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FULL COMMITTEE HEARING ON 

OVERSIGHT OF THE SMALL BUSINESS 

ADMINISTRATION AND ITS PROGRAMS 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

HEARING HELD 

APRIL 21, 2010 

Small Business Committee Document Number 111-064 

Available via the GPO Website: http://www.access.gpo.gov/congress/house 


Congress.#13
HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

DENNIS MOORE, Kansas 

HEATH SHULER, North Carolina 

KATHY DAHLKEMPER, Pennsylvania 

KURT SCHRADER, Oregon 

ANN KIRKPATRICK, Arizona 

GLENN NYE, Virginia 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

DAN LIPINSKI, Illinois 

JASON ALTMIRE, Pennsylvania 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

JOE SESTAK, Pennsylvania 

BOBBY BRIGHT, Alabama 

DEBORAH HALVORSON, Illinois 

SAM GRAVES, Missouri, Ranking Member 

ROSCOE G. BARTLETT, Maryland 

W. TODD AKIN, Missouri 

STEVE KING, Iowa 

LYNN A. WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

BLAINE LUETKEMEYER, Missouri 

AARON SCHOCK, Illinois 

GLENN THOMPSON, Pennsylvania 

MIKE COFFMAN, Colorado 

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KAREN HAAS, Minority Staff Director 

(II) 

STANDING SUBCOMMITTEES 

Subcommittee on Contracting and Technology 

GLENN NYE, Virginia, Chairman 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

KURT SCHRADER, Oregon 

DEBORAH HALVORSON, Illinois 

MELISSA BEAN, Illinois 

JOE SESTAK, Pennsylvania 

AARON SCHOCK, Illinois, Ranking 

ROSCOE BARTLETT, Maryland 

W. TODD AKIN, Missouri 

MARY FALLIN, Oklahoma 

GLENN THOMPSON, Pennsylvania 

Subcommittee on Finance and Tax 

KURT SCHRADER, Oregon, Chairman 

DENNIS MOORE, Kansas 

ANN KIRKPATRICK, Arizona 

MELISSA BEAN, Illinois 

JOE SESTAK, Pennsylvania 

DEBORAH HALVORSON, Illinois 

GLENN NYE, Virginia 

MICHAEL MICHAUD, Maine 

VERN BUCHANAN, Florida, Ranking 

STEVE KING, Iowa 

W. TODD AKIN, Missouri 

BLAINE LUETKEMEYER, Missouri 

MIKE COFFMAN, Colorado 

Subcommittee on Investigations and Oversight 

JASON ALTMIRE, Pennsylvania, Chairman 

HEATH SHULER, North Carolina 

BRAD ELLSWORTH, Indiana 

MARY FALLIN, Oklahoma, Ranking 

LOUIE GOHMERT, Texas 

(III) 

Subcommittee on Regulations and Healthcare 

KATHY DAHLKEMPER, Pennsylvania, Chairwoman 

DAN LIPINSKI, Illinois 

MELISSA BEAN, Illinois 

JASON ALTMIRE, Pennsylvania 

JOE SESTAK, Pennsylvania 

BOBBY BRIGHT, Alabama 

LYNN WESTMORELAND, Georgia, Ranking 

STEVE KING, Iowa 

VERN BUCHANAN, Florida 

GLENN THOMPSON, Pennsylvania 

MIKE COFFMAN, Colorado 

Subcommittee on Rural Development, Entrepreneurship and Trade 

HEATH SHULER, North Carolina, Chairman 

MICHAEL MICHAUD, Maine 

BOBBY BRIGHT, Alabama 

KATHY DAHLKEMPER, Pennsylvania 

ANN KIRKPATRICK, Arizona 

YVETTE CLARKE, New York 

BLAINE LUETKEMEYER, Missouri, Ranking 

STEVE KING, Iowa 

AARON SCHOCK, Illinois 

GLENN THOMPSON, Pennsylvania 

(IV) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

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

Graves, Hon. Sam .................................................................................................... 2 

WITNESSES 

Hon. Mills, Karen, Administrator, U.S. Small Business Administration ........... 3 

Hon. Gustafson, Peggy, Inspector General, U.S. Small Business Administration ........................................................................................................................ 5 

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 28 

Graves, Hon. Sam .................................................................................................... 30 

Hon. Mills, Karen, Administrator, U.S. Small Business Administration ........... 32 

Hon. Gustafson, Peggy, Inspector General, U.S. Small Business Administration ........................................................................................................................ 34

(V) 

(1) 

FULL COMMITTEE HEARING ON 

OVERSIGHT OF THE SMALL BUSINESS 

ADMINISTRATION AND ITS PROGRAMS 

Wednesday, April 21, 2010 

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 Vela ́zquez [chairwoman of the Committee] presiding. 

Present: Representatives Vela ́zquez, Moore, Dahlkemper, 

Schrader, Kirkpatrick, Nye, Altmire, Halvorson, Graves, Bartlett, 

Buchanan, Luetkemeyer and Thompson. 

Chairwoman VELA ́ ZQUEZ. Good morning. This hearing is now 

called to order. 

In January of last year, the House adopted Rule 11 requiring 

regular hearings on waste, fraud, and mismanagement of programs 

under the Committee’s jurisdiction. Since then, we have held no 

fewer than 18 oversight hearings, spanning a broad range of issues 

from federal contracting to SBA disaster loans. 

Today’s discussion is in that vein. It will allow us to build on 

past oversight hearings, providing a much-needed opportunity to 

examine some of the agency’s most critical programs, and it could 

not come at a more pressing time. 

Over the last two years, our economy has endured a seemingly 

endless parade of challenges. While these setbacks have differed in 

scope and industry, they have managed to have the same impact 

on small firms. Even today, as we steadily climb back towards recovery, entrepreneurs face obstacles. Now, more than ever, they 

need the resources necessary to not only overcome those roadblocks, but to keep our recovery strong. 

Historically, the SBA has helped deliver that support. It has 

served as a vital source of stability for small companies, particularly during periods of economic decline. But as this Committee is 

well aware, the agency has also struggled in areas ranging from 

lending to procurement. 

After years of underfunding, SBA continues to wrestle with a legacy of neglect—one that has eroded its oversight mechanisms and 

left many office programs in disarray. With an emphasis on accountability, and a strong commitment from the Inspector General, 

we can tackle those issues directly. 

As Judge Brandeis famously said, ‘‘Sunshine is the best possible 

disinfectant.’’ And make no mistake—there is no better tool for 

2 

scrubbing out waste than transparency. When it comes to holding 

agencies accountable, the Inspector General has a critical role to 

play, and I am pleased the IG is with us today. 

It is my hope that our conversation will serve as a frank and 

open forum for examining SBA’s problem areas, because until we 

have identified those concerns we can neither move forward with 

solutions, nor expect to see improvements. 

When SBA programs are running at full capacity, they are true 

economic catalysts. Just look at the small business development 

centers. In 2008 alone, they helped generate 58,000 new jobs at a 

cost of $3,000 apiece. Or, consider the Recovery Act’s SBA loan provisions. They have allowed the agency to support more than $23 

billion in lending. At a time of historic declines in the small business capital markets, that particular effort has been nothing less 

than a lifetime. But, unfortunately, not all of SBA’s initiatives have 

been quite so successful. 

Later this morning we will look at a number of IG reports, all 

of which point to problems within SBA programs. In some instances, core initiatives have been racked by fraud. In other cases, 

they have been undermined by questionable practices. It is imperative that these troubled programs be restored to reflect their original mission—strengthening and supporting small businesses, because at the end of the day small firms aren’t just the backbone 

of our economy, they are our greatest source of job growth. 

According to a recent study by the Kauffman Foundation, virtually all new jobs created between 1980 and 2005 came from startup companies. With unemployment at 9.7 percent, it only makes 

sense to focus on these firms—the small and startup businesses 

that have always provided job security. With a portfolio of strong, 

well-managed SBA programs, we can do that very thing. 

I know I speak for all members of the Committee when I say we 

are dedicated to upholding the integrity of the agency’s programs 

and to ensuring small firms have the tools and resources they need 

to thrive. 

I would like to thank our witnesses, both Administrator Mills 

and Ms. Gustafson, for being here today. 

This marks the Committee’s first hearing with the IG, and I 

know we are all looking forward to today’s discussion. 

I will now yield to Ranking Member Graves for his opening remarks. 

Mr. GRAVES. Thank you, Madam Chair, and thank you also for 

holding this important hearing on the oversight of the Small Business Administration and its programs. I look forward to hearing 

from Administrator Mills and the Inspector General on the agency’s lending programs. 

The SBA programs operate in coordination with the private sector by guaranteeing loans made by banks and certified development companies. Due to the possibility that taxpayers could have 

to pay on the guarantee, the programs should be overseen with the 

utmost care and transparency. 

SBA regulations and procedures are supposed to be designed to 

protect the Federal Government. However, the Inspector General’s 

recent report indicates that lenders have been failing to comply 

3 

with SBA requirements. This should raise a red flag at the agency, 

but it appears that little has been done to correct the problem. 

