilities. They, 

too, have been in the process with SBA for a year and a half and 

will share their experience with the Committee. 

And now I will recognize Mr. Chabot, who will introduce his witness, Mr. Bryan McDonald. 

Mr. CHABOT. Thank you, Mr. McDonald. My understanding is 

that you are the Director of the governor, Governor Barbour’s, Office of Development. We appreciate your testimony here this morning and look forward to hearing it. Thank you. 

Chairwoman VELA ́ ZQUEZ. Mr. Francis, you may proceed. 

STATEMENT OF EDWARD FRANCIS, CHIEF COMMERCIAL OFFICER, HANCOCK HOLDING COMPANY, ON BEHALF OF THE 

AMERICAN BANKERS ASSOCIATION; ACCOMPANIED BY 

DONNA COLOSINO, CO-OWNER, CRESCENT POWER SYSTEMS; 

AND BRYAN McDONALD, DIRECTOR, MISSISSIPPI OFFICE OF 

DEVELOPMENT 

Mr. FRANCIS. Madam Chair and members of the Committee— 

Chairwoman VELA ́ ZQUEZ. I am sorry, but let me just state that 

every witness will have five minutes to make your presentation. 

And then you can enter your whole presentation for the congressional record. 

Mr. FRANCIS. Thank you. 

My name is Edward Francis. And I am the Chief Commercial Of- ficer of Hancock Holding Company. Hancock is a $6 billion institution that is headquartered in Gulfport, Mississippi. It has been in 

existence since 1899. We operate over 100 branches in Louisiana, 

Mississippi, Alabama, and Florida. I am pleased to be here today 

to represent the American Bankers Association. 

When Hurricane Katrina struck the Gulf Coast in 2005, Hancock’s headquarters building and numerous branch offices along 

the Gulf Coast were wiped out. Our entire computer operations 

center, loan operation, and deposit operations shops were lost. Despite the devastation, we were able to open some branches the very 

next day to service our customers. 

It took weeks before we learned the fate of our associates, but 

one by one they were all accounted for and were willing to do whatever it took to ensure that our customers were taken care of. 

When a disaster like the Gulf Coast hurricane strikes, the most 

immediate need that small businesses face is money, money to pay 

for cleanup, money for building repair and supplies, money to pay 

their staff, and money to keep their businesses and the local economy moving. However, several problems inherent in the SBA’s disaster lending program prevented the agency from meeting this 

need in a timely and efficient manner. Many of these problems still 

exist today. 

The hurricanes were followed by an extraordinarily high volume 

of SBA disaster loan applications, more than 2 million by last May. 

To handle the large volume, the SBA was forced to hire and train 

40

temporary staffers that had no prior loan experience or familiarity 

with the SBA’s policies. 

This required precious time. It was largely responsible for the 

long delays in application processing. Disaster victims had to wait 

an average of 74 days for the SBA to process their loan applications, a far cry from the SBA’s stated goal of 21 days. 

The ABA believes that a practical solution is for banks to be 

more directly involved in SBA disaster lending process, much like 

Mr. Jefferson and Mr. Baker had mentioned. 

Banks are well-suited for this purpose. Banks, many banks, are 

certified SBA lenders and are familiar with the SBA procedures, 

placing them in a good position to help the agency and disaster victims. 

Integrating banks directly in disaster lending will allow the SBA 

to take advantage of the licenses that banks already have with individuals and businesses in the communities. It will also allow the 

SBA to rely on the existing expertise of our bank loan officers and 

will avoid problems associated with hiring temporary staff. 

Capitalizing on these existing assets is the most effective way to 

get disaster lending into the greatest number of victims’ hands in 

the shortest time possible. 

The SBA’s disaster lending program should be modeled after the 

agency’s 7(a) lending program. Because of the nature of disaster 

loans, some of the elements will have to be different. 

We recommend that the SBA offer a higher loan guarantee, 

waive some collateral requirements for smaller loan amounts, and 

allow longer repayment terms for disaster loans. This will prevent 

the cash flow problems the victims face immediately after a disaster. Giving them adequate time to rebuild would create a stronger incentive for banks to get involved in disaster lending. 

Madam Chair, at Hancock Bank, we had a longstanding culture 

that we would be the first to open and the last to close after any 

hurricane. Immediately after the Gulf Coast hurricanes, we created 

an outreach program so that we could thoroughly assess the needs 

of our business clients. These efforts helped ensure that the relationships we have built over the many years would not be simply 

swept away with the tides of the disaster. 

We are proud of our accomplishments and know that other banks 

are just as committed to the long-term economic stability of their 

communities. Improving the SBA disaster loan program will help 

us rebuild our communities quickly and efficiently in the wake of 

disasters. We look forward to working with the Committee toward 

that goal. 

[The prepared statement of Mr. Francis may be found in the Appendix, on page 92.] 

Chairwoman VELA ́ ZQUEZ. Ms. Colosino, you will be recognized for 

five minutes. 

STATEMENT OF DONNA COLOSINO, CO-OWNER, CRESCENT 

POWER SYSTEMS 

Ms. COLOSINO. I want to express my thanks, Madam Chairman, 

and to all the members of the Committee for holding this hearing, 

first, and for allowing small business also to give a face and a voice 

to our experience. 

41

Can I ask a question? Is there anyone from SBA in the room? 

I am part of an organization called Second Wind. Second Wind is 

a grass roots organization that was formed post-Katrina in the 

New Orleans area. It is small business people helping small business people. So I am proud to be here as a member of Second Wind. 

