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27–808 PDF 2006

FY ‘07 BUDGET AND REAUTHORIZATION

PROPOSALS OF THE SBA

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

WASHINGTON, DC, MARCH 15, 2006

Serial No. 109–43

Printed for the use of the Committee on Small Business

(

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

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

JEB BRADLEY, New Hampshire 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

RIC KELLER, Florida 

TED POE, Texas 

MICHAEL SODREL, Indiana 

JEFF FORTENBERRY, Nebraska 

MICHAEL FITZPATRICK, Pennsylvania 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

DANIEL LIPINSKI, Illinois 

ENI FALEOMAVAEGA, American Samoa 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

RAU ́ L GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

JOHN BARROW, Georgia 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

J. MATTHEW SZYMANSKI, Chief of Staff 

PHIL ESKELAND, Deputy Chief of Staff/Policy Director 

MICHAEL DAY, Minority Staff Director

(II) 

C O N T E N T S 

WITNESSES

Page 

Barreto, The Honorable Hector, Administrator, U.S. Small Business Administration ................................................................................................................... 5

Smith, Ms. Patricia, PEMBA Lighting and Automation ...................................... 21

APPENDIX

Opening statements: 

Manzullo, Hon. Donald A. ................................................................................ 36

Velazquez, Hon. Nydia ..................................................................................... 73

Prepared statements: 

Barreto, The Honorable Hector, Administrator, U.S. Small Business Administration ................................................................................................... 75

Smith, Ms. Patricia, PEMBA Lighting and Automation ............................... 96

(III) 

(1)

FY ‘07 BUDGET AND REAUTHORIZATION 

PROPOSALS OF THE SBA 

Wednesday, March 15, 2006

HOUSE OF REPRESENTATIVES

COMMITTEE ON SMALL BUSINESS

Washington, DC 

The Committee met, pursuant to call, at 2:45 p.m., in Room 2360 

Rayburn House Office Building, Hon. Donald Manzullo [Chairman 

of the Committee] presiding. 

Present: Representatives Manzullo, Bradley, McCotter, Westmoreland, Velazquez, Udall, Lipinski, Christensen, Bordallo, Barrow, Moore. 

Chairman MANZULLO.Today, the Committee will examine the 

President’s Fiscal Year 2007 Budget Reauthorization Proposals of 

the Small Business Administration. The President’s Budget request 

includes $624 million in spending for the SBA in Fiscal Year 2007. 

This is about 37 percent less than what was spent on the SBA in 

Fiscal Year 2001, while in the same time, the SBA served more 

small businesses than ever in its history. The SBA certainly knows 

how to do more with less and it ought to be commended. While the 

President’s budget request for the SBA is generally sound and reasonable, there are few notable exceptions particularly the proposal 

to increase fees in the SBA’s finance programs to begin to cover 

some administrative expenses and the idea to institute an adjustable interest rate for disaster loans in the fifth year. 

However, I would be negligent if I did not remind my colleagues 

and the small business community that the President’s budget request also includes the following key tax relief proposals of keen interest to small businessmen and businesswomen. 

1. Making permanent the tax cuts previously passed by Congress 

including death or an estate repeal in which the average tax savings in 2005 was $3,235 per small business according to the U.S. 

Treasury; 

2. Making contribution to the Health Savings Account tax deductible; and 

3. Enacting an even higher and permanent small business ex- pensing limit to $200,000. 

The Committee is also in the middle of a comprehensive review 

of all SBA’s programs which has not been done since 1995 in preparation for reauthorization. In 2004, Congress passed a two-year 

reauthorization bill that made a variety of significant changes to 

the policies and small business programs of the SBA. The Committee is reviewing how the SBA has carried out the various proVerDate 0ct 09 2002 13:35 Oct 04, 2006 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\HEARINGS\27808.TXT MIKE
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grammatic changes contained in the previous reauthorization and 

ideas for further reform. 

Two weeks ago, Representative Musgrave’s Subcommittee examined SBA’s entrepreneurial programs. Last week, Representative 

Bradley’s Subcommittee reviewed SBA’s finance programs and before the March District work period, Representative Akins’ Subcommittee will conduct an oversight hearing on SBA’s procurement 

programs. 

Today we’re honored to have the Administrator of the SBA, Hector Barreto testify before the full Committee to discuss his vision 

of the direction of the SBA for the reminder of the administration. 

Mr. Barreto is the second longest serving SBA administrator in its 

history and I am pleased that he has taken the time to be with us 

this afternoon. 

Through the hearing process, the Committee has received input 

from SBA stakeholders as to what should or should not be included 

in the authorization package. About two weeks ago, the Committee 

received the Administration’s legislative proposals for the SBA. The 

purpose of the hearing today is to examine these proposals, particularly in light of input we received from other SBA stakeholders. 

I’m pleased the Administration included several provisions in 

their reauthorization package that would further improve SBA’s response to catastrophic disasters. The SBA has done an excellent job 

already by approving a record $6 billion of low interest disaster 

loans for over 86,200 Gulf State residents and business owners affected by Hurricanes Katrina, Rita and Wilma at a rate twice as 

fast as the nation’s previous largest disaster, the Northridge Earthquake in 1994. 

The overall approval rate for SBA’s disaster loans in the Gulf region is 31 percent or 37 percent if you exclude withdrawn application, not 15 percent as alleged by the minority. This is up 16 percent from the last year. Why has this happened? SBA has hired 

and trained 4,250 employees to process disaster loan applications, 

doubled the size of their loan processing center, quadrupled the 

size of their call center, doubled access to the loan processing system, streamlined documentation for all business loans and simplified approvals and processes for business loans under $100,000, 

expedited loan approvals with credit scoring, created a new system 

for tax verification with the IRS and launched the Disaster Loan 

Partners Initiative designed to increase the role of private sector financial institutions in recovery efforts. 

The further reforms that the Administration seeks in the reauthorization include increasing the size of disaster loans, offer an 

economic injury disaster loans to nonprofits and provide more flexibility to allow business development centers to redeploy resources 

and staff to assist disaster victims. This will require legislative 

changes to the Small Business Act. 

I’ll also be working on initiatives to further improve and expand 

the reach of SBA’s finance programs to serve more small businesses all with the context of a zero-loan subsidy rate and SBA’s 

entrepreneurship programs as part of the SBA reauthorization 

process. I’ll yield to Ms. Velaquez in just a second. But as with is 

our custom here and Mr. Barreto, if there is a question as to which 

you would feel having a high level member of your staff answer the 

3

question directly, that person could just scoot up to the table, introduce himself or herself for the record and answer that question. 

That’s within your prerogative. 

[Chairman Manzullo’s opening statement may be found in the 

appendix.] 

Mr. BARRETO. Thank you, Mr. Chairman. 

Chairman MANZULLO. Okay. Ms. Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Over the past five 

years, SBA’s budget has been cut nearly in half. Clearly, there are 

many areas of the Agency’s budget we could delve into today. But 

at this point in time, with thousands of Gulf Coast small businesses desperately in need of SBA assistance, the SBA’s Disaster 

Loan Program needs the immediate attention of Congress. 

Hurricane Katrina has been very telling of what the SBA has become. There is no doubt that Hurricane Katrina was one of the 

most massive disasters to ever touch down in the United States 

and there was no way for the individuals that reside in the Gulf 

Coast region to avoid its path. 

But what could have been mitigated? What we do have control 

over is the response. SBA’s lack of planning and foresight in this 

disaster response shows that something has gone terribly wrong in 

this agency’s ability to assist small businesses. The fact that they 

implemented a brand new loan processing system at the height of 

the hurricane season is indicative of the Agency’s foresight for dealing with disasters. To compound the difficulties, the Agency drastically reduced their disaster employees as part of a work force 

transformation to only have to turn around at the last minute and 

rehire a brand new group of workers. 

The worst part is that this Agency does not seem to have learned 

from its mistakes. SBA has been through two massive disasters 

over the past five years. Yet they have no plan of action and they 

have done nothing to show that they have taken steps to avoid this 

type of mistakes in the future. 