Additionally, the Inspector General’s report raises some significant concerns about SBA program management. Poor oversight increases the risk to the taxpayer. And while I am generally supportive of programs designed to assist small businesses in obtaining scarce credit and capital, I cannot and will not maintain that 

support if the programs are not properly monitored to protect the 

taxpayers from unnecessary risk. 

Ultimately, the issue of today’s hearing is whether the SBA lending programs operate primarily for the benefit of the lenders or for 

the small business borrower. I believe that Congress wants these 

programs to assist small business borrowers. If that is in fact the 

case, the agency must take aggressive action to ensure that only 

the most responsible lenders are involved in these programs. Anything less would be unacceptable to Congress and the tax-paying 

public. 

Again, I want to thank you, Madam Chair, for holding this hearing. I am looking forward to hearing the witnesses’ recommendations on how we can increase the availability of capital to small 

businesses without placing the taxpayers in jeopardy for poor business management decisions. 

Thanks. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

And it is my pleasure to welcome The Honorable Karen Mills. 

She was sworn in April 6, 2009, as the 23rd Administrator of the 

U.S. Small Business Administration. The SBA helps small business 

owners and entrepreneurs secure financing, technical assistance, 

and training on federal contracts. 

Welcome. 

STATEMENT OF KAREN MILLS 

Ms. MILLS. Thank you very much. Chairwoman Vela ́zquez, Ranking Member Graves, members of the Committee, it is an honor to 

be with you. In working with you over the past year, these meetings have been important and helpful. This is a shared endeavor 

to improve oversight and risk management while removing waste, 

fraud, and abuse. 

I am pleased to say that we are making good progress. One tangible metric is that we have cut the number of overdue IG findings 

in half, from 97 last June to 48 this March. We also have less than 

50 open recommendations from GAO, having closed six full audits 

since 2008. 

And just last week we received an award from the Association 

of Government Accountants for excellence in accountability reporting. But there is more work to do. 

It is now part of the SBA’s strategic priorities to build on this 

progress in two particular areas. The first areas are government 

contracting and business development programs, where we have efforts aimed at all three steps in the process. 

At the front end, it means more efforts with upfront certification 

and eligibility. For those already in the program, it means more 

emphasis on ongoing compliance and site visits. And, finally, if 

4 

they are found to be out of compliance, it means pursuing and removing bad actors. 

Already we have made dramatic increases in site visits and 

HUBZone firms from fewer than 100 in 2008 to over 900 in 2009, 

and we are on track to do more than 1,000 this year. We are working to ensure that only legitimate, eligible firms are benefiting from 

the HUBZone program. 

In our 8(a) program, we agree with nearly all of GAO’s recent 

recommendations, and we have begun to implement them. Already 

we are training our field staff to more quickly identify ineligible 

firms. And when it is clear that fraud exists, we are taking steps 

to debar and/or work with the Department of Justice to prosecute. 

We also did the first comprehensive review of 8(a) in a decade, 

and proposed regulatory changes. We went to 10 cities. We held 

two tribal consultations and received extensive public comments. 

GAO has given us positive feedback on how we handled this process. 

For all our contracting programs, the President’s FY11 budget re- quests $2 million for strengthening efforts to prevent waste, fraud, 

and abuse. 

The second area is lender oversight. We are working to instill 

best practices that will ensure compliance and manage risk more 

effectively, as we work with our lending partners. In the 2011 budget, we request $2 million more for lender over- sight and onsite reviews, as well as $1 million for stronger program 

assessments. This will help us address areas that the Inspector 

General has recently brought to our attention, including the premier certified lenders in the 504 program. 

Overall, the entire SBA team is focused on continued vigilance 

in identifying, tracking, and reducing risk. Through our partnership with this Committee, and with insights from the GAO and our 

Inspector General, I know we have moved in the right direction 

this past year. And we commit to continue to take even bigger 

steps in the future. 

Separately, an important issue has come up in the past few 

weeks that I want to bring to the Committee’s attention. The SBA 

and the White House support the congressional intent of parity— 

equal treatment among our contracting programs, 8(a), HUBZone, 

service-disabled veterans, and soon women-owned small businesses. 

However, a recent court decision potentially undermines this policy by interpreting the Small Business Act to provide for a 

HUBZone preference over the other programs. The administration 

supports legislative efforts to confirm Congress’ original intent to 

provide for parity. 

I welcome any questions. Thank you very much for having me 

here. 

[The prepared statement of Ms. Mills is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Administrator Mills. 

And now I welcome The Honorable Peggy Gustafson. She was 

worn in as the Inspector General of the U.S. Small Business Administration on October 2, 2009. The Office of Inspector General 

conducts and supervises audits, inspections, and investigations relating to SBA programs and supporting operations. 

5 

Welcome. 

STATEMENT OF PEGGY GUSTAFSON 

Ms. GUSTAFSON. Thank you. Madam Chairwoman, Ranking 

Member Graves, and distinguished members of the Committee. 

Thank you very much for allowing me to discuss the IG’s current 

efforts to deter and detect waste, fraud, abuse, and inefficiencies in 

SBA programs. 

Today I would like to focus on several recent audits, some recent 

criminal indictments and convictions, and two new management 

challenges that my office issued to the agency in October of 2009. 

Regarding our audits, during the first seven months of FY2010, 

my office has issued 24 audit reports and other reviews. These reports contain 97 recommendations to SBA to promote efficiency and 

reduce waste. We recently issued a report on an audit of the underwriting practices and compliance of three of the largest premier 

certified lenders, or PCLs, that are authorized to approve loans in 

the CDC 504 loan program with limited prior SBA review. 

My office found a high rate of errors on PCL loans involving poor 

loan underwriting and eligibility or loan closing issues. Based upon 

our sample, we project that for loans disbursed in fiscal year 2008 

by the three PCLs, a total of $209 million worth of loans involved 

problems with borrower eligibility or loan closing issues, and that 

loans totaling nearly $56-1/2 million had weaknesses in underwriting. 

We also found that a number of CDCs pay a sizable percentage 

of gross receipts to their executives, which reduces the amount of 

funds available to that CDC for economic development activity. 

In response to the provisions of the Recovery Act, my office has 

developed a recovery oversight plan, created a separate recovery 

oversight group within our Auditing Division, and has so far issued 

14 recovery oversight reports identifying programmatic and other 

deficiencies. 

As part of this oversight work, my office recently reviewed origination and closing of Recovery Act loans made in the 7(a) Loan 

Program. We identified deficiencies in 53 percent of the sample of 

loans we reviewed made by lenders with no prior SBA approval, 

and errors in 23 percent of the loans, which SBA had themselves 

approved. 

We also recently completed three audits that raised concerns 

with SBA’s procurement of goods and services. To summarize the 

findings in these reports, we found that 92 percent of a sample of 

contract actions reported by SBA for fiscal year 2008 contained one 

or more inaccurate or incomplete data elements in the FPDS government database, and that fiscal year 2009 had a higher error 

rate of 97 percent of the sample contract actions having errors. 

We determined that SBA’s current workforce involved in procurement actions is insufficient to effectively award, administer, and 

oversee SBA contracts, and is increasing the risk of mismanagement and improper payments on SBA contracts. And we found that 

SBA did not report all non-competitive Recovery Act contracts to 

Recovery.gov and has mischaracterized some of the actions that 

have been reported to Recovery.gov. 

6 

During the first six months of this fiscal year, IG criminal investigations have resulted in 51 indictments and 14 convictions, and 

obtained approximately $16 million in potential recoveries and 

fines. Most of our investigations involve false statements to obtain 

SBA guaranteed loans, SBA disaster loans, or government contracts that are supposed to be set aside for disadvantaged small 

businesses. 

Our investigations have identified an ongoing pattern of fraud by 

unscrupulous loan agents and other consultants who orchestrate 

multi-million dollar schemes where numerous SBA guaranteed 

loans are originated based on falsified information. 

During the past decade alone, we have had numerous cases involving loan agent fraud on loans totaling over $260 million. Fraud 

in the 8(a) and HUBZone programs, and other SBA preferential 

contracting programs, is also a problem. Recent IG audits and investigations, and recent reports from the GAO, show that ineligible 

companies continue to obtain set-aside contracts, and that non-disadvantaged individuals are exploiting these programs. 

We are working with the Justice Department to pursue criminal 

and civil fraud prosecution against companies that have improperly 

obtained contracts under the HUBZone and service-disabled veteran programs, and we are working with the agency to develop a 

more robust debarment and suspension program. 

As required by law, my office issues a report in October identifying key management challenges for SBA. Our most recent report 

had two new challenges. One challenge is based on significant projected improper payments in both the Disaster Loan Program and 

the 7(a) Loan Program. And the second challenge identified concerns with SBA’s management of its largest current IT project to 

upgrade its loan monitoring and financial management systems, a 

project with an estimated cost of over $250 million. 

Again, I want to thank you for the opportunity to comment on 

these issues, and look forward to your questions. 

[The prepared statement of Ms. Gustafson is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Inspector General. 

Administrator Mills, it has been a month since the IG delivered 

its report on acquisition personnel. And we would like to know, 

what changes has the SBA made to address the problems raised in 

that report? And what is your timeline to fix those issues? 