You heard a little bit about our business. We have been in business for 13 years. Our 2006 sales were about $7.7 million. We are 

basically a manufacturer’s representative business. Our clients are 

Exxon and Chevron and General Hospital and LSU Medical Center. So when we responded to the hurricane, we responded to their 

issues promptly. 

Our property was located in Lakeview, which is a now famous 

community, about a mile from the 17th Street Canal. We sustained 

no damage in the hurricane. Basically we were able to call into the 

building, get our phone messages. So we were like ‘‘Good. We lived 

through this.’’ 

However, when the levee failed, the building was swamped with 

about 12 feet of water for several weeks. So we lost everything. We 

lost our inventory. We lost all parts of our business, including all 

business documentation that we had for 13 years. 

I am going to summarize our experience for SBA loan number 

906149, which was supposed to help us address our catastrophic 

business losses. This testimony is based on the notes I kept in that 

process. 

As a small business attempting to recovery from disaster, several 

themes emerged in our experience with the SBA. One, there is no 

accountability at SBA, not today, not a month ago, not two months 

ago, not a year ago. 

Two, there is no continuity and virtually no follow-through. I 

have been passed off to more than 20 different owners, however 

you label them, of my file. 

Three, the process is grossly redundant and obviously excruciatingly slow. We were asked to provide the SBA with the same materials again and again at least a dozen times, at least a dozen times. 

Number four, while usually outwardly nice enough,—and some 

vary and some not so—SBA representatives were typically clueless 

about our application, I mean like ‘‘Who are you?’’ clueless, ‘‘What 

do you want?’’ clueless. We were given off-the-cuff advice by different representatives that contradicted, you know, what other people had told us over and over again. 

In addition to taking forever after all, we still have not received 

the loan, for which we were approved. Working with SBA after a 

disaster is like having a second job. It takes a toll on your time, 

your resources, and your well-being. 

Our application was filed the 13th of October, 2005. Early January of 2006, there was a site visit at our location. And January 

25th of 2006, we were approved for a loan for $250,000. In that 

time frame, while it was tense and hard for us, okay. So a year ago, 

more than a year ago, we were approved for a loan for $250,000. 

I want to make a point that Mr. Preston said that the loan 

amount was under three percent. That is only for homeowners. 

Small business owners pay four percent, which is, as you know, 

about two percent above market. 

42

Nina, Amy, Mike, Chad, John, on and on, the representatives 

that we spoke with, all the way through about May. Again, every 

time I speak to someone from SBA, without fail, they don’t know 

who I am. They don’t understand anything about my claim. 

Did we have outside challenges, as Mr. Preston said? Yes, we 

did. We were responding to our clients’ very urgent needs. 

Let’s be clear on another point, very clear. The federal govern- ment, which is extending me a loan for $250,000 and I am willing 

to pay 4 percent on that loan, not asking for help that I’m not willing to pay for—okay. 

Let’s move to May 17th of 2006. And we received an initial dis- bursement of $10,000. This is a very important point. At that point, 

SBA sort of chucked us off the list. And our loan has been serviced. 

I am continuing to ask for the fulfillment of that loan, but that 

$10,000 moved us from one box to another. So somehow I am included in that 98 percent that has been serviced. And I have clearly not been serviced. 

And, worse yet, the clock starts to tick on your one-year grace period at that point. Okay? So you have one year to repay. Well, now 

our clock is ticking from May of 200. And you say, ‘‘Well, surely 

you want to repay that $10,000.’’ 

And I would say, ‘‘Absolutely. Absolutely.’’ And I will start repaying that. But my loan is coming due in full in May of 2007. 

I am not alone. Do not think they pulled me out of a pile of great 

experiences from SBA and stuck me up here because I have the 

one bad story. My loan will come due May of 2007 for $250,000, 

and I have received $10,000. I have the bill right here telling me 

when it is going to start to be repaid, just so you know. 

Okay. Fall of 2006, the reengineering process that I heard so eloquently spoken of has now been kicked into place for about three 

months. Okay? So I get a call. I call in again, just to check, as I 

have routinely, repeatedly. And I speak to Mr. Jeff Hardway, who 

asked me to resend all documentation again. This is three months 

after the team process has been in place. 

I resend it. I resend it to him, call again, ask to speak to Mr. 

Jeff Hardway. There is no Jeff Hardway. ‘‘We don’t know anybody 

by that name. Can we help you?’’ This is our next loan officer, 

which is loan officer number 18. This was in October of this year, 

Appalonia Arayza. He says, ‘‘I’m sorry. I don’t have any information. Can you tell me what happened? And can you resend all the 

documentation?’’ Okay. 

So we worked through that process. Finally in January of 2007, 

we send our notarized loan documents into SBA. Okay? A full year 

after we were approved for this loan, we send in the loan documents. They are notarized. Everything is as we have been told it 

should be. 

I called back in another three weeks, two and a half weeks. No 

Appalonia Arayza. I have a new loan manager. Does he know anything? His words to me were—and I am quoting—‘‘Who are you? 

And what do you want?’’ 

I’m thinking, ‘‘Okay.’’ Your gut reaction is to cry or yell, but no. 

I think maybe this is the one. Okay? Maybe this is the person at 

SBA that will listen, that will hear, and that will do something for 

us. 