Instead, the Agency has chosen to make decisions on a whim. 

From their Go-Along Program which was supposed to make millions in loans, but they have only administered 150 loans, these are 

not solutions. Steps like these do not put loans into the hands of 

those that needs most right now. Today nearly seven months after 

Hurricane Katrina touched down, 65 percent of the loans have been 

declined, less than ten percent of approvals have been paid out and 

individuals are still saying that they are having to wait over three 

months just to hear back from SBA. Rather than addressing these 

downfalls, SBA has instead managed to throw out a myriad of reasons for all of this. But the bottom line here is that the approval 

rates should not be declining at such massive rates. 

We are releasing today a report that shows for the last five years 

approval rates have been historically lower for the disaster loans 

when compared to previous administration. Where averages used 

to be around 60 percent during the George H. W. Bush and Clinton 

Administrations, they are now only around 35. These declining approval rates are a result of change in priorities. The goal used to 

be to make this loan wholeheartedly, but now it seems the goal is 

to make these loan on the cheek. 

4

We’re going to hear from a real woman business owner from the 

Gulf Coast region today, one woman that is representing thousands 

of stories just like hers. I also want to share this video of Patrick 

Kimber (PH) from the Gulf Coast as yet another example of the 

hardships facing individuals in accessing disaster assistance 

through SBA. It is clear that something is not working here and 

it is about time we have some leadership that will get the job done 

and enable the Gulf Coast to make a full recovery. 

[Ranking Member Velazquez’s opening statement may be found 

in the appendix.] 

Chairman MANZULLO. Before you start that, could you pause 

that just a second please? It’s very usual to have a video tape as 

part of a person’s opening statement because the opening statement is to include the words of the person making the opening 

statement, but I’m doing that to accommodate the minority and I 

understand this tape is less than a minute. Is that correct? 

Ms. VELAZQUEZ. That’s correct. 

Chairman MANZULLO. And I also would ask if you would be willing to have this person who testifies sign a privacy waiver so the 

SBA can conduct its own investigation. 

Ms. VELAZQUEZ. Absolutely. 

Chairman MANZULLO. And also as to the witness, your minority 

witness, we were just advised of that person a few hours ago, 

would you be willing to have that person also sign a Privacy Act 

waiver? 

Ms. VELAZQUEZ. We’ll get that to you, Mr. Chairman, on that. 

Chairman MANZULLO. It’s important because we just had notice. 

It’s usually 48 hours notice given to a witness and the reason for 

that is so that—You’re willing to sign that? 

Ms. VELAZQUEZ. She’s willing to sign that, Mr. Chair. 

Chairman MANZULLO. Would somebody from our staff take it to 

the witness and have her sign the Privacy Act? Okay. Is that the 

wrong one? Just a second. 

Ms. VELAZQUEZ. Can we play the video? 

Chairman MANZULLO. Go ahead. 

WITNESS. The biggest frustration with the SBA now is that is 

seems like they are only giving it to what I would call the top ten 

percent, all these people that already had one and it’s a government program. Why aren’t they helping the little people as much 

as they’re helping all of the big wigs. I pay my taxes too. I work 

hard. I don’t default on any of my loans at all. I pay my house on 

time. I had two brand new cars, paid them off before they’re ever 

due. I’ve had loans even after the hurricane that I’ve paid off already. 

The money that I have received to work on my house from my 

insurance company I’m going to pay my mortgage company so I 

don’t default on my loan. People like me who’s 26 years old, have 

three kids and a wife, I’m just trying to live the American dream 

and I do everything like everybody else. Why not me? 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Chairman MANZULLO. Could I have the name of the person who 

made the tape for the record? 

Ms. VELAZQUEZ. Mr. Chair, I could provide it. Sure. 

5

Chairman MANZULLO. Could your staff get it and provide it within the next half hour or so? 

Ms. VELAZQUEZ. Mr. Chairman, you can get it at the House Recording Studio. 

Chairman MANZULLO. Wait a second. You’re the one that asked 

to have this tape shown. As a matter of record, whoever testifies 

or gives testimony before this Committee, I want to know who they 

are. 

Ms. VELAZQUEZ. The House Recording Studio, Mr. Chairman. 

Chairman MANZULLO. Do you know the name of this person? 

Ms. VELAZQUEZ. I could give it. Yes, sure. 

Chairman MANZULLO. Why don’t you give it for the record? 

Ms. VELAZQUEZ. I don’t have it now, Mr. Chairman. 

Chairman MANZULLO. Does anybody on your staff know who it 

is? 

Ms. VELAZQUEZ. I would be more than happy to submit it to you. 

I don’t have it now. 

Chairman MANZULLO. Would you do that before the hearing 

ends? 

Ms. VELAZQUEZ. Sure, Mr. Chairman. 

[Ms. Velazquez didn’t provide the name of the person who made 

the tape for the record.] 

Chairman MANZULLO. All right. Thank you. Proceed please. 

STATEMENT OF THE HONORABLE HECTOR BARRETO, U.S. 

SMALL BUSINESS ADMINISTRATION 

Mr. BARRETO. Thank you, Chairman Manzullo. Ranking member 

Velazquez. Distinguished members of the Committee. Thank you 

for inviting me here today to discuss the President’s Budget Request for the U.S. Small Business Administration and related legislative issues. Since 2001, the SBA has been on a mission to deliver 

more services to the nation’s small businesses as efficiently and effectively as possible. We are very proud of SBA’s success in that 

quest and the Fiscal Year 2007 Budget reflects the continuation of 

this goal. 

Lending is at an all-time high. More clients than ever are being 

served by our Entrepreneurial Development Programs and we’re 

improving methods to assist small businesses gain fair access to 

government contracting opportunities. A number of different initiatives have been implemented to further that goal. 

We realize that any time that you strive to be more results driven as President Bush has directed us, there are going to be challenges. Nonetheless, we remain keenly focused on our efforts to 

serve the needs of America’s small businesses by restructuring key 

Agency operations and reengineering the Agency’s largest loan programs, the SBA has achieved record program growth while reducing its budget by 37 percent since Fiscal Year 2001. 

The SBA has also improved the effectiveness of the taxpayers’ 

dollars supporting small business development. With these improved efficiencies in 2007, SBA will be able to record record numbers of small business loans with a total budget request of $624 

million. 

SBA lending has seen record-setting growth in small business 

lending in our Flagship Loan Programs. Since 2001, the number of 

6

loans has more than doubled on 7A and 504 loans. In Fiscal Year 

2005, we made nearly 98,000 small business loans in our two primary lending programs compared to only 42,000 in 2001. In Fiscal 

Year 2005, minorities received 31 percent and women received 17 

percent of 7A and 504 dollars which we funded. The Fiscal Year 

2007 request will support $28 billion in financing to the U.S. small 

business community. This represents a 42 percent business lending 

increase over Fiscal Year 2005 through the 7A and 504 and SBIC 

Debenture Program. 

In all of these programs, SBA will be able to continue to meet 

the growing demand for loans in Fiscal Year 2007 without fears of 

shutdowns or caps because all three programs will operate at zero 

subsidy. Zero subsidy is still the best policy for the long-term stability and growth of SBA’s loan program and as you can see with 

our results over the last year, it has not impacted our lending. 

In addition to better results, we’ve also increased efficiencies in 

lender oversight functions, loan processing and liquidating, saving 

the taxpayer millions of dollars. Further consolidations and efficiencies planned for Fiscal Year 2006 and 2007 will result in additional savings. 

In keeping with these savings and efficiencies, the Administration is proposing an administrative fee for 7A and 504 and SBIC 

financings for loans over $1 million. This fee will cover the cost of 

making these loans and will save the taxpayers $7 million in Fiscal 

Year 2007. 

On the Entrepreneurial Development side of our mission, we continue to focus on making our programs more effective and efficient 

as well. Key to this is a close collaboration with our resource partners, the Small Business Development Centers, SCORE, the Counselors to America’s Small Business and Women’s Business Centers. 