Ms. MILLS. Madam Chair, earlier this week we announced a reorganization of our internal acquisition department. We are following the best practices of 10 other agencies—we are actually the 

tenth agency to reorganize under the Chief Financial Officer, so 

that the Internal Control Department will then be aligned with the 

Procurement Department, and those experts in internal control will 

provide better oversight to procurement. 

We operate our procurement operation out of our Denver Finance 

Center, and we will be moving our procurement operation to be 

under that with new procedures. 

Chairwoman VELA ́ ZQUEZ. What about personnel? 

Ms. MILLS. We have really important, terrific people in this area 

at the SBA. And change is very difficult, so— 

7 

Chairwoman VELA ́ ZQUEZ. Well, the Inspector General’s report 

particularly addressed the issue of the inadequacy of the SBA acquisition office in terms of failed to adequately staff the office that 

was doing procurement work for the Recovery Act. 

Ms. MILLS. Yes. And this is one of the reasons for the move to 

Denver, where we have a pool of very strong personnel. We are 

going to offer all of our people in this area, the opportunity to move 

to Denver and support them. And if they don’t move, I just want 

to reiterate that we are going to take care of them here. 

Chairwoman VELA ́ ZQUEZ. But my concern—if this is to implement those provisions of the Recovery Act, will require the expertise and the staff. And nine months ago you learned from the IG 

that you were not in compliance with the OMB requirements regarding the staff. But you are telling me that this week you are 

moving to do this. 

Ms. MILLS. Yes. We have been working on this move for quite a 

long time. There has been extensive review of what the best practices are to get the right staff, whether that staffing would be available here, and how to change the procedures and the supervision, 

so that we have the quality of supervision. And this is the solution 

that we are pursuing. 

Chairwoman VELA ́ ZQUEZ. For more than a decade there have 

been inaccuracies in federal small business contracting data. And 

when you and I, we have a first meeting, that is one of the issues 

that I raised with you. 

A recent IG report found that SBA’s own data had an error rate 

of 92 percent for FY2008, 97 percent in 2009. In many cases, SBA 

was misreporting small business contracts that actually went to 

large businesses. Do these findings call into question the agency’s 

credibility and ability to monitor government-wide reporting problems? 

Ms. MILLS. Your point is exactly correct. This is extremely disturbing and is unacceptable. We have to be the standard for the 

rest of the agencies. 

Chairwoman VELA ́ ZQUEZ. So, Ms. Gustafson, has the agency implemented any of the IG’s recommendations yet on this area? 

Ms. GUSTAFSON. Representative Vela ́zquez, they have committed 

to implementing those recommendations. In all candor, the audit is 

a couple months old. I am not certain that they have been finally 

implemented. I will get that answer back to you. I will check on 

that and get that answer back to you. 

Chairwoman VELA ́ ZQUEZ. Administrator Mills, can we get a 

timeline— 

Ms. MILLS. Yes, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. —when the agencies plan to implement 

those? 

Ms. MILLS. Yes, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. Okay. Last month this Committee was 

working to secure documents from the SBA’s Office of Inspector 

General related to an active audit. During that process, the SBA 

General Counsel interjected herself in the matter, actually calling 

the House General Counsel. Was this done at your direction or at 

the direction of your staff? 

Ms. MILLS. No. 

8 

Chairwoman VELA ́ ZQUEZ. No, it wasn’t— 

Ms. MILLS. That was not done. 

Chairwoman VELA ́ ZQUEZ. It was at the direction of who? 

Ms. MILLS. I don’t have any direction about this effort. 

Chairwoman VELA ́ ZQUEZ. Do you think that was an appropriate 

action? 

Ms. MILLS. My understanding of the situation is that we will try 

to be helpful in any case that we could. 

Chairwoman VELA ́ ZQUEZ. Ms. Gustafson, should it be a source of 

concern if the SBA’s General Counsel has taken it upon herself to 

act as an intermediary between this Committee and the IG in matters pertaining to agency oversight? 

Ms. GUSTAFSON. Madam Chairwoman, there is no question that 

the agency’s General Counsel does not act for me. And being very 

involved in the IG Reform Act of 2008, one of the things that Act 

did was very specifically state that the IG is to have her own counsel, or his own counsel. And I have my own counsel. 

And so to your exact question, which is, is it appropriate—would 

it be appropriate for an agency General Counsel to act on my behalf, I would say no, that is not appropriate, and I would— 

Chairwoman VELA ́ ZQUEZ. Administrator Mills, I hope that in the 

future your General Counsel will refrain from interjecting herself 

into matters that are related to the Inspector General and the 

work—the oversight work of this Committee. 

This is to the IG. The findings of your report on the PCL program paint a picture of lax SBA oversight and deficient internal 

controls. Given what you have found in your report, if Congress 

were to undertake a major expansion of the CDC program, could 

the agency effectively administer the program? 

Ms. GUSTAFSON. What I think the message of the report needs 

to be is not that the agency can’t undertake effective oversight of 

the CDC program, but that we are concerned with how that oversight has been undertaken so far. SBA has the ability to set forth 

guidelines for the CDCs to eliminate or reduce the possibility of 

some of the underwriting concerns that we really had. 

SBA does on-site reviews where they look at these types of 

issues. And one of the things that our report says is that there 

needs to be a tieback. The agency needs to look back and see if 

CDCs are doing better when they find these issues. We didn’t really find that here. 

So I wouldn’t say that it is a question that it couldn’t be done, 

but— 

Chairwoman VELA ́ ZQUEZ. Can they do it today? 

Ms. GUSTAFSON. They would have to devote more resources than 

they are devoting now. 

Chairwoman VELA ́ ZQUEZ. Thank you. The PCL lender program 

was intended to reduce SBA costs by delegating authority for CDCs 

to process, close, service, and liquidate loans. In other words, PCLs 

were thought to be the most qualified to effectively administer this 

program with minimal SBA involvement. In light of your report on 

the program, does it appear the PCL program is meeting the intended goals? 

Ms. GUSTAFSON. I really hesitate to paint a broad brush over the 

entire program based on this audit. We looked at three of the largVerDate Aug 31 2005 17:42 May 07, 2010 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\55999.TXT DARIEN
9 

er PCL lenders, and, again, I don’t think that this audit should be 

taken to mean that they cannot do that. I just think that there is 

smaller oversight and there is lax oversight. And, again, I think 

the emphasis needs to be that there needs to be stronger oversight. 

Chairwoman VELA ́ ZQUEZ. Thank you. Mr. Graves. 

Mr. GRAVES. Thank you, Madam Chair. 

Thanks, Administrator, for being here. A couple of questions for 

both of you. The first one is, some of these lenders are not complying with some of the standards, but my question is, has the SBA 

ever revoked the status of any of its lending partners? 

Ms. MILLS. Yes. Yes, we do revoke the status of the lending partners. 

Mr. GRAVES. Recently or— 

Ms. MILLS. Yes, we do on a continuous basis. 

Mr. GRAVES. —regular basis? 

Ms. MILLS. Yes. 

Mr. GRAVES. And the second one is a completely different question, because we get some complaints from some folks when it 

comes to the standards review for certain industries. And some of 

them are very frustrated, because they think that the standard is 

so outdated it is making it very difficult for them to compete for 

federal programs. 

My question is: can we modify the order in which the standards 

are reviewed, or change that priority for some industries, or speed 

it up, do something? Because we are getting a lot of complaints 

from different folks. 

Ms. MILLS. Yes. Representative Graves, I understand that you 

might be talking about the size standards industry by industry. 

Mr. GRAVES. Absolutely. 

Ms. MILLS. —yes, we would be happy to focus on industries in 

which membership feels that a review needs to happen. And we 

would be happy to take a look. 

Mr. GRAVES. In some cases, we need that review right away. But 

I will have the staff work with your staff. 

And for you, Ms. Gustafson, my question is—and it is a real simple question—what are the risks to the taxpayer from the PCL program? 

Ms. GUSTAFSON. Well, the PCL program obviously includes a portion that is guaranteed by the Federal Government. 

Mr. GRAVES. Right. 

Ms. GUSTAFSON. And there really isn’t a lot, once these loans are 

due—once these loans are given, there is not a lot that the Federal 

Government can do to not pay a guarantee on that loan. And so 

that is really the biggest risk. 

Again, this is a program where it was envisioned that there 

would be a lot of authority given to lenders, and the government 

was going to have to just kind of accept that, under the understanding that they were trusting the lenders to do the right decision. And so the risk comes in the—and I forget the hundreds of 

millions—the millions of dollars—I apologize, I forget the numbers—of outstanding loans that are out there that would probably 

have to be paid as a guarantee under the program. 

Mr. GRAVES. Okay. Can we get that number? 

Ms. GUSTAFSON. Oh, absolutely. Yes. 

10 

Mr. GRAVES. Thanks, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. Ms. Dahlkemper. 

Ms. DAHLKEMPER. Thank you, Madam Chair. 