43

If there are 23,000 people whose loans have not been disbursed, 

you are looking at someone who is in the area of SBA loans that 

have been disbursed. I have heard so many MBA terms here. One 

of the MBA terms that came to my mind was, ‘‘GI, GO.’’ And that 

means garbage in, garbage out. My loan has not been disbursed. 

I am not in that number. I want you to understand that. 

Another thing I need you to understand is that now I am being 

told by my newest loan officer that I have to provide receipts, receipts on amounts up to $250,000 in order for me to receive it. So 

what that is saying is I have to spend my loan to receive it. That 

is not exactly facilitating the process of renewal in a community 

that is hurting. 

So I heard a little bit, too, about demographics. And maybe the 

demographics of the area has a reason for us not recovering. But 

I would say to you that if you have been told and if you believe 

that this SBA has been re-engineered and if you have been told 

and if you believe that all of those loans had been processed appropriately because my loan is on the checkmark side of being done, 

you are getting bad information. And please don’t allow yourself to 

be given bad information. 

I would not even tell this story at a New Orleans cocktail party 

because I’m telling you it wouldn’t raise an eyelash, an eyebrow. 

Everybody has this story. 

I swear to you on my father’s grave this is the story. I am not 

an anomaly. I would never have taken the time to do this. My husband wouldn’t have taken time away from our business to do this 

had we thought we were an anomaly. We are not. I promise you 

we are not. 

[The prepared statement of Ms. Colosino may be found in the Appendix, on page 111.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Ms. Colosino. 

Mr. McDonald? 

STATEMENT OF BRYAN McDONALD, DIRECTOR, MISSISSIPPI 

OFFICE OF DEVELOPMENT 

Mr. MCDONALD. Good morning. I would like to thank the members of the Committee for allowing us to share with you about the 

state of small business recovery that is occurring in Mississippi. I 

want to thank you very much, Madam Chairwoman and Ranking 

Member and distinguished members of the Committee for giving 

me the opportunity to visit with you here today. Also, as one who 

rarely gets to see snow, I want to thank you for making that happen. 

On August the 29th, 2005, Hurricane Katrina struck Mississippi 

with a terrible blow. Although the eye of the storm landed at the 

Mississippi-Louisiana line, that eye was more than 30 miles wide. 

And Katrina completely devastated our entire coastline of some 80 

miles. The miles upon miles of utter destruction are somewhat unimaginable except to those of you who may have had a chance to 

witness it with their own eyes. 

This hurricane wasn’t just a calamity for the Mississippi Gulf 

Coast. Its impact reached far inland, all the way into our state. We 

recorded hurricane-force winds more than 200 miles from the Mississippi coast. 

44

Damage along our Gulf Coast was widespread. And damage estimates totaled more than $125 billion. FEMA has reported that over 

65,000 homes in south Mississippi were damaged or destroyed. 

Electricity was lost for some 80 percent of the state’s 3 million residents. More than 45 million cubic yards of debris were left in the 

hurricane’s wake in south Mississippi. So Hurricane Katrina’s effects on Mississippi alone would rank her as the largest natural 

disaster ever to strike the United States. 

Small business women and men across our state found themselves having to scramble. They had to adjust and innovate just to 

make do. And it was the spirit of those people, people of our small 

business community, that helped pull us through. Our people are 

strong and resilient and self-reliant. And from day one after the 

storm, they got to work and did what had to be done. They helped 

themselves, and they helped their neighbors, often when they 

didn’t have. Their spirit has been an inspiration to all of us. And 

the spirit remains the key to our recovery and rebuilding and renewal effort. 

SBA has been a strong partner with Mississippi. And SBA’s business and economic injury loan programs have aided thousands of 

Mississippi businesses. With more than $500 million in loans, the 

SBA has also offered, as you know, physical disaster business loans 

of up to $1.5 million to repair or replace businesses that are located 

in the declared disaster. 

Additionally, SBA’s economic injury loans for small businesses 

provide financial assistance to small businesses that suffered substantial economic injury. Our small businesses in some 67 Mississippi counties affected by Hurricane Katrina have also taken advantage of the SBA-backed loans of up to $150,000. Those loans, 

known as go loans, have been delivered through local banks and 

have been handled under an expedited process that in some cases 

have delivered a response on a loan in 24 hours or less. 

SBA has also served as a very good partner for Mississippi 

through our homeowner assistant grant program. Prior to disbursing HUD-funded homeowner assistant grants, the state must 

share the information with the SBA to ensure no duplication of 

benefits exists. 

We would like to thank the SBA publicly here for their efforts 

to ensure that timely payments to homeowners are made. That information, the search for duplication of benefit, is currently being 

provided on a 48-hour turnaround basis. We certainly appreciate 

that. 

SBA’s assistance along with the hard work of our state and our 

citizens has helped spur a tremendous economic recovery in our 

state. With employment levels now above pre-Katrina levels, Mississippi’s economy recovery is in full swing. Ongoing recovery efforts will require continued investment, innovative partnerships, 

economic incentives, and workforce training. 

While much has been achieved in the months since Hurricane 

Katrina, our work to recover, rebuild, and renew is a marathon effort that we know will take years. Much opportunity lies ahead. 

Hurricane Katrina with all its destruction gave birth to a renaissance in Mississippi that will result in rebuilding our state bigger 

45

and better than before. Small businesses will be at the heart of 

that renaissance. 

Small business women and men of our state have been a model 

of the spirit and character of our people. They remain strong and 

resilient and self-reliant, though they have endured terrible hardships. They bore the worst of Katrina. And many are still living in 

conditions that amount to deprivation, but they persevere. 