With the help of these partners as well as through our extensive 

online resources, we provided training and counseling to over 1.1 

million clients. To reach new clients, SBA is encouraging our partners to utilize online development and maximize the resources we 

provide them to increase capacity and outreach. We’re certainly 

going to use technology at the SBA to the greatest extent possible 

to reach additional clients. 

With respect to government contracting and business development, I can report that we now have 58 procurement center representatives, PCRs, assisting small business with federal procurement issues. SBA’s Office of Government Contracting and Business 

Development has also instituted enhanced practices and technological improvements. These have provided many benefits and increased efficiencies concerning government contracting opportunities and monitoring. 

Strives have been made to maximize staff resources and monitor 

contracting activities as well as to improve communication and 

interaction with the small business community through the automation of many basic systems. SBA’s focus in Fiscal Year 2007 as 

it has been since I became Administrator and also part of the 

President’s small business agenda will continue to be to work to increase small business participation and competition in the federal 

procurement arena. 

7

I would also like to speak about our disaster response. To date, 

we have received an unparalleled 389,000 disaster loan applications from homeowners, from renters and businesses. This is nine 

times more than we received for Hurricane Andrew. More than 

$6.1 billion in disaster loans have been approved to more 87,000 

victims. In the last two and a half months, we’ve approved more 

than $4 billion in disaster loans. 

Let me put this in perspective. The SBA is already surpassed by 

more $2 billion what was previously the largest response in history. That was the 1994 North Ridge earthquake in California. Following that disaster, it took one full year to process 250,000 applications which we received. 

In this response to the 2005 Gulf Coast hurricanes, the SBA has 

processing more than 251,000 applications in half that time. Our 

response has been agency-wide from the thousands working in our 

Office of Disaster Assistance to the hundreds of staff in our district 

offices across the country who are helping to process loans. Ninetyseven percent of the economic injury disaster loans have been processed. More than 286,000 damaged properties have already been 

inspected. That’s 95 percent of all of the total inspections. 

We’re now focusing our efforts on loan closing and disbursements 

so that we can put money in the victims’ hands and they can start 

rebuilding. We’ve already made disbursements in more than 36 

percent of the approved loans. I am proud of the hard work, the 

dedication, the compassion and urgency our staff is demonstrating. 

It’s important to reiterate that we make disaster loans with lenient 

underwriting requirements. We do not provide grants. This is how 

the SBA Disaster Loan Program model has worked for more than 

50 years. 

With respect to the Fiscal Year 2007, we’re proposing funding to 

support $900 million for loans to homeowners and businesses 

struck by natural disaster. That estimate is based on the five year 

average. The Fiscal Year 2007 Budget proposes to continue providing preferential loan terms to victims of disasters. 

However, in order to contain escalating costs of these loans, the 

budget proposes to adopt a graduated interest rate for the Disaster 

Loan Program. Without such an action, the subsidy costs of disaster loans will increase to over 20 percent over this year’s rate. 

During the first five years after a disaster, interest rates will remain deeply subsidized as they are currently structured, although 

the interest rate caps would be eliminated. Thereafter, rates would 

revert to a rate reflected of comparable Treasury instruments determined on the approval date of the loan still below market rate. 

This structure would continue to provide borrowers with deep interest subsidy when they need them the most, immediately after a 

disaster. And after five years, the subsidies would be reduced for 

the remainder of the loan term. 

The SBA operates like the businesses it helps to succeed by continually meeting challenges and evaluating cost effectiveness. The 

SBA has succeeded in achieving record growth in its programs 

while at the same time reducing the overall budget request through 

focused, practical implementation of the President’s Management 

Agenda, the PMA, and related initiatives. 

8

To maintain these trends and to build on the Agency’s achievements, the SBA budget reflects a commitment to improving management systems and processes, investing in new and upgraded infrastructure, improving the efficiency and skill level of our staff 

and continuing transformation of Agency operations. The Agency is 

committed to continuing our mission and legacy to develop more 

services efficiently to the nation’s small businesses. The SBA’s 2007 

Budget Request does just that. 

Mr. Chairman, Members of the Committee, thank you again for 

the opportunity to meet with this Committee today. I would be 

happy to answer any questions. 

[The Honorable Barreto’s testimony may be found in the appendix.] 

Chairman MANZULLO. Thank you. I have a series of questions 

and maybe I won’t be able to have a chance to get them in during 

this round. First of all, thank you for coming. I appreciate it very 

much. Do you support allowing individual certified development 

companies to process or contract out loan liquidations? 

Mr. BARRETO. Now you’re talking about CDCs, processing disaster loans. 

Chairman MANZULLO. No. Just 504s. 

Mr. BARRETO. 504s, absolutely. Obviously, that’s been the real 

strength to our program is the incredible work that our certified 

development companies do on that program. 

Chairman MANZULLO. Do you support a higher $3 million maximum loan amount in the 7A Program? 

Mr. BARRETO. That is something that we’re taking a look at right 

now and analyzing. It’s something that we’ve discussed before. The 

only thing that we want to understand a little bit more because as 

you know the implications of the program are constantly changing. 

So we’re looking at it right now to see how many people could benefit from larger loans of that level and we’re very glad to continue 

working with NATCO on that proposal. 

Chairman MANZULLO. Appreciate that. With regard to the disaster that occurred along the Gulf Coast, the equivalent of that is 

a series of side-by-side tornados 100 miles deep running from Boston to Chicago. Most of us have no idea as to the enormity of the 

damage that was done down there. In this particular disaster, 

FEMA referred a lot more people to SBA than before and many 

think that that’s one of the reasons for the high denial rate because 

my understanding is that SBA became a gatekeeper not only as to 

its own programs but also as to the FEMA grant programs. Would 

you want to comment on that? 

Mr. BARRETO. Yes sir. Thank you, Mr. Chairman. We’ve gone 

back and we’ve reviewed this. Obviously, we’ve received millions of 

referrals from FEMA on this disaster. I want to say that we’ve sent 

out close to three million applications, fielded well in excess of two 

million requests for loans, have received almost 400,000 loans. 

When we went back and we looked at this in previous disasters, 

it used to be that FEMA would refer to us somewhere around 35 

to 40 percent of the people that were inquiring for assistance. In 

this disaster, it’s been closer to 85 percent of the individuals that 

have originally registered with FEMA that have referred to the 

SBA. So that by itself created a tremendous, a huge volume. 

9

But one other thing that we’ve talked about before and sometimes I think people forget this is that many of the individuals that 

apply for SBA are not looking for a loan. They’re actually looking 

for a grant. But the way that the federal disaster model is structured right now, SBA must make every attempt to determine 

whether that individual could qualify for any kind of a loan. So far, 

FEMA has done more than 1.7 million grants and the total amount 

of those grants now totals close to $7 billion in grants. 

Chairman MANZULLO. And those applications when people applied to you and were rejected by the SBA, then they qualified for 

FEMA grants. Is that correct? 

Mr. BARRETO. Yes, if they’re a homeowner they go back to FEMA 

for the grant. 

Chairman MANZULLO. Do you have any idea how many of those 

people applied to SBA and then were rejected? 

Mr. BARRETO. I can get you the exact number, but the majority 

of them would have because FEMA has referred most of the individuals to the SBA and as I mentioned, FEMA has communicated 

to us that they’ve done 1.7 million. 

Chairman MANZULLO. So the fact that SBA rejected these people 

does not mean that these people did not receive any help. Is that 

correct? 

Mr. BARRETO. That is absolutely correct. 

Chairman MANZULLO. Okay. Thank you. Excuse me. And the help they received would have been up to $26,000 from FEMA. 

Mr. BARRETO. $26,200 is the maximum amount. 

Chairman MANZULLO. So when you rejected them for a loan, many or most of them actually got a grant of $26,200. 

Mr. BARRETO. That is correct. 

Chairman MANZULLO. Thank you. And as to those people that 

got the grant, Mr. Barreto, a lot of times it’s because they simply 

couldn’t qualify for a loan based on their credit history. 

Mr. BARRETO. That’s what would have happened because of credit history, no ability to be able to repay the loan. For a variety of 

other reasons, they would not qualify for an SBA loan. We make 

every attempt. We have very lenient underwriting and by the way, 

the credit underwriting that we do for disaster loans has not 

changed. It’s not more difficult in this disaster than it has been in 

other disasters. We’re very lenient as it is. 