Administrator Mills, as you know, I have introduced some legislation for the 7(a) Express Loan Program to increase the size of the 

loans, as well as the guarantees. I really see this legislation as just 

one of the important tools we need to give our struggling small 

businesses. I have talked to many businesses. I have talked to my 

small banks in my region about this piece of legislation, and they 

believe it is another tool to get access to our small businesses for 

that working capital that they need. 

I introduced this legislation, and many of my colleagues have actually joined me in co-sponsoring this legislation. But as I am, you 

know, listening to this I just want to ask you, the 7(a) Express 

Loan Program, do you think that it should be discontinued? Or do 

you think that we can move that forward in a way that we won’t 

see some of the abuses going on that we have seen? 

Ms. MILLS. The 7(a) Express Program is an extremely powerful 

program, particularly in this time when many people have had 

their lines of credit pulled. In the last year in the Recovery Act we 

did 20,000 loans, so we helped 20,000 businesses with $1.5 billion. 

We believe that people like this program quite a bit, because it 

allows banks to use their own paperwork. It does have a limit of 

$350,000. If that limit were higher, the statistics say that the larger loans perform better, so it actually would reduce the risk of the 

overall pool as well. 

We feel that all of these oversight issues that are brought up are 

serious and need attention across the board, and we are committed 

to increasing our oversight, not only of the programs raised today 

but in all of our programs. 

Ms. DAHLKEMPER. Well, just as a follow-up to that, I know that 

there is also a proposal by the administration to allow the 504 

loans to be refinanced. And how does the 504 loan refinancing plan 

proposed by the administration support our small businesses in the 

current economic climate? 

Ms. MILLS. We have analyzed all of the gaps in creating the 

small business jobs package proposed by the President. One of 

these gaps is in refinancing owner-occupied real estate. We know 

that there are enormous numbers of small businesses— such as a 

dentist who owns the office or a manufacturer who owns the warehouse--who took out a bullet mortgage that will become due in 

2010, 2011, 2012. 

We have proposed using the 504 program in a non-delegated 

manner, so it would not go to the lenders that the Inspector General reviewed for delegated authority. We would review all of these 

loans, and we believe that we would only take loans that were in 

good standing, and for refinancing, and that the risk in this matter 

has been assessed and modeled as being lower than the current 

504 risk pool, because that is for an expansion. And when a small 

business owner has an expansion, he or she doesn’t actually know 

what the next year’s cashflow coverage will be, because they are 

growing. 

So we are looking to meet this market gap, and we believe that 

this is a lower risk way of reaching probably seven to ten billion 

11 

small businesses who will really potentially be out of business if 

they can’t refinance these bullet mortgages. 

Ms. DAHLKEMPER. Thank you. Ms. Gustafson, can I just ask you 

about the 7(a) Express Loan Program? Particularly with my legislation that I brought forward, do you see any issues with that program? 

Ms. GUSTAFSON. Well, in the interest of full disclosure, we 

haven’t done an audit very recently—I have been there not very 

long—on SBA Express, so I don’t want to go too far out on a limb, 

except to say that any time—one of the things that SBA Express 

does, again, when you have delegated authority, there is always an 

increased risk due to that, which isn’t to say that it would necessarily mean that your legislation would not be a good idea. 

I don’t feel like I have the—it is just all of these programs with 

delegated authority always give auditors a little bit of pause, just 

because there is a risk when you are having the lenders do some 

of this process. But it is not a question of being unmanageable. 

Again, the key is that SBA is doing effective oversight on the programs that they are administering. And with that, if that is in 

place, and with that commitment from the SBA, there is no reason 

to think that it would be unwise. 

Ms. DAHLKEMPER. Thank you. I know my businesses are very interested in this. It is a crucial time to get this type of legislation 

passed. So thank you very much. My time is up. 

Chairwoman VELA ́ ZQUEZ. Time is expired. Mr. Thompson. 

Mr. THOMPSON. Thank you, Madam Chair. Thank you to both of 

you for coming today, testifying, and for—you know, for the efforts 

that you are putting in to assure and really safeguard the resources that we use for strengthening small businesses, working to 

eliminate the waste and fraud and abuse. 

Administrator Mills, one of my questions is, since our last hearing, what further actions has the Small Business Administration 

taken to remove and to eliminate firms that do not qualify under 

HUBZone or the service-disabled programs? 

Ms. MILLS. Thank you. We found the last hearing, particularly 

on service-disabled veterans, extremely helpful, and have put in a 

three-part action plan to address many of the issues that came up. 

The first action is that we are working on the front end on identification of service-disabled veterans, and there the VA holds the 

database. 

I have met with General Shinseki, and with Department of Veteran Affairs Deputy. The SBA has their cooperation on improving 

that database, so we can find out who is a service-disabled veteran. 

The second thing is that we have enhanced our bid protest process, and we are now doing about double the bid protests. If a service-disabled firm is found to be ineligible, we require them to delist themselves from the contract register, the CCR, within 30 days. 

If they don’t do it, we do it. So an ineligible firm can’t stay in the 

register, which was something that we found was a problem. 

And the third is that we have investigated the 10 fraudulent examples in the last GAO report. We have referred all 10 to the Inspector General, and will pursue anybody who is proven to be acting inappropriately to the Department of Justice. 

12 

Mr. THOMPSON. In follow-up, given the GAO report, one of the 

problems with HUBZone service-disabled veteran contracting, it 

sounds like—and I throw this out there for you to respond to—has 

the agency become more aggressive in suspending and preparing 

debarment proceedings against federal contractors, if found to be 

ineligible? 

Ms. MILLS. Yes. 

Mr. THOMPSON. Okay. 

Ms. MILLS. We call that going after the bad actors. 

Mr. THOMPSON. Okay. Very good. I read that the White House 

sent out kind of—a little different question, sent out postcards to 

millions of small businesses concerning tax credit and the recent 

health bill. And what actions has SBA taken to inform small businesses of the potential impacts of the health care bill, you know, 

such as mandate to provide insurance to the employees, you know, 

the details that businesses need to know proactively to prepare 

their business plans? 

Ms. MILLS. Right now, on our website, a small business can find 

a very clear description of how to determine eligibility for tax credits. We have estimated that about four million of the six million 

employer-owned employee small businesses could potentially be eligible. But it is hard for them to know, so it is our role to walk them 

through it. 

We are also committed to training and educating all of our 900 

small business development centers, our women’s business centers, 

and our SCORE representatives, so that they also could walk a 

small business through it. And I don’t know about you, but I personally have actually walked a number of small businesses through 

this question, because this is money in their pocket in 2010, and 

they need to have it. 

Mr. THOMPSON. Okay. Thank you. Inspector General, I just want 

to pursue kind of a previous follow-up on premier certified lenders. 

You know, what additional oversight do you believe the SBA should 

take with respect to the PCLs? 

Ms. GUSTAFSON. Well, first and foremost, I think they need to reconsider some of their responses to our audit. I would really like 

to see them tighten up some of the standards that the PCLs are 

using, as far as underwriting. I do think that that’s a problem. 

Again, I think it is crucial that these onsite reviews be done regularly. I think they are probably being done pretty regularly, but 

there has to be follow-up and there has to be consequences. And 

I don’t really—we didn’t really see that happening. 

And they don’t always have to be just bad consequences, but I 

do think that they need to be encouraged and told to be more prudent in some of the practices. I really think that that was the 

main— 

Chairwoman VELA ́ ZQUEZ. Would the gentleman yield? 

Mr. THOMPSON. Sure. Please. 

Chairwoman VELA ́ ZQUEZ. IG, and one of those areas that really 

raised concern could be the exorbitant salaries that some of the 

CDC executives are getting. And the IRS reported that some of the 

executives make more than $500,000 a year, with some earning 

close to $1 million annually. Isn’t that contradicting the mission of 

the CDCs? 

13 

Ms. GUSTAFSON. With the exception of a very few CDCs, which 

were not part of our sample on salary, these are nonprofits, and so 

these are eye-popping salaries. And, again, the crucial thing for us 

is all of the money that is being paid to salaries is necessarily not 

available for either reserve or for economic development in that 

community. And that is really what those CDCs are expected and 

really charged with doing. So it is a concern. 

And so I hope that they do follow through with their agreement 

to look at maybe some requirements on reserves, how much needs 

to be there, use— 

Chairwoman VELA ́ ZQUEZ. Is that an area for SBA to— 

Ms. GUSTAFSON. Absolutely. Yes. 

Chairwoman VELA ́ ZQUEZ. Thank you for yielding. Did you have 

another— 

Mr. THOMPSON. No. My time had well expired beyond at that 

point when I yielded. Thanks. 

Chairwoman VELA ́ ZQUEZ. Mr. Schrader. 

Mr. SCHRADER. Thank you, Madam Chair. Following up on that 

last line of questioning, I guess I would ask the Administrator, 

who, frankly, is new to the position, within a year, so a lot of this 

has happened on other people’s watch, and she is working hard I 

think to correct that, is what I am hearing. 

But with regard to the salaries, that has been a big issue in the 

financial debate. So how are you anticipating dealing with that 

with some of the CDC programs? 

Ms. MILLS. These excessive salaries are deeply disturbing, and 

for exactly the reasons that the Inspector General just described. 