Our state’s small business community is rebuilding one day at a 

time. And we ask for your continued assistance in helping them 

move forward. Through your efforts and the efforts of the people 

of our great state, we will rebuild. And it will be a Mississippi that 

exceeds anything we have ever known before. 

Thank you, Madam Chairwoman. 

[The prepared statement of Mr. McDonald may be found in the 

Appendix, on page 105.] 

Chairwoman VELA ́ ZQUEZ. Thank you. I want to thank all of you 

for your presentations and especially Mrs. Colosino, your powerful 

presentation on your experience with the SBA disaster loan program. 

Mr. McDonald, I just can’t help myself but ask why is it that experience in Mississippi with the SBA has been so dramatically different than the one in Louisiana? 

Mr. MCDONALD. Madam Chairwoman, I will share a couple of observations on that point. It is very difficult to use the term 

‘‘blessed’’ when you speak of what happened at Katrina. So I will 

use the term ‘‘fortunate.’’ 

We experienced a hurricane. We did not experience a flood. 

Therefore, arguably, we had a 90-day head start in that respect 

with the SBA because we didn’t have to wait for water to recede. 

I also want to share with you that we have been very focused and 

very deliberate about taking steps to remove any barriers to communication. 

Administrator Preston has facilitated that process and met with 

us on many times. And, much in the spirit that is offered here, we 

know it is not a perfect world. We recognize, this Committee clearly 

recognizes that more needs to be done sooner. We have been fortunate in our communications with SBA to engage them on a level 

in which they respond in the same manner. They have been eager 

to work with us and remove those barriers. 

Chairwoman VELA ́ ZQUEZ. Did you have any experience with victims, especially small businesses, in your area regarding the relationship in assessing the service from the Small Business Administration disaster loans? Were there any backlogs? Were there any 

loss documentation, runaround, any of the things that we have 

been hearing from the other part of the region? 

Mr. MCDONALD. Yes, Madam Chairwoman. And I certainly didn’t 

want to paint a picture of a perfect world. We experienced some of 

the same, many of the same, instances, again, I believe on a somewhat smaller scale because of the size of our affected community. 

And what we found is as we elevated those issues and sought expedited attention from the SBA, that we were in most cases able to 

receive that. 

Madam Chairwoman, much like in parts of our brother or sister 

state, you know, in Mississippi, in the 80 miles of coast that were 

46

affected, small businesses are more than just the economy that provided the paycheck for my father that allowed me to go to college. 

Small businesses are the fabric. They are the corner store where 

life happens. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. MCDONALD. And so we really saw a pointed response from 

the community. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Ms. Colosino, I understand that your loan file has moved among 

different loan processing teams and case managers since the agency implemented its new case manager system. Have you seen this 

as an improvement over their earlier system? 

Ms. COLOSINO. No, clearly not. We have not seen an improvement. In fact, I didn’t even know there was a new system implemented. That was news to me. So it has been the same experience. 

My testimony has the language in it, I guess, that reflects that 

change. I just didn’t know. But we have continually been passed off 

again and again and again. So in any organization, that would 

never work, doesn’t work here. 

Chairwoman VELA ́ ZQUEZ. You mentioned a dozen times where 

you have to resend your documentation. Do you know if this happened after the new case management system was implemented? 

Ms. COLOSINO. Well, I have sent it—I don’t know—probably half 

a dozen times since then, since the new case management system. 

Chairwoman VELA ́ ZQUEZ. The new case management system was 

implemented in the summer. Have you had to resubmit documentation ever since? 

Ms. COLOSINO. Yes, ma’am. I have had to resubmit at least half 

a dozen times and as late as November. 

Chairwoman VELA ́ ZQUEZ. We have heard many small businesses 

to say that time is of the essence following a disaster situation. In 

your experience, what is the appropriate time frame for receiving 

financial assistance? 

Ms. COLOSINO. Well, the 74 days that apparently is the average 

probably is too long. You know, for us we liquidated our own savings. We had to sell our house eventually. Had we been able to receive our loan in a more timely manner, we wouldn’t have had to 

do that. 

You know, 74 days to me sounds great. I am at 380-something 

days. So I would say, you know, wouldn’t it be great if you could 

do it in 60, awesome if you could do it in 45? A regular loan takes, 

you know, five weeks. Anything is better than 380. 

Chairwoman VELA ́ ZQUEZ. Would you like to comment, Mr. 

Francis? 

Mr. FRANCIS. Yes, ma’am. Thank you. 

Having serviced hundred of thousands of small business, we saw 

the need arise immediately. We saw businesses that wanted to 

take advantage of the cleanup that needed to buy new equipment. 

A big pressing need was the worry about where their employees 

were, the fact that they needed to make payroll to keep those employees so that when they returned, they could return to work. 

Those needs are immediate. They are the day after the storm. It 

is not 60 days. It is not 90 days. It is immediately. And I can’t 

stress that enough, that it is waiting on the SBA. Even if it is 74 

47

days, it is too long. We need to be a in a position that we can react 

to those businesses and help them immediately. 

Chairwoman VELA ́ ZQUEZ. The system that they need to get their 

feet back on track and keep their businesses open or just close the 

businesses out altogether. 

Mr. FRANCIS. I am sorry? Repeat that. 

Chairwoman VELA ́ ZQUEZ. What I am saying is that time is of the 

essence. And if they don’t get in a timely manner the cash assistance that was promised to them and they keep waiting and waiting, they will lose their businesses altogether or, like in some many 

instances, people will decide not to move back into the area. 