Chairman MANZULLO. All right. Thank you. And this is the last 

question. 

Ms. VELAZQUEZ. Mr. Barreto, regarding the Gulf Coast disasters, 

can you please evaluate your performance today? What grade 

would you give yourself as the Administrator of SBA for handling 

this situation? 

Mr. BARRETO. I’m not sure that I understand the question in 

terms of a grade. I can tell you that we’ve done more than $2 billion in loans above the biggest disaster in history and $6.1 billion 

in - 

Ms. VELAZQUEZ. Let me tell you why I ask this. I ask this because the SBA implemented a new disaster processing system in 

the heart of the 2000 hurricane season. The SBA paid for disaster 

processing capacity that it did not receive. The SBA did not realize 

it had nearly run out of money to make disaster loans until days 

10

before. The SBA centralized without a sufficient backup plan disaster problem processing in Fort Worth which nearly was devastated by Hurricane Rita. The SBA had insufficient workforce 

plans which then led SBA to ask banks to volunteer their employees and now has SBA trying to get banks themselves to process 

loans through convoluted and inefficient methods. So based on all 

of this, Mr. Barreto, are you satisfied with your performance? 

Mr. BARRETO. Well, one of the things I think that you said in 

your opening comments, Congresswoman, is that this is the largest 

disaster in U.S. history. There’s no doubt. Usually the SBA processes about 100,000 loans for every disaster that we deal with and 

the SBA on a year to year basis may have as many asMs. VELAZQUEZ. Mr. Barreto, I don’t have much time. 

Chairman MANZULLO. I’m going to— 

Ms. VELAZQUEZ. Mr. Chairman, this is my time. 

Chairman MANZULLO. I understand that. I might give an extra 

minute or so. But you asked a question and the witness is entitled 

to answer the question. 

Ms. VELAZQUEZ. And I want to clarify what exactly it is that I 

want. I want to yes or no answer. Are you satisfied? 

Mr. BARRETO. Well, I’m very satisfied with the responseMs. VELAZQUEZ. Thank you. 

Mr. BARRETO. -of the Office of Disaster Assistance. I think 

they’ve done an incredible job during very difficult and trying 

times. 

Ms. VELAZQUEZ. You have been through two major hurricanes in 

the last year which went well beyond the plans you have more typical disasters. In this hand, I have a 40 pages press plan to deal 

with negative publicity about SBA’s response to the hurricanes. 

This is from your agency. Why don’t you have a plan to deal with 

infrastructure, networking and staff issues related to this type of 

a typical super disaster? 

Mr. BARRETO. Well, we do have plans to deal with disasters as 

I mentioned. We respond to about 50 disasters every year. A lot of 

times people forget that anytime that there’s a flood or a fire or an 

earthquake or any of those things we’re responding to multiple disasters at any given time. 

The thing that we don’t have, Congressman Velazquez, is we 

don’t have thousands of people sitting in offices across the country 

waiting for the big one. It just would be not feasible for us to be 

able to do that. So the way that the SBA works is that we have 

an Office of Disaster Assistance that has a cadre of permanent employees and before the hurricanes, there was less than 900 employees in that disaster operation which was sufficient to respond to 

the disasters that we have on a year-to-year basis. As you mentioned I believe, that since that time we’ve had to ramp up capacity. We’ve hired more than 4,000 employees that are currently 

working on responding to the biggest disaster in U.S. history. 

Ms. VELAZQUEZ. Thank you, Mr. Barreto. I have seen what SBA 

is calling a surge plan and it’s not a surge plan. It is simply a guide 

for responding to run-of-the-mill disasters. It does not address what 

the Agency will need to do to respond to large scale disasters. It 

contains no detail for integration or implementation and it is a 

complete mystery for how it will work. 

11

I’ve been looking at SBA disaster plans and I have lots of questions about them. Why doesn’t this so-called surge plan contain 

contingent arrangements with IT vendors for additional telecommunications capacity? Why doesn’t it contain vendor arrangements to secure additional land capacity? Why doesn’t the plan 

contain contingent arrangements for additional commercial real estate in Fort Worth and Sacramento? Why doesn’t it contain detailed plans for how to hire additional staff? Why doesn’t it provide 

instruction for specific training for search related staff? You know 

what the General Accounting Office said. That is not a plan. 

Mr. BARRETO. Well again, we for fifty years have responded to 

every disaster in U.S. history. We responded to 9/11 and I had opportunity to work very closely with you on that response. But the 

truth of the matter is that there has never been a disaster of this 

scope and for an agency the size of SBA with less than 900 employees to be able to predict when the next big one is going to be, what 

part of the country, what kinds of relationships we have, is somewhat challenging. 

I’d be happy to provide you with the plans that we do have. I 

want to make sure that you have all those and also I’d like to let 

you know that after this disaster we learned that we need to have 

a plan for the next big one. In other words, it’s not a question if 

something like this could happen again. It will happen again and 

we have to prepare for it. 

Ms. VELAZQUEZ. But, Mr. Barreto, a search planChairman MANZULLO. The gentle lady’s time has expired. 

Ms. VELAZQUEZ. You said you would give me an extra minute. 

Chairman MANZULLO. That’s correct. 

Ms. VELAZQUEZ. Can I finish my question? 

Chairman MANZULLO. You already have been given extra minutes but go ahead. That’s fine. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. A surge plan doesn’t 

mean a chart that will tell your staff how many staff it will take 

to make a loan and that is all you have in your surge plan. 

Mr. BARRETO. And again, one of the things that we need to do 

is we need to do a combination of things. As you probably know, 

we sent out a request for information because we want to work 

closer with the private sector. And by the way, one of the parts of 

the story that’s not told is we’ve done about $1.5 billion in disaster 

loans for businesses, but we’ve also done about $250 million in 

business loans through our banks. 

So we do have a relationship with the private sector working on 

a number of different fronts. But now what we’re looking at is in 

the future whenever you have this kind of volume, basically what 

is five or six years worth of work in a few months, one of the things 

that we’re also going to have to do is not just do this internally, 

but we’re also going to need to look for ways that we can work with 

the private sector. And again, we have to be very flexible because 

we don’t know where the next disaster is going to occur. 

Chairman MANZULLO. Mr. McCotter. 

Mr. MCCOTTER. Thank you, Mr. Chairman. Can you follow up on 

that coordination with the private sector? 

Mr. BARRETO. Sure. 

12

Mr. MCCOTTER. Because in many ways the response to Katrina, 

the aftermath, was much better by the private sector than by the 

government and I would be curious as to what you’re talking about 

and what specifically. 

Mr. BARRETO. I’m talking about the work that we do every day 

with the private sector. One of the things that we realized is, and 

by the way, let me take a step back. I think there’s often times 

some confusion about what kind of loans the SBA can do. The SBA 

has only one type of disaster loan. It is a long-term, rebuilding and 

reconstruction loan for physical damage to residences and physical 

damages to businesses. 

That’s the only kind of disaster loan the SBA can provide and 

what we know is there’s a lot of folks out there that that’s not 

going to be enough. They’re going to maybe need a smaller loan. 

They’re going to need something that is more of a short-term cash 

infusion. They may need loans to buy equipment, etc. And that’s 

really where we engage the private sector. 

I mentioned to you that we’ve already done approximately a 

quarter of a billion dollars in additional loans through our lenders, 

in other words, lenders working with us to approve small businesses in the Gulf area. If you put that $250 million with the $1.5 

billion, you’re getting pretty close to $2 billion so far that we’ve 

been able to do for small businesses. 

The other thing I want to remind folks is that more than 90 percent of the applicants are not small businesses. That’s one of the 

things that makes this disaster very, very different. Usually you 

have a ratio of two or three to one which would be normal. The 

ratio here is nine to one homeowners to small businesses. 

Mr. MCCOTTER. You also mentioned grants. Would you please explain the difference between a small business loan and a grant? 

Mr. BARRETO. Sure. Small business loans must be paid back. 