These are nonprofits, and any excesses are supposed to be reinvested in community development. And if they are not, this is inappropriate and has to change. 

We are responsible for oversight of these CDCs, and we are now 

preparing new guidelines on corporate governance to address exactly this issue. 

Mr. SCHRADER. To follow it, I guess I would ask the IG, you have 

talked a little bit about the HUBZone issue with the courts interpreting it one way versus another. I guess I would be interested in 

what you would—what direction you are looking for from the Congress. And, frankly, I would be interested in Ms. Mills’ response to 

that also. 

Ms. GUSTAFSON. Well, in all candor, that was actually Administrator Mills who talked about that— 

Mr. SCHRADER. Oh, sorry about that. 

Ms. GUSTAFSON. —talked about the HUBZone. But while— 

Mr. SCHRADER. Chat away. 

Ms. GUSTAFSON. While I am here, the one thing I do want to 

point out, without getting into a policy debate on preferential—on 

priorities of these programs, we have longstanding concerns about 

the ability to really enforce the HUBZone, just to put it out there. 

HUBZone is a difficult animal to get hold of, because it is hard to 

figure out where these companies—the majority of the employees 

live and whether they are really attempting to maintain the statistics that they have to as far as how many employees live in an economically disadvantaged area. 

14 

So this would be preferential treatment for the program that we 

think is hardest to really enforce, and very hard—Administrator 

Mills talked about an enhanced bid protest procedure. A lot of 

times these things are kind of dependent on the person who loses 

the bid to protest, and it is really hard for a losing bidder to know 

exactly where these companies are, especially in the really limited 

amount of time they have to do the protest. 

And so those are the concerns that I personally—that I have as 

IG on this, but— 

Mr. SCHRADER. Ms. Mills, would you comment, then, please? 

Ms. MILLS. Yes. The SBA and the White House support the congressional intent of parity, or equal treatment, among the contracting programs, which is 8(a), HUBZone, service-disabled veterans, and the women-owned small business. The concern is that 

there was a recent court decision that potentially undermines the 

policy, because it interpreted the Small Business Act to provide for 

a HUBZone preference. 

The administration supports the legislative efforts, which would 

confirm Congress’s original intent to provide for parity. 

Mr. SCHRADER. All right. Very good. A little different strain—we 

have tried it before, Administrator Mills, about some of the existing 

small business programs. And there has been interest, both in Congress and the administration, to increase some of the levels of opportunity within the 7(a) and 504 programs. 

And we have had a conversation about larger small businesses 

and smaller small businesses, and talked a little bit about making 

sure that some of the smaller small businesses had enough in the 

pot that they could compete for, because some of the larger small 

businesses could eat up a lot of the increases that we both, you 

know, could argue about the number, but I think are important. 

Could you address that? How do you see us addressing that going 

forward? 

Ms. MILLS. The President and the administration have asked 

Congress to consider raising the loan limits on 7(a) and 504 to $5 

million. Currently, there are $2 million loan limits. The reason for 

this is that there is a gap in the marketplace. Many of the institutions that did do these larger loans for warehouses, and for financing some of these business development companies, are not in the 

market anymore. And so there is enormous pressure from everyone, from car dealerships and franchisees to manufacturers, who 

have capped out at the $2 million limit. 

The concern was raised by you and also by the Chairwoman from 

the start that this would crowd out the smaller loans. The smaller 

loans are really extraordinarily important at the SBA, and these 

are the main street small businesses which we serve as the core 

of what we do. 

So one of the things that has been suggested is that we cap the 

number of these jumbo loans that would be allowed, so that we 

serve that market, and do not allow them to crowd out the smaller 

loans. The concern is that these large loans are more profitable, 

larger, easier to do, and that the banks might not pay attention to 

the smaller loans. We cannot let that happen. 

Mr. SCHRADER. I appreciate that. I yield back. 

Chairwoman VELA ́ ZQUEZ. Mr. Luetkemeyer. 

15 

Mr. LUETKEMEYER. Thank you, Madam Chair. Ms. Gustafson, 

very quickly, in your testimony you talk about a lot of things that 

are wrong or things to be changed or doing differently. Have you 

seen improvement over the last year or two in the way things have 

been done? 

Ms. GUSTAFSON. Well, I have been here six months, but I will try 

to speak— 

Mr. LUETKEMEYER. Okay. 

Ms. GUSTAFSON. —on behalf of the office in general. I think— 

Mr. LUETKEMEYER. You qualified your answer already. Okay. 

Ms. GUSTAFSON. I think that, you know, I came into the job kind 

of at the tail end of the preliminary work that SBA had done on 

the Recovery Act, and big increase in those programs. And I know 

from speaking to my auditors, and working on it when I got there 

in October, we were really heartened by the amount of thought and 

work that went into trying to implement these programs and institute a risk management plan on these types of things, as opposed 

to doing it very quickly and dealing with the aftermath afterwards. 

I am very heartened by Administrator Mills’ statement that she 

is very serious about suspension, debarment, and enforcement. I do 

think that that’s something that SBA has been lacking in. And because of a lack of resources, or just kind of in their more traditional 

role as an advocacy organization almost, I do think that that is 

somewhere that they have been lacking. 

I am hopeful that we continue to work together and we do get 

a stronger suspension and debarment program in SBA. We are not 

there yet. I hope we see some suspensions and debarments. Traditionally, it has been very hard to get anybody debarred from an 

SBA program, unless there has been a conviction. And that is really not what the law is, and I think it is important to start really 

kicking people out of the program before they are going to jail. 

And, you know, I have a commitment from the Administrator 

that she is going to work with us on that, and, you know, I think 

it is going to be very telling in the next several months whether 

we can really get that done. Suspension and debarment is a 

lengthy process, but the proof will be in the pudding pretty soon 

on these. 

Mr. LUETKEMEYER. Okay. Great. You mentioned something a 

while ago about loan agent fraud. Can you explain that just a little 

bit for me, please? 

Ms. GUSTAFSON. Yes. Our criminal investigators in the last several years have seen a really kind of distressing trend of very complex fraud schemes out there, not the traditional business owner 

who might be falsifying an equity injection to get a loan for his own 

personal benefit, or just because he can’t quite make it. 

We are seeing active conspiracies among people like loan agents, 

where they are packaging loans and taking part and falsifying documents, and it is not just one SBA loan, and it is certainly not just 

one government loan, and— 

Mr. LUETKEMEYER. So the loan originator himself is a part—or 

herself is a part of the scheme to defraud the government or get 

people monies who don’t really have—or shouldn’t be eligible for 

them. 

16 

Ms. GUSTAFSON. Exactly. As I mentioned in my testimony, in the 

last 10 years, just talking about cases where we have been able to 

pursue criminal action, we are talking about loans of $250 million, 

where one of the bad actors is a loan agent who is actively involved 

in perpetuating the fraud. 

And that is why one of the management challenges for the agency has been—it is very hard to track these loan agents, and it 

would be fantastic to be able to go to the database and start when 

you can see a trend, you can stop this stuff a lot sooner. And right 

now we don’t have that capability, and so, again, in our agency 

management challenges, tracking loan agents and really monitoring that and trying to figure out both where the bad actors are 

and where just the bad loan agents who are doing bad loans are 

is crucial. It is really crucial, so— 

Mr. LUETKEMEYER. Very good. Administrator Mills, what do you 

see as the environment out there right now? Do you see the continued increased demand for SBA loans? Is it tapering off? Do you see 

the economy—how is your office interacting with everybody? What 

do you see? You are on the front line. 

Ms. MILLS. Yes. We are now operating at a very high level. We have put about $26 billion into the hands of small business through 

the Recovery Act due to the 90 percent guarantees and the fee reductions. So we are at above our 2007/2008 levels. We have completely come back at the SBA. 

But the total environment out there is not back. There is still a 

problem with access to capital for small businesses, and it comes 

in a series of pockets. There are all kinds of underserved markets 

that are being left behind in the recovery. There are larger loans 

that aren’t being made. There are lines of working capital being 

cut. There are commercial real estate issues. What we have done 

is identify those gaps, and then design our small business jobs bill 

request before Congress to meet each of these gaps. 

Chairwoman VELA ́ ZQUEZ. Time is expired. 

Mr. LUETKEMEYER. Thank you, Madam Chair. 

Mr. GRAVES. Madam Chair, can I interject real quick? To dovetail on what Representative Luetkemeyer said, and what I was 

talking about, too, as far as the status revoked of some of these 

firms, could we get a list from the last five years of the firms, your 

lending partners, whose status you have revoked? 

Ms. MILLS. Yes. 

Mr. GRAVES. Please. 

Ms. MILLS. Yes. 

Chairwoman VELA ́ ZQUEZ. Mr. Nye. 

Mr. NYE. Thank you, Madam Chairman. Inspector General Gustafson, I noted in your testimony—and we have talked a little bit 

today about the fraud that was uncovered in the service-disabled 

veteran program—you mentioned that your office is working with 

the Department of Justice to prosecute companies that were found 

to have defrauded the program. Can you give us a little detail on 

exactly what you are doing with Department of Justice and how far 

along you have gotten? 