Mr. FRANCIS. Exactly. That is exactly what has happened. We 

have many businesses that were not borrowing money that had 

checking accounts with us that didn’t go apply for loans, that just 

basically closed shop and left. 

Chairwoman VELA ́ ZQUEZ. In your testimony, you describe how an 

increased deferment period will significantly benefit small business 

borrowers. What length of deferment do you believe is appropriate? 

Mr. FRANCIS. Well, a lot of that depends on the type of business. 

If you have to rebuild your whole building to set up your manufacturing shop, that is a lot longer. If it a restaurant that needs to 

buy new equipment and new tables and chairs to put in place, it 

is a shorter process. And so it all depends on the business. 

I think that is where the bankers really come into play is because we know these people. We know the businesses. We know 

how those cash flows work. We know the character of those individuals. And so we can deal much quicker, much more directly with 

those folks. And we understand those different types of businesses 

because of the experience that we have. 

Chairwoman VELA ́ ZQUEZ. You heard Mr. Baker, Congressman 

Baker, talking about including private lenders in the disaster lending process. Would it be necessary for the SBA to make a 100 percent guarantee or would an 85 percent guarantee be sufficient to 

ensure the private sector coming in? 

Mr. FRANCIS. No, ma’am. We would not like to have 100 percent 

guarantee. Eighty-five percent guarantee is sufficient. That is, we 

share in the risk of that. It is not the government’s money going 

out. It is private capital money going out through the banks. 

Eighty-five percent guarantee in a situation that is a little less, 

I guess, rigid in documentation because of the immediate need 

would be more than enough to get monies in the hands of small 

businesses. 

Chairwoman VELA ́ ZQUEZ. So under the proposal that you were 

making, how would banks ensure that interest rates are kept low 

for disaster loans? 

Mr. FRANCIS. Well, that is a very good question. And that is the 

one thing that really drives the demand for small business disaster 

loans, is the interest rate. If those interest rates were the same as 

a mortgage loan or a regular business loan, nobody would go 

through that rigmarole to get a loan except the ones that are the 

least creditworthy. 

So I think that the government has to think about a way to subsidize the interest rates, not for the banks’ benefit but for the benefit of the borrowers, so that we could pass on those savings to the 

48

customers. That would be a very effective tool to get low cost of 

capital in the hands of individuals and the borrowers and small 

businesses. 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Francis. 

And now I recognize Mr. Chabot. 

Mr. CHABOT. Thank you, Madam Chairwoman. 

Mr. Francis, since most disaster loans are those for physical 

damage suffered by homeowners, would it make sense to have 

banks process homeowner disaster loans and allow the SBA to 

focus on disaster loans for businesses? 

Mr. FRANCIS. Well, I tell you what. I think that the SBA in my 

opinion does a better job of processing the individual loans than 

they do the business loans. And the reason why is because they are 

less complex. The business loans are the ones where we have the 

relationship. 

We understand these businesses. We have worked with them for 

many years. That is where the SBA has trouble. When you have 

got documentation destroyed, lease agreements destroyed, and you 

can’t reproduce them, that is where things get stuck. 

Mr. CHABOT. Well, let me reverse my question, then. Would it be 

better to have them concentrate on the other and have the private 

sector? 

Mr. FRANCIS. I think it would be best to have the banks and 

other financial institutions concentrate on disaster loans. These are 

our customers. They are our mortgage customers. We create mortgages for them. We create small business loans for them. We know 

these folks. We can talk to them the day after the storm or try to 

talk to them the day after the storm. We don’t have to mobilize 

people. We are already there in existence. We have got branch networks in existence. We don’t have to go find space for them to 

work. We don’t have to go find workers. We have them in place. 

So I would recommend that we look at having the banks work in 

conjunction with the SBA on individual loans and small business 

loans. 

Mr. CHABOT. Okay. Have your bank customers expressed any difference to your employees about the speed with which the SBA is 

currently processing disaster loans today than in the first year 

after Hurricane Katrina? 

Mr. FRANCIS. To be honest with you, we have not heard a whole 

lot of it lately. In the beginning, there was a lot of frustration, but 

most of the businesses have just said, ‘‘Forget it. We will come to 

you for the loans.’’ 

Our loan demand is way, way up. And they are just coming 

straight to do bank loans. Now, the disadvantage is that they don’t 

get to borrow at a low interest rate that the direct SBA loans offer. 

But the businesses need the case more than they need the low cost 

of capital to survive. 

Mr. CHABOT. Thank you very much. Let’s see. Ms. Colosino, first 

of all, thank you for coming here and telling us how this affected 

you. Obviously it has been an awful experience all the way around. 

And, you know, your testimony is very disturbing because we 

heard testimony earlier obviously that things are improving. And, 

according to you, things haven’t gotten any better. And a thing that 

49

is particularly disturbing is you indicated you are pretty reflective 

of a lot of other folks in your community. 

Do you want to expound upon that at all as to how you are 

aware that other people are going through the same thing that you 

are? 

Ms. COLOSINO. Well, just from being part of Second Wind, first 

of all. Second Wind started with ten businesses, small businesses. 

And now it’s 1,200 small businesses. So that is one way. 

And then, you know, we are a member of our community. I am 

a native New Orleanian. My husband and I both went to college 

there. You know, that is our home. So we know many, many people 

that have done precisely what you said, which is say, ‘‘Oh’’ and go 

to a regular bank. 