Grants do not need to be paid back. SBA has no authority to do 

grants. We must underwrite loans and ensure that there is some 

opportunity for that loan to be paid back. That is something that 

our Oversight Committee also expects us to do is to be good shepherds of the taxpayer’s money and we’re endeavoring to do that. 

There is a balance though. We must do everything that we can 

to help the victims and as I mentioned, we’ve done $6 billion in 

loans so far. But we also have to ensure that there’s some opportunity that that loan may be paid back. 

Mr. MCCOTTER. How quickly are you able to turn around? Say 

someone believes that they file for a small business loan, but 

they’re in turn actually more eligible for a grant which does not 

have to be repaid. How quickly does that happen? 

Mr. BARRETO. What happens is that it’s going to be one or the 

other. In other wordsMr. MCCOTTER. The determination, how quickly is the determination? 

Mr. BARRETO. Right now, it’s running a little over sixty days. 

We’d like it to be half that much and by the way, I want to state 

for the record that we have processed 95 percent of the loans to 

businesses which are referred to as economic injury loans. We’ve 

processed almost 90 percent of the physical damage awards to 

small businesses and we’ve processed over 70 percent of the homeVerDate 0ct 09 2002 13:35 Oct 04, 2006 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 G:\HEARINGS\27808.TXT MIKE
13

owner loans. By the way, one of the key indicators is also inspections. We’ve done 95 percent of the inspections of all the properties 

that we need to inspect. 

Mr. MCCOTTER. I appreciate the statistical recounting of that. 

My question is that one of the problems, the concerns, that the people have is given the size of the disaster is that there are many 

people who are unable to receive help for the circumstances in 

which they find themselves, circumstances which in many ways 

were exacerbated by human failings both in the inception of the 

disaster and its aftermath and then the effort to recover much of 

the livable state the people had. My question is how many people 

are out there trying to get help either through a small business 

loan or through a grant that have to be processed. 

Mr. BARRETO. Well, we’ve processed close to 300,000 of the applications and we receive applications every single day. In fact, I 

think you may be aware that the deadlineMr. MCCOTTER. Can you give me an estimate of the number of 

people who are out there that are still trying to receive help? I 

think that was the point of Mr. X’s video. 

Mr. BARRETO. I would be glad to do that, to tell you. We have 

something approximating 8,000 applications that are still in some 

form of processing for small businesses. That represents approximately ten percent of what we received. 

Mr. MCCOTTER. And if these people do not receive satisfaction of 

a small business loan or are not eligible for that, are they then directed where they can go get grant money? 

Mr. BARRETO. No. The only folks that are eligible for grant 

money would be homeowners, if those individuals have homes and 

they’re not eligible for, that there is no other remedy for a small 

business person through our program, if they do not qualify for the 

disaster loan. 

Mr. MCCOTTER. But they can be directed elsewhere. I would 

think it would speed the process when you talk about a recovery 

plan to clearly delineate between what is a grant, what is a small 

business loan, so the people who are not eligible for your loans can 

still go get the assistance they need somewhere else and relieve the 

burden upon your administration. 

Mr. BARRETO. I’m not sure I completely understand it. If they’re 

a homeowner that are going through our process, they have to be 

turned down by us before they can qualify for a grant from the 

Federal Government. 

Mr. MCCOTTER. My point would be, and I know my time is up, 

is to make sure that if they’re ineligible is that these poor people 

don’t spend their time trying to get something they’re not entitled 

to, but are instead directed to the proper place in the first place. 

That’s all. 

Mr. BARRETO. Understand. 

Chairman MANZULLO. They would be directed to FEMA. 

Mr. BARRETO. If they’re a homeowner. If they’re a small business, we have to underwrite them to determine if they’re eligible 

for a loan. 

Mr. MCCOTTER. Okay. 

Chairman MANZULLO. Dr. Christensen. 

14

Dr. CHRISTENSON. Thank you, Mr. Chairman. I’m really glad that 

we’re having this hearing. I thank you and the Ranking Member 

for it. Welcome, Administrator Barreto. 

Mr. BARRETO. Thank you. 

Dr. CHRISTENSEN. I’ve been to New Orleans several times. I’ve 

met with your disaster staff by phone and I hear your testimony, 

but the slow processing and the record low approval rates, low and 

slow disbursement even after approval, it’s the same slow response 

that is represented by the entire response of the Federal Government in the face of what everyone agrees is the worse disaster this 

country’s experienced. And it has been and remains an emergency 

and I’m extremely disturbed that people and businesses are continuing to be left to languish even though it’s seven months later. 

And there is so much rebuilding to be done. 

I’m particularly concerned as you would imagine by the lack of 

responsiveness to the health care sector. And that’s what my meeting was about. It seems like all other businesses are being treated 

like business is usual and in the face of such a catastrophe, I would 

think that the government would respond appropriately accordingly 

to the amount of disaster that’s there, not business as usual which 

is what I’m seeing. 

How many health related businesses have you approved economic injury loans for? I’ll tell you that I applied twice and didn’t 

get it. 

Mr. BARRETO. I can tell you, and I would be happy to go back 

and research exactly the number, but we have approved 2,388 applications for economic injury disaster loans. That represents 95 

percent of all of the applications that we received that we’ve already processed. 

Dr. CHRISTENSEN. Let me just ask you also. Does SBA see restoring the health infrastructure in the Gulf region as being a priority 

and is there any coordination between the SBA and Department of 

Health and Human Services or any other agency to meet this priority need in the area? 

I’m going to tell you what I heard from SBA and every other 

agency as we’ve been trying to address is people are not coming 

back, that kind of an attitude, and I was definitely not satisfied. 

Mr. BARRETO. People not coming back to the Gulf, New Orleans? 

Dr. CHRISTENSEN. Yes. 

Mr. BARRETO. Well, there’s no doubt about it. 

Dr. CHRISTENSEN. People are back. They are seeking health care 

in almost pre-Katrina numbers. 

Mr. BARRETO. Right. Our understanding is, and I’ve been down 

there five times and in constant contact with our folks, something 

in the order of 60 percent plus of the individuals that lived there 

before are not there right now and that’s something that’s also affecting a lot of the small businesses about whether or not they can 

come back. Can they get employees? Will there be customers? What 

are the conditions on the ground for them? 

Dr. CHRISTENSEN. But the question was given the enormity of 

the disaster and its devastating impact on health care and affecting 

private providers as well, has SBA worked with the Department of 

Health and Human Services or any other agency to address this 

dire need in the area? 

15

Mr. BARRETO. Well, we’re in regular communication with them. 

It’s kind of coincidental, but I have two meetings scheduled with 

senior people in HHS next week at their offices to discuss this 

issue and we’re in regular communication with them. I know that 

they’re putting a lot of focus on it and one of the individuals is the 

Surgeon General of the United States who has been down there 

and is working on a number of different initiatives. So we’re looking at ways that we can do that. 

I don’t know how many, and I’ll find out for you, people in the 

health care industry have applied for economic injury assistance, 

but we’ve received very few over all applications so far. We’ve received very few. 

Dr. CHRISTENSEN. Or any kind of loan to help them restart their 

business, I would appreciate the data. 

Mr. BARRETO. Sure. 

Dr. CHRISTENSEN. You know I’m one of the districts that loans 

were sold and you know the problems we’ve had and I want to 

know if after the people who are so devastated received the loan, 

can they expect that SBA is going to continue to hold those loans 

or are they going to be sold and have you learned from any of the 

past experience on how to do that better? 

Mr. BARRETO. We’ve learned a lot and I appreciate the opportunity to have worked with you on some of these issues. As you 

know we’ve had a moratorium on selling any loans for a couple of 

years now and we haveDr. CHRISTENSEN. Yes, that’s because my Chairman and Ranking 

Member have supported me on that. 

Mr. BARRETO. And we have no plans on selling any loans. No 

plans. 

Dr. CHRISTENSEN. Thank you. 

Chairman MANZULLO. Mr. Bradley. 

Mr. BRADLEY. Good afternoon, Mr. Chairman. Mr. Barreto, good 

to see you. 