Ms. GUSTAFSON. As they are active criminal investigations, I 

can’t. I will tell you that we pursued—we opened a case on every 

instance that GAO found, and we are still—some of these cases, 

17 

many of these cases, are still active, and we really do anticipate 

getting some movement and getting some actions, getting some indictments. And when that happens, I can fill you in. But until 

then, in an open hearing, I really can’t. I am sorry. 

Mr. NYE. Okay. Can you talk a little bit about—you mentioned 

talking with Administrator Mills on an action plan and getting 

some input from her on some of the steps that can be taken to 

strengthen the enforcement, particularly on debarment and suspension. Can you talk a little bit about some of the specific steps you 

would like to see, and going back to the bid protest phase? 

And you mentioned that one of the challenges—and I hear this 

from a lot of constituent companies at home—that they feel like the 

burden has been on them sometimes to point out the problem rather than having that happen as a matter of automatic course. Can 

you talk about what you would like to see? 

Ms. GUSTAFSON. Right. That’s exactly right on the bid protest. I 

mean, it is good to have a robust bid protest process, in case a losing bidder happens to have the information where they can pursue 

it. But the timelines are short, and the burden is really tough. 

What I would like to see is multi-step. First, again, it is important that Administrator Mills has said that she will make sure the 

SBA is kicking people out of the program that don’t belong there. 

But it really is going to be a big change for the agency to see themselves as a strong enforcement authority. 

There needs to be some very strong training on what these programs are, when suspension is appropriate, when debarment is appropriate. We are always worried about programs where it is a selfcertification program where you don’t have to do a lot on the front 

end to prove that you should be in there. And service-disabled veteran is one of those where there is a lot of leeway to just get yourself on the list, and we are concerned about that. 

Again, this is something we need to work with the VA on as well, 

but it concerns us. There needs to be—one of the things SBA is 

doing, for example, in the women owned small business programs, 

which is a new program that they have announced some regulations for, is requiring documents to be there, so that people can see. 

You know, it is just not enough to just say, ‘‘Yes, I qualify because 

I am this, this, and this and this.’’ You have to submit some documents to show that. 

I think that that is—that is crucial. It is too much—too much 

emphasis on the tail end which will never be completely effective. 

You have to have people hesitate before they decide to try to get 

in these programs, and I am not sure that that is happening right 

now. 

Mr. NYE. Okay. Administrator Mills, can you just comment on 

your thoughts on steps that you will be taking to try to enhance 

that? And also, can you talk a little bit about your approach towards perhaps using suspension as maybe an intermediary step 

that might be easier to pursue than debarment? 

Ms. MILLS. We see, in all our procurement programs, three 

phases of going after fraud, waste, and abuse. The first is on the 

front end, whether it is certification, or, in the cases of self-certification, we actually send a letter requiring people, under penalty of 

18 

perjury, to re-self-certify, and we make sure that they know that 

we are serious and that they have to be eligible. 

The second is site visits--ongoing and monitoring actual businesses. So once someone is in a program, we need to visit them. 

And as I said earlier, we are up to more than 1,000 site visits in 

HUBZone, for instance, in order to make sure that people who are 

supposed to be in the program stay. 

And the third is we are committed to going after the bad actors. 

We are very grateful for the partnership with the IG. We think the 

suggestions the IG has made for training and other changes in 

order to be more effective in going after bad actors are very valuable, and we are going to pursue them aggressively. 

This is a very high priority. 

Mr. NYE. And just one last question. Do you intend to make 

greater use of unannounced site visits, the kind that really I think 

have a little bit more effect, since they don’t know you are coming? 

Ms. MILLS. Yes. 

Mr. NYE. Thank you. I yield back. 

Chairwoman VELA ́ ZQUEZ. Mr. Bartlett. 

Mr. BARTLETT. Thank you. I first want to apologize for being 

late. We just completed a markup in Armed Services. 

I want to make a couple of comments about HUBZones, and then 

to ask a question about HUBZones. Most of our programs are 

meant to help disabled veterans or women, specific groups. The 

HUBZone program really helps whole communities. 

As an example of that, I have a HUBZone contractor who has a 

facility, both in Howard County near NSA, and out in Garrett 

County. His facility in Garrett County pays his people there probably three times the mean annual salary in Garrett County. So it 

is a hugely important economic engine there. 

He recently had an employee that qualified for a job in Howard 

County or one in Garrett County. He told the employee that if he 

went to work in Howard County, he would get $100,000; if he went 

to work to do the same kind of thing in Garrett County, he would 

get $70,000. The worker very wisely chose to go to work in Garrett 

County for $70,000, because he will live better in Garrett County 

on $70,000 than he would live with $100,000 in Howard County. 

So this is a win-win program, both for the community because 

now we have people working in Garrett County at roughly three 

times the mean annual salary there, and now NSA can hire three 

people in Garrett County, where they could only hire two people in 

Howard County. So it is a win-win for both the government agencies and for the communities. 

But, as you know, this program has been fraught with fraud, and 

that is partly our fault, because if you look at the 8(a) program and 

this program, we gave you, until very recently, enormously relatively more money to monitor the 8(a) program than we did the 

HUBZone program. 

We were counting on something which runs contrary to good 

business practice, and that is we were relying on peers to say, ‘‘Joe 

over there is cheating. He really doesn’t have enough of his people 

in the District, and that is—the office in the District is only a 

fraud. His main office is somewhere else.’’ 

19 

Now we have given you more money, which we should have 

given you earlier, and I was pleased that you—how many site visits 

you said you had made. How are we doing it, making sure that this 

really worthwhile program is effectively monitored, so that people 

aren’t able to cheat so easily? 

Ms. MILLS. As I said, we have a three-prong—we are very committed to going after this fraud, waste, and abuse, and it has—this 

is an issue where we have done a lot of work. We still have more 

work to do. 

In the front end, we have changed the certification and increased 

our requirements substantially. In the middle part, we have done 

the increased site visits, which went from I think seven in the six 

months before I came to now more than 1,000 in this year. And we 

have trained, so now we are doing unannounced site visits, and 

really much more robust, you know, activity in that, and people 

know we are serious. We are going after the bad actors. 

So we are committed to executing this program at another whole 

level, because we have had lots of issues to address. We have addressed some of them. We have more work to do. 

Mr. BARTLETT. I know that GSA has looked at this previously. 

Is GSA now following—I am sorry, GAO—GAO now following the 

progress that the administration is pursuing? 

Ms. MILLS. GAO gave us several audits. We actually accepted I 

think 11 of the 12 recommendations, and really it is 12 of the 12, 

because we don’t have any issue with the last one. So we are working with GAO. They have given us a very good road map in our 

contracting operations, and we are working to implement all of 

those recommendations. 

We also have $2 million in the FY11 budget for increased oversight in our contracting programs. 

Mr. BARTLETT. Are they happy with your progress? 

Ms. MILLS. The GAO? 

Mr. BARTLETT. Yes. 

Ms. MILLS. Well, as I said, we accept all of their recommendations. So I hope they are happy. 

Mr. BARTLETT. Well, but have you implemented them? You may 

accept them— 

Ms. MILLS. Yes, we are implementing them. 

Mr. BARTLETT. —but implementing something else. 

Ms. MILLS. Yes, we are implementing all of them. 

Mr. BARTLETT. And they are happy with the extent to which you 

have implemented them? 

Ms. MILLS. You know, they are— 

Mr. BARTLETT. Is there something in writing saying that, or have 

they not yet had an opportunity to do that specifically? 

Ms. MILLS. I don’t think that they have come back, but we hope 

that they will be very happy. We are working very much in good 

partnership with them, and we believe, as I said, there is more to 

do. But we are making progress. 

Mr. BARTLETT. Thank you very much. 

Chairwoman VELA ́ ZQUEZ. Mr. Altmire. 

Mr. ALTMIRE. Thank you, Madam Chair. Administrator Mills, we 

have talked extensively about the salaries issues, and I just had 

more point I wanted to ask about that, just for clarification. And 

20 

as context, as you know, the IRS prohibits nonprofit entities from 

engaging in certain activities in order to maintain their status. 

Specifically, nonprofits must ensure that earnings do not benefit 

any private shareholder or individual. And, as we have discussed, 

the CDCs at the heart of this report were paying an average of 25 

percent of their earning in executive compensation, which, as most 

people would agree, is well above what you see generally in the 

nonprofit world. And you have said that you identify that as a 

problem and something you want to see corrected through the administration level. 

But my question is: would the SBA—would you support legislation that moved forward that strips CDCs of their nonprofit status 

when executive compensation is deemed to be excessive? 

Ms. MILLS. As we said, this is deeply disturbing, because the 

money that is—that goes into excessive salaries is really taken 

right out of the benefit of the community. And these CDCs are subject to our oversight, and we are going to issue corporate governance guidelines to this effect. 

Mr. ALTMIRE. Good. But what— 

Chairwoman VELA ́ ZQUEZ. Would you yield, the gentleman yield? 