We also have secured three different loans from banks to buy 

property and things that we need for our business in the interim. 

Okay? So three times I have gone commercially. 

And it is just part of the fabric of New Orleans that SBA doesn’t 

work for us. It is so— 

Mr. CHABOT. Let me make sure I understood something that you 

said earlier, too. Just to clarify, you had mentioned when you got 

the initial $10,000, you said that within a year—you sort of left the 

impression that the entire loan was due at that time. My understanding is that for a year, that is when the payments actually 

start on the additional up to $250,000. Is that correct? 

Ms. COLOSINO. Well, to clarify, we received a disbursement in May of 2006 of $10,000. And I have received pre-bills, I guess you 

could call them, for the entire loan amount, which says, ‘‘Starting 

in May 2007, you will have payments due on $250,000,’’ not on the 

10. 

Mr. CHABOT. Right. But not on the entire amount, just payments 

every month. I assume they are monthly payments that are due? 

Ms. COLOSINO. Yes, sir. They are monthly payments calculated 

not on 10,000, which I received, but on 250, which I have not. 

Mr. CHABOT. Right. Thank you. 

And the other thing that was particularly disturbing is when I 

know how much trouble you have to go through to get all of the 

forms filled out and get all of the copies and everything and get 

them in and then to have to do it all over again. We have had that 

periodically over time but not a dozen times like that. That has to 

be extremely frustrating. And we absolutely have to do a better job 

than that. 

Mr. McDonald, let me turn to you in my final questions here if 

I can locate them. In your professional opinion, what lessons should 

be learned by the state and the federal government from Katrina? 

And given your state’s experience with Katrina, what suggestions 

do you have to give the federal government in improving its responses to such catastrophic disasters? 

Mr. MCDONALD. Well, Congressman, I would respond to that by 

saying that I think some of the information the Committee has received here today—and I have to choose my words carefully in saying ‘‘information’’ but the plans, as I appreciate them, that are underway. They focus on identifying the lessons that have been 

learned through Katrina but, more importantly, planning to make 

sure that those are not repeated in other disasters are central to 

50

what I believe is in the best interest of the process, more specifically communication. 

Those communication lines, which allow us to facilitate interaction to identify expediters, to respond in a meaningful way the 

tenor of testimony, which I think is very accurate, which indicates 

the frustration felt working not only with various caseworkers but 

through various agencies and departments of government, in this 

event are somewhat unique because of the regional nature of the 

disaster. 

The great news is after the disaster, Congress responded with a 

lot of help. And that is great. Each of those individual programs 

have appropriate checks and balances. And there was struggle. And 

there continues to be struggle and disconnect in making sure, as 

was discussed with the homeowner program, that there is not a duplication of benefit, that at the end of the day, it makes a bad situation worse in requiring an individual to return money or be asked 

to repay money. 

So I would suggest to you that the efforts that have been undertaken here, certainly that of review and ensuring that communication, those lessons are really learned, the changes are made and 

that the changes are not just discussed but are real, that would be 

a top priority to us. 

Mr. CHABOT. Thank you very much. I yield back. 

Chairwoman VELA ́ ZQUEZ. Mr. Jefferson? 

Mr. JEFFERSON. Thank you, Madam Chair Lady. 

Mr. Francis, let me ask you this. Other banks offer their services 

to the SBA. Louisiana Bankers, the American Bankers have all 

made them aware that they are there to be helpful. What has been 

the reason for the resistance that has been explained to you as to 

why the SBA hasn’t taken you up of the offer to be of assistance 

to them? 

Mr. FRANCIS. That is a good question, Mr. Jefferson. We worked 

with the LBA right after the storm, many banks meeting with the 

SBA, head of the SBA, to try to get them to understand and let 

the banks be more directly involved. 

That is when the SBA came out with the go loan program, which was okay, but $150,000 from any business is not enough money. 

And it was a drop in the bucket. And it got some momentum, but 

I really think that the SBA didn’t understand and didn’t trust that 

the banks could do as good a job as they could do. 

I really think it was as control thing from the SBA’s standpoint 

that can the banks do disaster lending as good as the government 

can do it? And I think at the end of the day, that’s why it did not 

get enacted. 

I think we had momentum at that time to get some changes done 

legislatively and they just did not take the opportunity to do that. 

Mr. JEFFERSON. How do you think the experience of a small business owner like the lady sitting next to you and others she has described would have been different if banks had been permitted to 

get involved in this process? 

Mr. FRANCIS. She would have had her money weeks after the 

storm. And I will tell you my parents own a small business. And 

their experience is exactly like hers. The only thing they did differently is they said, ‘‘Forget it. We are not doing it. It is too 

51

much.’’ After the third time resubmitting paperwork, it is just they 

said, ‘‘No way. We are not going to go through this.’’ 

And the banks would have gotten money in the hands of businesses. And I think the recovery would have happened quicker. 

And it would be a lot further along today if we had been more directly— 

Mr. JEFFERSON. One of the witnesses from the SBA said they 

were concerned about monitoring and accountability from banks. 

Does that make any sense to you? 

Mr. FRANCIS. It absolutely makes sense. And as a certified lender, we have to adhere to the rules and regulations of the SBA. And 

we understand those. The banks understand rules and regulations. 

Let me tell you, the FDIC, the Comptroller of the Currency, we understand what rules and regulations are. 

Mr. JEFFERSON. That is not a legitimate concern on the part of 

the SBA that banks couldn’t be able to live up to that requirement? 