Mr. BARRETO. Good to see you. 

Mr. BRADLEY. I apologize for being detained before I could get 

here. The subcommittee that I chair on Taxes, Finance and Export 

held a hearing last week on looking at SBA finances and the Ranking Member participated and Congresswoman Millender-McDonald. 

So I certainly appreciate that. 

I’d like to focus in for a moment on the 7(a) loan program. I have 

to admit, Mr. Chairman, I supported you in my first year in Congress in voting to continue the 7(a) subsidy and then continued to 

support that in my second year and now according to the testimony 

of your witnesses last week as well as some of the other panel 

members, I think it was a split view on the effectiveness or the necessity if you will for the subsidy for the 7(a) loans. 

And so you’re here and I certainly would like to get you impression. I’m pretty sure I know what it’s going to be and why. But if 

you could illuminate a little bit on what your prepared remarks 

were on why you don’t feel it is necessary and why we can do without it. 

Mr. BARRETO. Well, let me approach that question in two different ways. One of them is that some of the concern before we had 

zero subsidy was that lenders were going to leave the program, the 

16

average loan size would go back up, minorities would get no loans 

and just a complete erosion of what we’d accomplished over the 

couple years before that. 

Now we didn’t believe that that would happen and since last 

year when we were testifying on this, now we have the facts to 

prove it. Last year was the all-time high for loans at the SBA in 

its 53 year history. We did close to 100,000 loans. That’s double 

what we were doing four years ago. We guaranteed almost $20 billion worth of capital for small businesses. That’s more than twice 

of what we were doing four and a half years. 

And one of the things that we knew because our lenders were 

telling us this and our small businesses were telling us this is they 

said ‘‘Look. The most important thing for us with the 7(a) program 

is for it to be continuous, for there not to be starts and stops. We 

don’t want to hear that you don’t have your budget approved by the 

beginning of your fiscal year and that you’re feeling pressure on 

the loan program and that you’re going to have to put a cap on the 

loan program and if you really run tight, you may even have to 

close it down.’’ 

Lenders were very, very concerned about this. They said to us, 

‘‘Look. You got us excited about doing loans to small businesses 

through your program and now we dedicate a lot of resources to 

small business lenders, millions of dollars, a lot of personnel. So we 

can’t afford for you to put a cap on the loan for one day and we 

certainly can’t afford for you to close down the loan program for 

one day.’’ 

So now that there is continuity, consistency. Now that there is 

more stability in the program, not only have we not lost lenders. 

We have new lenders that have come on board. So we’ve very optimistic about our prospects. We believe that this is going to be another banner year. So we’re able to do both those things, meet the 

needs of small businesses and save the American tax payer close 

to $100 million in appropriation that is not necessary to be able to 

support that program. 

Mr. BRADLEY. Perhaps you could illuminate for me at least or 

other members of the Committee why with the 7(a) subsidy is it 

that it creates the stops and starts that you were talking about because I remember in 2003 I called you directly because I had a constituent that was trying to close on a loan and buy a business that 

he had a purchase and sale on and it was capped. Why is it that 

subsidy leads to a capping? 

Mr. BARRETO. Well, I think probably a better reason for that has 

to do with the fact that if the beginning of the fiscal year we don’t 

have our budget approved which we never have since I’ve been 

here, then we’re operating on a continuing resolution and that continuing resolution is basically an estimate, not an estimate, but it 

is an amount similar to what happened in the year before. 

When your loan program is growing as fast as our program is 

growing, I mean our program was up 30 percent last year, the 504 

loan program is up 30 percent this year, it puts a tremendous 

amount of pressure. I know of liken it to a small business owner 

who you would say to them, ‘‘Look. You need to run your business 

and you need to write checks. But I’m not going to tell you what 

you have in your bank account ’’ and a small business owner would 

17

say ‘‘That’s impossible.’’ And I would say, ‘‘Sometimes that’s kind 

of the way we had to run the SBA 7(a) loan program in past.’’ 

So now that we do not have a subsidy, that’s not an issue for us 

anymore. That program is self-sufficient. The lending authorities, 

the critical aspect, this budget that we submit for 2007 has $28 billion in lending authority. For a lot of small businesses and lender, 

that is really the bottom line. 

Chairman MANZULLO. Thank you. Ms. Bordallo. 

Ms. BORDALLO. Thank you, Mr. Chairman and Ranking Member, 

I want to thank you for holding this important meeting on SBA’s 

disaster loan programs and disaster response and welcome, Mr. 

Barreto. The response to the hurricanes not only by SBA but other 

Federal departments certainly everybody will agree in this room remains a source of ongoing significant concern. I represent the territory of Guam. The people of Guam are no strangers to natural disasters, Mr. Barreto. We are in Typhoon Alley. We have super typhoons, in one instance, six months apart with 200 an hour mile 

winds. So we certainly know how to deal with these typhoons and 

this is why the Government of Guam, the military on the island, 

all government agencies and SBA meet quarterly to discuss disasters. 

So it is my question to you, planning is everything and without 

it, any response effort is certainly doomed to fail. So I would like 

to know. Can you comment on whether the SBA would implement 

a program aimed to coordinate with local governments, chambers 

of commerce, your SBA office, to discuss disaster program response 

and could you conduct it or would you be able to conduct it in a 

regular basis? 

We wouldn’t be caught like we were and this is why Guam is so 

successful. We don’t have debts. Our homes are built strong to 

withstand these winds and I’m just wondering if somehow you 

could get the word out. Your people would be ready. Everyone 

would be ready when these disasters come about. 

Mr. BARRETO. I think it’s an excellent recommendation and I 

mentioned before that we’re in the process right now of putting together a comprehensive plan for another large scale event. Not to 

belabor the point, but it’s just that never anything like this has 

ever happened before and that’s not an excuse. It’s just what happened. 

And I mentioned before that for us to be able to respond to a disaster immediately, we literally would have to have assets deployed 

all over this country and in Guam and other places ready for that 

disaster. Now we don’t have those type of resources. The way that 

the SBA works, we have a small cadre of disaster employees, before 

this last disaster, less than 900 employees. We have 4,500 employees now working in the disaster operation. 

Now what will happen after we finish responding to this disaster 

if there’s not another one right after it and we don’t know when 

the next one will be, but we now have thousands of individuals who 

are going to be part of our network. We have like our own reserve 

corps and whenever there’s a disaster, we bring up experienced 

people that have worked with us before that know our program. 

One of the benefits, if you want to call it a benefit, is the fact that 

18

we have now identified thousands of people. We’ve trained them. 

We’ve equipped them and they will be part of our reserve corps. 

Now I totally agree with you with regards to the communication 

because a lot of times people are not clear. If you’ve never gone 

through a disaster, you have a lot of experience with this, but if 

you’ve never gone through a disaster, never filled out an SBA disaster application, you could be lost. You may not understand what’s 

going on. You’re almost in a state of shock. I mean we saw small 

business people in a state of shock months afterwards. 

So what I would like to explore is utilizing our network of SBA 

district personnel across the country and for that matter in Guam 

and other places to assist us in communicating that and to be in 

relationship. It’s one of those things that they always talk about. 

You need to develop a relationship before you need that relationship and I think that that is very important and I would like to 

work with you on that and to include that kind of ongoing interaction with the assets that we do have every single day, working 

with the local folks that are responsible for disasters. 

Ms. BORDALLO. Thank you, Mr. Barreto, and I hope you will be 

able to implement it. And if I have any time left, Mr. Chairman, 

I would like to yield it back to the Ranking Member. 

Chairman MANZULLO. You have 39 seconds left. 

Ms. VELAZQUEZ. She’s yielding to me? 

Ms. BORDALLO. Yes, I did. 

Ms. VELAZQUEZ. Oh okay. Thank you. Mr. Barreto, the SBA recently went through a work force transformation where it reassigned as well as eliminated employees. As a core Federal disaster 

response agency, why didn’t you take this opportunity to create a 

full-time disaster planner within the SBA? 