Mr. ALTMIRE. I would, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. Also, I would like to bring to the attention of the Committee and the Administrator that recent IRS 

records show that a number of CDCs have luxury cars for company 

use, including a CDC with Lexuses, another CDC driving a Mercedes, and yet another one with a high brand Acura. 

So do you think that these type of amenities are consistent with 

the goals of the program? And when you say that you are working 

on corporate and governance, give us a timeline as to when those 

will be implemented. 

Ms. MILLS. Well, this is increasingly disturbing information, and 

thank you for bringing that to our attention. We will give you a 

timeline, but this is for immediate attention. 

Chairwoman VELA ́ ZQUEZ. Thank you for yielding. 

Mr. ALTMIRE. Certainly. So the question was about legislation 

moving forward. Do you feel, given your answer, that it wouldn’t 

be appropriate, that you have identified this as a problem, and you 

think you can correct it administratively? Or if we did decide to 

move forward legislation, is it something that we would have your 

support on? 

Ms. MILLS. Well, we certainly will move forward immediately on 

this, and we—I think we share the concern amongst us, so we are 

probably all in the same—of the same mind on this. 

Mr. ALTMIRE. Great. Thank you. 

Inspector General Gustafson, approximately 80 percent of loans 

guaranteed annually by the SBA are made by lenders to whom 

SBA has delegated the loan-making authority, as you know. And 

the SBA has centralized many loan functions and reduced the 

number of staff performing these functions. 

So the SBA has given more responsibility and independence to 

its lenders, but the need for effective oversight would seem to be 

more important than ever, given that fact. So has the OIG identified any systemic deficiencies in the SBA’s lender oversight and 

risk management efforts? 

21 

Ms. GUSTAFSON. We have been concerned with lender oversight 

as well. I know that there has been a very recent GAO report on 

lender oversight. We were actually intending to begin an audit of 

just the lender oversight process. And given the very extensive 

GAO report, which I thought, quite frankly, was very useful, we 

have held off on that, because it seems kind of duplicative to come 

in at a time when SBA has made attestations that they are going 

to work on the issues that GAO has identified. 

We have concerns with lender oversight. We, of course, have had 

instances of lenders with delegated authority really doing some 

kind of bad things, and having delegated authority a lot longer 

than they really should have, based on some prior cases. And, obviously, that is a big concern for us. 

So I would just echo what GAO has found. Sorry. 

We have in the past reiterated that we do understand that SBA 

has a limited amount of resources, but still has a very important 

oversight role. We would like to see things like their onsite reviews 

timed more appropriately, so you have an onsite review at a time 

when you may be looking at a lender’s delegated authority and 

their risk rating, and having the two kind of marry, so that it becomes a useful tool and a timely tool. 

That is something that I think GAO echoed in their audit, and 

I think that would go a long way. When you have limited resources, directing the resources at the right time is crucial. I am 

going to read my post-it note for a second. 

So we have found in our oversight of Recovery Act loans that we 

are concerned about the quality of purchase reviews. That is something that, again, needs to be really emphasized by SBA, and we 

come in and we have concerns about those. And, again, we are concerned about the quality of onsite reviews and the timing of onsite 

reviews. That is something that is on our radar and that we will 

be looking at as well. 

Mr. ALTMIRE. Thank you, both. 

Chairwoman VELA ́ ZQUEZ. Mr. Buchanan 

Mr. BUCHANAN. Hi. Administrator, I appreciate the opportunity. 

You called me at my office. We had a good discussion, so I appreciate the opportunity to be here today. 

I read a little bit—I want to talk about health care. It is a little 

maybe off the subject, but I want to touch base on the White House 

had sent out a bunch of mailers of small businesses in terms of 

talking about tax credits and other things. What is the SBA doing 

to work with small businesses about the new health care bill in 

terms of compliance or in terms of tax credits that they might receive? Do you have an aggressive effort? Maybe you covered that, 

I don’t know, I got here a little late. 

But I just wanted to touch base on that, because that—I am 

hearing of that in the business community. I was back home this 

weekend, and we had an actual hearing in our area. But health 

care is a big issue for small businesses, and they are trying to 

make sense of where we are at in that process. 

Ms. MILLS. Yes. We do have an aggressive effort in the area of 

making sure that small businesses that might be eligible for the 

new 2010 health care tax credits know that they might be. We immediately posted on our website the IRS guidance along with plain, 

22 

common sense examples, so that a small business can walk themselves through what they might be able to apply for as a tax credit. 

And I was saying that we are also going to train our personnel, 

and resource partners, to help a small business get the money that 

they need, because this is cash in their pocket in 2010. We believe 

that four million of the six million small businesses that have employees may in fact be eligible, so that is a pretty big number. 

Mr. BUCHANAN. The other thing, on a little different note maybe, 

but we just had a conference that I spoke at where we had Panama 

and a lot of our people in our area, small business people primarily, 

looking to do more business in Central and South America and 

Florida. Has the SBA had discussions with the Export-Import Bank 

or the United States Trade Representatives on ways to increase exports by small businesses? 

As you recall, the President made that part of his State of the 

Union as to he thought that was a great opportunity to create jobs, 

and I agree. And then, I don’t know if you want to touch on the 

other thing, the free trade agreement that came up a lot about 

Panama and the U.S. and why we can’t get that done. 

Ms. MILLS. We are part of the President’s National Export Initiative in which we are working to double exports over the next five 

years. Thirty percent of exports are done by small business under 

indexes, so there is a lot of opportunity. Only 250,000 small businesses export. 

We at the SBA provide the leadership in the Small Business Export Trade Coordinating Committee, which includes Department of 

Commerce, Department of State, and the Export-Import Bank. So 

Gary Locke and Fred Hochberg and myself go on the road, and we 

have a big effort around small business exporting that is very 

much an interagency effort. We will be implementing a lot of new 

programs. We right now train 17,000 small businesses a year in exporting, but we are going to do more. 

Mr. BUCHANAN. And my last question is just—we did a congressional hearing with a fellow member of the panel—he is actually 

chairman of the Finance and Tax; I am the ranking member—Congressman Schrader, in my district, I think Monday—Monday I 

guess it was, and we talked about access to capital. There still appears to be all the banks in our area—maybe it is different in different areas, especially all the community banks, but even the bigger banks, have—they are not in the business of lending money, 

but that is their primary source. 

Is there any way that the SBA in this environment, because it 

is so tough for small businesses to get access to credit, that they 

could do any kind of direct lending of qualified small businesses? 

Because I have got to tell you, we had one guy as a witness that 

does consulting for the region, and he says he is, you know—credit 

that was very easy to get or they have had more than enough collateral, they can’t get—there is no credit, absolutely zero, or very 

little available, because they are looking at past earnings in our region, and a lot of businesses haven’t done very well the last year 

or two. Is there any thought about that at all? 

Ms. MILLS. Well, we know you were kind enough to invite one 

of our capital access folks down there with you, and you have a 

particularly— 

23 

Mr. BUCHANAN. And he did a good job, by the way. 

Ms. MILLS. —tough—thank you. We have a great team. But you 

have a particularly tough geography, and your banks have been hit 

hard and are recovering more slowly. 

We have brought our SBA lending back above the 2007/2008 levels, but the rest of the market is not recovering as fast. So what 

we have done is go through where the gaps of the markets are. And 

we have proposed specific parts of the jobs plan, whether it is 

something for commercial real estate, owner-occupied commercial 

real estate, whether it is something for working capital lines of 

credit, or just continuing this really successful 90 percent guarantee and fee reductions. 

That is only continued now through I believe the end of May. We 

very much hope that Congress might consider continuing it further, 

at least for the fiscal year end. 

Mr. BUCHANAN. Thank you, and I yield back. 

Chairwoman VELA ́ ZQUEZ. Time is expired. Ms. Kirkpatrick. 

Ms. KIRKPATRICK. I want to thank both of you for the good job 

that you have done in a relatively short time, and, you know, I 

have seen an improvement in my district. And, Administrator 

Mills, I especially want to thank you for your attention to rural Arizona, and for coming to Arizona, and the time that you have spent 

on the phone with me talking about this. 

You know, it is still that balance between adequate documentation for small businesses and making sure they get the money they 

need. I am still seeing that problem in rural Arizona where even 

in good times small businesses struggle. And so when the criteria 

is really tightened, they don’t look good compared to the urban 

businesses, and we are still struggling with that. 

And I just wondered—I wanted to follow up a little bit with Mr. 

Buchanan’s line that, you know, I hear it from a lot of my small 

businesses, they would prefer to apply directly to the SBA and not 

to have to go through a bank, because the major banks who are 

carrying the SBA loans have good relationships with metropolitan 

businesses, but they are not informed about how small businesses 

in rural areas work. 

And so maybe—I would like your thoughts about the SBA, you 

know, lending directly. Also, you know, is there any criteria with 

the major banks that they fund a certain portion of small business 

loans in rural America? 

Ms. MILLS. On the question about rural loans, you know, we are 

working very hard on that, and I am actually pleased that I have 

recently seen some data that actually in Arizona things are lightening, because that was one of the areas that had lagged. 