Mr. FRANCIS. Banks make mistakes, but for the most part, I will 

bet you we are 99.9 percent accurate. 

Mr. JEFFERSON. Thank you. 

Mr. FRANCIS. We have to be. 

Mr. JEFFERSON. Ms. Colosino, welcome to the Committee. I am 

glad you made it through the weather all the way to get here. I 

am sorry Ms. Olivier and others from Louisiana couldn’t make it, 

but I am glad to see you here. 

Ms. COLOSINO. Thank you. 

Mr. JEFFERSON. I heard one of the predicates of your testimony, 

predicate statements, was that the storm came and everything 

seemed to be in good shape. You called folks and said, ‘‘Hey, we are 

still here, and we are ready to go back to work.’’ And then the levee 

breached. 

Now, the Corps of Engineers has said that it is responsible for 

that. It has admitted that its negligence in the construction, the design of the levee was the reason why the levees broke. 

And here you are now a year later or whatever, years later now, 

almost a year, 18 months, whatever it is, still trying to get something fixed, taking on new loan responsibility and all the rest, because of something that a federal agency failed to do. 

In the early questioning I asked whether the SBA should not be 

involved more, as our Chair Lady said, in grant programs in these 

instances, not so much to give people money for the heck of it, but 

here the government actually caused this problem, number one. 

But, number two, to get back to Mr. Francis, it could be used not 

for the whole amount but to provide equity amounts that would 

permit the lending to take place more easily that could give them 

more latitude in getting money out and getting loans out. 

So even if they just did a small part of it, 15-20 percent of it, 

particularly where there would have been no disaster, you have an 

experience had it not been for the levee breech, you would have 

been in business now. You wouldn’t be talking to us. You wouldn’t 

have had this experience. 

So do you think that it is fair for the government to have more 

responsibility here with respect to making monies available to people who are just going about their business except the levees broke 

and due to the admitted fault of the government—it is not we have 

52

to speculate about this. The Corps have stood up there and said, 

‘‘We did this. It is our fault.’’ Then they just kind of did a reverse 

pivot and walked behind the curtains, and they are gone. 

Ms. COLOSINO. I am not sure how to answer that, but I will say 

that what would I wish for SBA to do? And that would be to really 

advocate for small business insurance issues. I mean, certainly 

banking issues and funding issues, but, you know, can we not talk 

about the other issues that small business people fight every day? 

So we were pitifully under-repaid by insurance, criminally so. 

So yes, I wish SBA could actually effect their disaster mission if 

that is what it is. If it is an entity that responds to small business 

in disaster, then I would say do so, but if that is the vision statement today, that is not how it walks and talks in the community 

of disaster. 

Mr. JEFFERSON. One of the problems here is that it seems like 

the SBA is undertaking its normal lending responsibility that it is 

assigned by statute, as opposed to its responsibility to help folks in 

a disaster to recover, treat them as if it is exactly the same thing. 

I hope they are. It seems like this is worse than the other one. But 

they treat them similarly, as opposed to treatment of the issue of 

recovery, helping people recover, which is an emergency issue. 

They don’t seem to be up to the task. 

Of the 1,200 people you associated with, are you saying most of 

these people had the same experience you had or similar experiences or have some of them had more satisfactory experience with 

the SBA? 

Ms. COLOSINO. What Second Wind did is about three weeks ago 

send out an e-mail to their constituents and said, ‘‘If you have an 

SBA story, tell it.’’ And I believe that you all are going to be provided with that. 

We have the stories, which they are bound. And I assumed when 

I wrote mine up that mine would just be bound in a document and 

sent on. So it wasn’t written to be delivered here. It was written 

to be part of the story. So did that answer your question? I’m sorry. 

Mr. JEFFERSON. The last thing I want to ask you is the people 

whose names you have talked about, I don’t remember them all, 

but you had individual names you mentioned. Where were these 

people from? Were these folks the SBA brought in from someplace 

to train them as lending officers and they went away and they kept 

giving you a new person because these folks went back to wherever 

they were from? Is that what happened? Do you know? 

Ms. COLOSINO. I don’t know because I could never get any information on the last person. You know, the last person disappeared 

off the face of the Earth. 

So okay. Here we start over. And you start all the way literally, 

literally from square one every single time, every time. Okay? 

Thank you. 

Chairwoman VELA ́ ZQUEZ. Now I recognize Mr. Gonza ́lez. 

Mr. GONZA ́LEZ. Thank you very much, Madam Chairwoman. 

Mrs. Colosino, would you give us permission to look into your 

specific case? In other words, it is your information. And if we request SBA to make an inquiry and report back to the Committee, 

obviously those are your records. And we need your permission, at 

least in my estimation. I am just asking to make sure because I 

53

would like as of today to articulate a specific request of SBA because we do have representatives from SBA present. 

Ms. COLOSINO. Okay. I would answer that in two ways. Don’t as- sume by any chance that I am here to get my $250,000. That is 

good, and that would be wonderful. But there are thousands of people standing behind me that just have a different name and the 

same face and the same song. Okay? 

So yes, you have my permission to do that. Yes, you do. You have 

our permission, my husband’s and mine. 

Mr. GONZA ́LEZ. And I would ask, Madam Chairwoman Vela ́zquez 

and Ranking Member Chabot, to see if they would join me in this 

request. We have SBA personnel here. I think this information 

could be gathered and reported back to us within two weeks. We 

won’t be here next week, so two weeks from today, first how Mrs. 