Mr. BARRETO. I’m not sure I understand the question. When you 

say ‘‘disaster planner,’’ what are you specifically referring to would 

be the responsibilities? 

Ms. VELAZQUEZ. Someone to put together a plan that will respond to the disaster. 

Mr. BARRETO. Well, the person that would be responsible for that 

is the Director of the Office of Disaster Assistance. 

Ms. VELAZQUEZ. Is he a planner? 

Mr. BARRETO. He has 30 years worth of experience dealing with 

every disaster. 

Ms. VELAZQUEZ. But isn’t he the person in charge of the disaster 

loan program? 

Mr. BARRETO. Well, he’s responsible for all aspects of disaster response. Everybody that works in disaster reports up to him and I 

will tell you. We’re fortunate to have him because he’s somebody 

as I said with 30 years experience working at the SBA, working in 

the disaster operations. So there is not a disaster that he doesn’t 

have experience with and understand. 

Chairman MANZULLO. The gentle lady’s time has expired. Mrs. 

Moore. 

Ms. MOORE. Thank you, Mr. Chairman. It’s always good to be 

here with you and thank you, Mr. Barreto, for appearing today. 

When I walked in the door, you were bragging and talking about 

how proud you were of the 97 percent loans that were processed 

and then it went down to 95. But all that being said, I guess I’m 

19

curious about what processing these loans means. Since I voted for 

all this disaster money, you’ve only disbursed about $440 million. 

Sixty percent of the businesses down, affected, by Katrina have 

had to close their doors forever. And I just want to know what’s 

the major reason. Like this processing, it’s almost seems like they 

go to the circular file. I think I’m going to process some of the junk 

in my house like that, just throw it away. Is that credit score or 

lack of ability to pay or what would be the reasons? You’re bragging about processing them, but the fact is that these businesses, 

we’re not helping to regenerate businesses in the area by merely 

processing them into the circular file. 

Mr. BARRETO. Okay. There are a number of different points to 

that question I would like to address for you. Please know that 

we’re not bragging. I’m not bragging. We’re not done yet with the 

response and until we finish with the response, we will not be satisfied. I’m simply letting you know what the current production 

rates have been and remember that we do three different kinds of 

loans. 

Actually, I think you could say we do the economic injury disaster loans and that’s the one that had approximately 90 percent 

processed. We do physical damages to small businesses and there 

we’ve processed about 90 percent of the applications. We do homeowners that have had physical damage. There we processed about 

70 percent of the applicants. We do personal property loans for people that don’t own a home or a business. We can do those loans 

up to $40,000. 

Also remember that the percentage is constantly changing because we’re always getting more disaster applications in. And in 

fact, the disaster deadline has been extended now for another 

month. 

Ms. MOORE. Thank you, Mr. Barreto. I think you’ve clarified the 

point because when I came in, you were talking about how proud 

you were and it just didn’t fit with the pictures that I see. I’m from 

Milwaukee, Wisconsin. Thank you. The UEP is going to be the 

sixth city. 

I’m wondering since you say that this is such a wonderful funding strategy. To zero fund, all the programs that would help minority businesses, the 7(a) loan program you were telling Mr. Bradley 

about that. The SBDC, the Women’s Business Centers, these 

things have been flat funded, cut and I’m going to yield the balance 

of my time to the Ranking Member because I guess I just don’t get 

it, how less money is going to help minority businesses. I do understand what you shared with us in terms of the funding cycle, but 

overall, I think more money would help since we’ve seen a steady 

decline of minority business lending and resources available to us 

in Milwaukee. How are you going to fund the UEP? 

Mr. BARRETO. Sure. Well, great questions and I would love to 

talk to you about that. First of all, when I talk about the zero subsidy for 7(a), all we’re saying is that those loans now are self-sufficient. They don’t require additional money. 

Ms. MOORE. We don’t need-We need more money. 

Mr. BARRETO. No, the lending authority is all time highs. What I’m proposing in this budget is $28 billion in lending authority, $28 

billion and last year you probably might know thisVerDate 0ct 09 2002 13:35 Oct 04, 2006 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 G:\HEARINGS\27808.TXT MIKE
20

Ms. MOORE. I want to yield my time to her. So thank you for 

that. 

Mr. BARRETO. But last year, we did almost 40 percent of those 

loans to minorities. So minorities are benefitting now more than 

ever before and then the UEP is a public/private partnership and 

the funding comes from several different sources. One of the key 

sources is the Kaufman Foundation who is a large underwriter of 

that program. We work very closely with Kaufman, with the Urban 

League and with other partners in that initiative. 

Ms. MOORE. Okay. Now, Mr. Chairman, please don’t take-Please. 

I wanted to yield it to the Ranking Member because I was satisfied 

with his answer. 

Chairman MANZULLO. You can use your ten seconds plus we’ll 

give her an extra couple of minutes. 

Ms. MOORE. Okay. 

Ms. VELAZQUEZ. Thank you. Mr. Barreto, we have heard that the 

decline rates associated with Hurricane Katrina are an anomaly, 

but that is not the case as we see in this chart. We have heard the 

excuse that it is due to computer system changes, but it is not. In 

fact, SBA’s response to hurricanes since you have been in office has 

actually been very similar with nearly all hurricanes having an 

SBA loan approval rate of 50 percent. The big difference is that 

major hurricanes that occurred in previous administrations had 

much higher approval rates, often near 60 percent, Andrew 50 percent, Opal 58 percent, George 61 percent, Charley when you were 

there 47 percent, Frances 36 percent, Ivan 53, Jeanne 37, Katrina 

37, Rita 15, Wilma 13 percent. Why is SBA under your administration approving loans as a percentage of applications, percentage, 

then previous administrations? 

Mr. BARRETO. Well, first of all, I think it’s important to do an apples-to-apples comparison. The approval rate is different in every 

disaster. I have some approval rates here for Allison and Frances 

which were 32 and 24 percent, respectively. 

But one of the things that is also important to note is that a few 

months back, we were talking about an approval rate of about 14 

percent and the reason again is because most of the folks that were 

applying for us ended up being grants, not loans. And by the way, 

many of those didn’t want a loan. They would say to us ‘‘I don’t 

want a loan, but I’m going to go through process so that you can 

turn me down and I can go back to FEMA and get a grant.’’ That’s 

why FEMA has done $1.7 million grants for over $7 billion. 

Ms. VELAZQUEZ. So you’re telling me that when George, Andrew 

and all those during George H. W. Administration and Clinton’s 

Administration, they didn’t apply for grants. They approved for 

home loans and disaster because the loan approval was 60 percent. 

Mr. BARRETO. No, they definitely would prefer to grant. Most 

people would rather not pay the money back. They would definitely 

like a grant, but they weren’t able to go get a grant because if we 

could do a loan for them, in other words, if they qualified for a 

loan, they have the option to go back for a grant. 

And one of the things that you’re seeing this disaster is that the 

income levels of the individuals, this has been said over and over 

again, some of the folks that were effected were in some of the lowest incomes area in the country. So they’re not going to be able to 

21

qualify for a loan immediately. We do everything that we can to approve them. 

By the way, the approval rate since the very beginning now has 

more than doubled and we thought that was going to happen and 

it’s going to continue to go up because a lot of the individuals that 

applied in the beginning who really didn’t want loans and ended 

up getting grants, they’re out of the system now. So most of the 

folks that we’re looking at right have higher credit scores. They 

have higher repayment ability. They have much more means to be 

able to qualify for a loan. 

Chairman MANZULLO. Thank you. 

Ms. VELAZQUEZ. You know that is not what the data. 

Mr. BARRETO. Well, it’s not an apples-to-apples comparison and 

one last thing I want to make sure that you do understand is that 

in the past when we received applicationsMs. VELAZQUEZ. It is a hurricane and another hurricaneChairman MANZULLO. Let the witness answer the question. 

Mr. BARRETO. I will explain this, Ms. Velazquez. You may not be 

aware of this, but for all the disasters in the past what would happen is there was no system and so applications would come in, a 

lot less applications would come in. Somebody would look at the application and say ‘‘That’s never going to become a loan ’’ and that 

would never appear in the system. What we do now is everything 

that we receive goes into DCMS, everything, and that’s one of the 

things that also skewing the percentage of approvals. 