On the issue of direct lending, I think the Chairwoman has also 

raised that issue, you know, from the beginning. We looked at it 

very hard. We had a whole task force around it. The issue of actually executing and operationalizing that has some unintended consequences and some costs related to it. 

And so we have gone in the direction of looking at the specific 

gaps and driving the program that we have to reach the areas that 

are not getting reached, you know, particularly the underserved 

markets, some of the smaller loans, which are still highly problematic. 

24 

Ms. KIRKPATRICK. Would part of that effort be requiring the 

banks who receive SBA funds to fund a certain number of—or a 

certain percentage of small business rural businesses? 

Ms. MILLS. We have not yet considered that. 

Ms. KIRKPATRICK. Okay. All right. And then, Inspector General 

Gustafson, you talked—I am a former prosecutor, so I know a little 

bit about how hard it is to prosecute white collar crime. What kind 

of resources do you need to be able to do a better job? 

Ms. GUSTAFSON. Well, everybody could use more resources. I 

have a tremendous staff of criminal investigators, but I appreciate 

your discussion about prosecutors. I was a former prosecutor, too, 

and I remember white collar cases, and I hated them because they 

are hard and they are complex. I would rather take a drug case 

any day, in all candor. 

I think what would really be helpful for us to get more bang for 

our buck would be, quite frankly, some change in the laws. Right 

now, not only are these cases tough and complex, but a lot of them, 

especially those in the contracting area, are no loss cases, which is 

to say the government got a contract, the government got services, 

and especially under federal sentencing guidelines it becomes very 

unappealing to go to an Assistant U.S. Attorney and say, ‘‘I need 

you to devote six months to this case,’’ and the guy is probably 

going to get probation. 

And that is something that in my understanding, there had been 

an approach to the Federal Sentencing Commission, and some resistance to that. A lot of times that kind of movement takes a statutory change. And if these people who really are defrauding the 

government, and taking money that is not meant for them, are 

going to prison, some of this—a lot of this would stop. And so that 

is something that would be incredibly helpful. 

On these complex cases, we have suggested longer statutes of 

limitation, because they are very complex. And, you know, I have 

a good staff, but I have under 50 investigators and billions of dollars out there that I am trying to oversee. And so it is tough. 

Chairwoman VELA ́ ZQUEZ. Would you— 

Ms. GUSTAFSON. Yes, I am sorry. 

Chairwoman VELA ́ ZQUEZ. I am sorry. 

Ms. GUSTAFSON. Yes, I will yield. Go ahead. 

Chairwoman VELA ́ ZQUEZ. I am sorry I interrupted you. 

Ms. GUSTAFSON. That is okay. 

Chairwoman VELA ́ ZQUEZ. Just finish your line of thought. 

Ms. GUSTAFSON. I have lost it. 

[Laughter] 

Chairwoman VELA ́ ZQUEZ. I am sorry. I am sorry. Would you 

yield? I know you are talking about how difficult it is to prosecute 

this type of white collar cases. But if we have proper oversight by 

the agency, and then it will make your job much easier. 

Ms. GUSTAFSON. Actually, the best way to deter these people is 

to hit them in the pocketbook, and that can be done with stronger 

enforcement. If they think on the front end that they are not going 

to get to where they are getting the money, that is a really strong 

deterrent, as opposed to maybe getting restitution at the end. It is 

a lot harder to get it back once it is out the door, so I agree with 

you wholeheartedly. 

25 

Chairwoman VELA ́ ZQUEZ. Thank you for yielding. 

Ms. KIRKPATRICK. Thank you. Thank you, Madam Chairman. 

Chairwoman VELA ́ ZQUEZ. Who else? Do you have any other questions? 

[No response.] 

I do have more questions. I would like to talk about SBA lender 

oversight. And, Ms. Mills, or, no, Ms. Gustafson, in May 2003, an 

IG audit of the microloan program identified deficiencies in the 

SBA’s oversight of lenders. Six years later, in April 2009, the IG 

reported that SBA still had not taken final action to develop a comprehensive microloan program standard operating procedures. 

It also has not set program goals or moved to require outcomeoriented data from all program participants. Why are we seeing 

this failure to take appropriate corrective actions? 

Ms. GUSTAFSON. That is a question that would be hard for me 

to answer. You are right, I think the microloan program is woefully 

understaffed. I think that they definitely need to have this oversight in place. I can’t explain why it hasn’t happened. I would note 

that lender oversight in general has been a management challenge 

for the agency for years, and last year, just looking at a report, we 

haven’t seen a change, we haven’t seen an improvement yet on 

some of these. So it is a problem. 

Chairwoman VELA ́ ZQUEZ. Administrator Mills, particularly at a 

time when small businesses are struggling in getting capital, 

microloan lending has been an important element that really 

helped some of those who have not been able to access capital. So 

we need to make sure that microloan lenders are complying with 

the law. And for that, we need proper oversight. 

Ms. MILLS. Madam Chair, you are exactly right. And this is now 

on us, and we are addressing it. We are working with the IG, increasing the staff, and writing the SOP. We need more clarity and 

more simplification. We actually have a program for automation. 

The place had no automated systems, all paper. 

Chairwoman VELA ́ ZQUEZ. Timeline? 

Ms. MILLS. That is unacceptable. 

Chairwoman VELA ́ ZQUEZ. Ms. Mills? 

Ms. MILLS. Pardon? 

Chairwoman VELA ́ ZQUEZ. Timeline? 

Ms. MILLS. Timeline? 

Chairwoman VELA ́ ZQUEZ. Yes. 

Ms. MILLS. Well, this is immediate. We are in process. We just— 

Chairwoman VELA ́ ZQUEZ. Okay. 

Ms. MILLS. —hired a new branch chief last week, and the SOP 

is being written. And we can give you a timeline. 

Chairwoman VELA ́ ZQUEZ. Okay. Administrator Mills, SBA recently put out a request for quotation worth up to $5 million for 

a task order consulting contract. This potential award has now 

been limited to four companies, including McKinsey and Company. 

This contract expands on work done under a previous contract performed by McKinsey. 

Given that a number of senior officials, including yourself, 

worked for McKinsey, does the agency have any officials outside reviewing these contracts? 

Ms. MILLS. We have a very robust competitive contract system. 

26 

Chairwoman VELA ́ ZQUEZ. I am asking about a truly independent 

third party. I am not—does the Board have outside people who do 

not—are not working for the agency or have worked for McKinsey? 

Ms. MILLS. The contracting process is an independent competitive process. I don’t personally get involved with any individual 

contracts. It is very important that that process be complied within 

an orderly process, because, as you said earlier, we are the standard. 

Chairwoman VELA ́ ZQUEZ. Okay. My question is: does SBA have 

officials outside the SBA reviewing these contracts? 

Ms. MILLS. I am not familiar with the individual contract, and 

we would be happy to get back with you and answer your question. 

Chairwoman VELA ́ ZQUEZ. Okay. In addition to the problems identified in the recent CDC PCL audit, the IG also conducted a review 

of the 7(a) loans disbursed pursuant to ARRA. The IG found numerous deficiencies in this program. The SBA has an outstanding 

request for over half a billion dollars to fund the 7(a) and 504 programs through the end of the fiscal year. What is the SBA doing 

to address the problems identified by the IG? And how is the agency working to ensure taxpayers’ money is being used responsibly? 

Ms. MILLS. This review of the IG actually turned out to be extremely helpful in giving us guidance of how to solve a problem 

which was unacceptable, and that was that the guidelines that we 

had given, according to the Recovery Act, required additional documentation, but it turned out the loans didn’t have that documentation, because it wasn’t clear to the lenders and the borrowers that 

they had to have these certifications. I think it was an additional 

immigration certification or a workforce certification. 

But now, thanks to the IG for pointing it out in this early audit, 

we were able to simplify and clarify what the requirements were 

and get it on track in an efficient way. And to us it is an example 

of how to work productively with the IG. 

Chairwoman VELA ́ ZQUEZ. In exercising our oversight role, this 

Committee could request contract file of the agency whenever we 

are in that process. We did so, and the SBA General Counsel indicated that they lost materials associated with an award. Is that a 

common occurrence, or is this the first time that such a thing happened? 

Ms. MILLS. Well, whether it is common or the first time, it is 

deeply disturbing. And we are getting—I am aware—that this file 

went missing. We are able to reconstruct the file. I think we have 

sent half of it to you, and the rest of it will come to you, and we 

will get it to you. And we are doing an investigation. 

Chairwoman VELA ́ ZQUEZ. I take the responsibility, the oversight 

responsibility, of this Committee very seriously, whether it be a 

Democratic administration or a Republican administration in the 

White House. And I want to make that clear. So it is nothing personal. It is our duty to do that. And I expect that when documents 

are requested, they are made available to us. 

Ms. MILLS. Absolutely. 

Chairwoman VELA ́ ZQUEZ. Thank you. Any other member has any 

question? 

[No response.] 

27 

So with that, I ask unanimous consent that members will have 

five days to submit a statement and supporting materials for the 

record. Without objection, so ordered. 

This hearing is now adjourned. 

[Whereupon, at 11:30 a.m., the Committee was adjourned.] 

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