Colosino’s loan application is listed. Is it listed as a completed 

transaction in that percentage when, in fact, you have received 

10,000 of the 250,000? And suddenly we have got figures out there 

that are truly misrepresentative, as you have pointed out to us. 

Secondly, you have indicated that in order to receive further funding from the $250,000 approved loan, you have only received 

$10,000 as of last summer. You have to produce receipts. Is that 

correct? 

Ms. COLOSINO. Yes, sir, that is correct. And I made him repeat 

it. And I put the phone on speaker. And I said, ‘‘Are you telling 

me right now that I have to produce for you receipts to the total 

loan amount?’’

And he said, ‘‘Yes, you have to produce receipts to the total loan 

amount.’’

I said, ‘‘I can’t, you know, like go down and give you an accounting of what we bought or still need to buy.’’

‘‘No, no. You have to have spent the money.’’ 

Mr. GONZA ́LEZ. The second question to SBA, then, is it required 

that someone who is receiving loan proceeds first has to somehow 

provide written receipts for expenditures before further amounts of 

money are provided to the borrower? 

The next question is,—and this is kind of confusing—it appears 

that you qualify for a quarter of a million dollars. You received the 

$10,000. And the clock starts ticking, as you accurately described. 

From the time you received the $10,000 a year and payments are 

then expected, predicated on an amount of 250,000—and I want 

that clarified. 

I definitely want SBA to please explain to me Earth’s time line. 

Is she supposed to start paying back $10,000 at the end of the 

year? If she receives another $50,000 today, is it a year from today 

that she starts paying back? She hasn’t had use of this money. I 

mean, none of this really makes much sense. 

I am hoping that all of this will be clarified and it sort of will 

make sense. And that is going to be my personal request. And, of 

course, I would ask other members of the Committee, the Chairwoman, and the Ranking Member to join in that. And I would request that the information be made available to us. 

54

Chairwoman VELA ́ ZQUEZ. I will be joining the gentleman. Mr. 

Chabot? 

Mr. CHABOT. I would be happy to join the gentleman in that request. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. GONZA ́LEZ. And I appreciate it. 

And you are right. It isn’t all just about you because this could 

be very, very representative of what is going on out there because 

we want to give people the benefit of the doubt and we want to 

work together. And I am taking more time than I anticipated. 

Mr. Francis, has the American Bankers Association made a formal proposal, been proactive in taking the initiative to approach 

SBA and say, ‘‘Hey, look, the way you are structuring this disaster 

alone is not going to work?’’ 

You know, in this go alone or whatever it is, maybe the problem 

with that is that the borrower is paying a higher rate of interest 

and so on. So it is really not the best answer out there but how 

you in the private sector can come in with a proposal to streamline 

this procedure and pointing out all about what fees should be 

charged and it should be different from 7(a) and so on in your written statement that I went over. Have you all made a formal proposal? And I don’t know if that is too much to ask of any association or private sector. 

Mr. FRANCIS. ABA has and we have as a bank, other banks. The 

LBA has. Yes, that has happened. 

Mr. GONZA ́LEZ. I would ask that you please let us know when 

you made it and what response you have received. I do appreciate 

the effort, believe me, because I think the answers are out there. 

And then, lastly, Mr. McDonald, I really don’t have a question, 

but it’s good that we remember that, of course, nothing to the dimension and scope of Katrina but that Mississippi was also hit and 

is in the rebuilding phase. You know, we have a reminder of that 

every day with one of our beloved colleagues, Gene Taylor. I also 

wish to remind other people that we had Rita in Texas. 

And that’s also been neglected. But thanks to all three of you for 

your presentation today. 

Chairwoman VELA ́ ZQUEZ. Before I move to recognize Mr. Johnson, Mr. Francis, I would like for you to explain to me, how do you 

disburse disaster loans? Would you ask for receipts before you provide the money? 

Mr. FRANCIS. No, ma’am, we would not ask for receipts. What we 

would do is we would verify if it was a real estate construction 

loan. What we would do is we would—normally in a real estate 

process, the contractor will go and perform work and submit a 

draw request to us that we would go out and inspect. And then we 

would fund the contractor. 

And in equipment purchase, the purchase order would be submitted. We would then submit the payment to the vendor for that 

equipment, but we would not ask the borrower in those cases to 

pay for it and then submit the receipts to us. 

Chairwoman VELA ́ ZQUEZ. Yes. Let me state for the record, that 

is part of the statute that you have to provide receipts before you 

get your money. But it doesn’t make sense to us or to me when we 

are dealing with people, victims who lost everything. 

55

Mr. FRANCIS. That is not the normal procedure in the banking 

industry. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

And now I recognize Mr. Davis. No questions? Then we’ll go to 

Mr. Johnson. No questions? Well, let again thank all of you. We 

will continue to monitor the situation with the disaster loan program and the disaster readiness of SBA. And we will continue to 

monitor the situation, the response from SBA. Ms. Colosino, maybe 

before you leave we could have a conversation with members of the 

staff of SBA. And I want to ask unanimous consent to enter into 

the record testimonies that were provided by witnesses who were 

not able to make it. 

[The prepared statements of the Hon. Michael Olivier and Ms. 

Patricia Smith may be found in the Appendix.] 

Chairwoman VELA ́ ZQUEZ. Without objection, this hearing adjourns. The Committee adjourns. And I want to again thank you 

all for being here today. 

[Whereupon, at 1:09 p.m., the foregoing matter was concluded.]

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