Chairman MANZULLO. Thank you, Mr. Barreto. Appreciate your 

being here. Ms. Smith, if you would like to take the stand. You’re 

excused, Mr. Barreto. Thank you very much. 

Mr. BARRETO. Thank you very much. I appreciate the opportunity to testify. 

Chairman MANZULLO. Mr. Mitchell, you’re going to stick around 

in case we need you. Thank you. Would somebody get Ms. Smith 

a glass of water there, a fresh glass? There you are. Ms. Smith, we 

welcome you to our Committee. The first thing I want you to do 

is take a sip of water and take a deep breath. 

Ms. SMITH. How did you know? 

Chairman MANZULLO. And then normally the time is five minutes. We could give a little bit more than that. I just want you to 

be relaxed and you’re here to tell your story. 

Ms. SMITH. Okay. Thank you. 

Chairman MANZULLO. Please proceed. Thank you. 

STATEMENT OF PATRICIA SMITH, PEMBA LIGHTING AND 

AUTOMATION 

Ms. SMITH. I did try to get it down to five minutes though for 

you, actually less hopefully if I don’t elaborate too much and to do 

that, I’ll try to read it more. 

Chairman Manzullo, Ranking Member Velazquez and Members 

of the House Small Business Committee, I am Patricia Smith. I am 

a co-owner of my business, along with my husband, of PEMBA 

Lighting and Automation in New Orleans, Louisiana. PEMBA is a 

small business with five to seven employees. We’ve been in business for eight years. 

22

Before Katrina hit, our business was doing well. In fact, we were 

expanding. My husband and I were relying on PEMBA to be the 

family’ primary source of income. The day that Hurricane Katrina 

hit our city, the livelihood of our business came to a sudden halt. 

The building was flooded. We had no electricity for a month. No 

phone or internet services for months. The city’s whole economy 

stopped. It seemed as if our business was doomed. 

Today I would like to share with you our experience in trying to 

get assistance from the SBA and recover our business after the disaster. But the truth is that my experience is not unique. You could 

bring in hundreds of small business owners from the Gulf Coast region and these ordeals would be echoed. 

Within a few weeks after the hurricane, I placed calls and I visited the Disaster Recovery Center to meet with the SBA personnel. 

They strongly, they the SBA strongly, encouraged me to apply for 

both a personal and business loan. On September 19, 2005, I handdelivered my complete SBA loan application including tax returns. 

I had questions about the process obviously and I was told that 

someone would contact me within three weeks and I could ask 

questions then. 

While waiting to hear if our loan was approved, we continued to 

struggle with the mounting losses of our business. We could no 

longer pay salaries and had to let employees go. My husband had 

to get another job for us to be able to pay the bills. Work continued 

to come in, but with lack of staff, we were not able to handle the 

work load. 

I waited over two months to hear the status of my loan application. In late November, I was told that the SBA did not have all 

of the information needed to file my request. They could not locate 

my tax returns. My heart sank. 

About a week later, I received a phone call from another SBA 

employee telling me that he had all of my information and did not 

know why I was asked to refax the tax information. I did begin to 

wonder about the organization and thoroughness of the SBA loan 

process. 

Again, about a week later, I received a request regarding the depreciation method used on our property in 2004. An SBA employee 

contacted me to tell me that we may not be able to get a loan since 

our property, the property that had been flooded, had been depreciated by 50 percent. 

December 9th is when this sad reality sunk in. We were denied 

a loan for both our home and business. We had insufficient collateral and therefore, were denied any possibility of getting an SBA 

loan. This was devastating news and it did not seem appropriate 

criteria for a loan after such a natural disaster. Of course, we had 

problems with our assets. They were flooded. After hearing from 

friends and associates that everyone was being denied assistance 

from the SBA and that people were beginning to appeal those decisions, I went on a letter-writing campaign to get the SBA to consider my loan. 

On February 16th, I faxed a letter of appeal to the SBA. I pointed our creditworthiness, number of years in operation, company 

growth and that we were indeed responsible individuals who pay 

23

our bills, things which you would expect to be important with a disaster loan. 

On February 24th, I was able to confirm receipt of my appeal letter. 

On March 3rd, I received a message to call the SBA. It took me 

two days to get through and leave a message for the person who 

called me. I received a call back later that day and was asked to 

send an updated profit and loss statement. Frustrated by how simple communications take enormous effort, I lectured that SBA employee. I was amazed how the delays affecting the livelihood of my 

small business did not seem to be important. 

This process began for me and my husband on September 19, 

2005. Time is critical in these situations and today nearly six 

months later, we’re still waiting for assistance from the SBA. The 

fact of the matter is that there are thousands who have also been 

denied but they haven’t gone on a letter writing campaign to get 

the agency’s attention. 

I am a registered Republican. So I’m not here to play politics. I 

don’t care. I’m here to represent the needs of thousands of small 

business owners just like me in the Gulf Coast. We need assistance 

now and we need a champion for our interest. The SBA has not 

been that champion. 

Instead throughout the ordeal, the Agency, while it has a lot of 

good people has been wasting my time. I can tell you from firsthand knowledge, the assistance they talk about is not reaching the 

people that need it. 

Thank you very much for allowing me to appear before the Committee today and letting me share my story. At this time, I would 

greatly appreciate it if you would ask me questions. Feel free to 

challenge my story and allow me to respond by what is truly happening and providing suggestions about improving the process for 

small businesses like mine. Your Committee is the only hope for 

small businesses whether it be from the Katrina disaster or future 

ones. Thank you. 

[Ms. Smith’s testimony may be found in the appendix.] 

Chairman MANZULLO. Thank you, Ms. Smith. Ms. Velazquez and 

I also belong to Financial Services Committee. So if you see us get 

up and leave, it’s because we have some votes that are pending 

there. I’m going to try to get through some questions here. First 

of all, thank you for coming up from New Orleans. I appreciate it 

very much. 

Besides the SBA, could you tell us what other agency or what 

other individuals you contacted? 

Ms. SMITH. Right. Good question. Actually, I contacted a lot of 

people. 

Chairman MANZULLO. Okay. 

Ms. SMITH. FEMA is obviously the first contact. 

Chairman MANZULLO. Could you give the order that you did it 

in? Your house was flooded? 

Ms. SMITH. No. 

Chairman MANZULLO. Or the business was flooded that day? 

Okay. 

Ms. SMITH. My commercial property was flooded. 

Chairman MANZULLO. Okay. 

24

Ms. SMITH. My house was damaged, but it was livable. 

Chairman MANZULLO. Okay. Go ahead. 

Ms. SMITH. First contacts, and I didn’t apply until we got back 

to see the damage. We couldn’t even get to the commercial property 

because that was just a restricted area. But to the home, we could 

get there. 

We applied with FEMA, let them know I had both a business 

and home losses and they told me at that time to go ahead and 

apply through them. They could help me with the application for 

the residential side, but that I would have to speak and contact the 

SBA for any help with the business losses. 

So that’s what I did. I went through the process of contacting the 

SBA which just like anything else when we say I called someone 

on the phone, it’s not what you and I think about calling someone 

on the phone. That might take me two weeks. So these ordeals 

when I’m telling you it’s taking me time to get through to FEMA 

or it’s getting me time through that and it’s not necessarily a fault 

of theirs. It’s a disaster issue. 

So I get through with the SBA and filed that application. 

Chairman MANZULLO. That was your first contact with the telephone call. Is that correct? 

Ms. SMITH. Yes. 

Chairman MANZULLO. Go ahead. 

Ms. SMITH. And so I contacted them. Actually, when I contacted 

them, I was also trying to get internet service up and running and 

trying to find out where to go. But I understood that, okay, this is 

what you need to do. You need to fill out an application. I 

downloaded an application and then I went over to a disaster recovery center. 

Chairman MANZULLO. And you met with an individual there? 

Ms. SMITH. Yes, and I have to tell you. I was very pleased when 

I met with that individual. 

Chairman MANZULLO. Was that in Baton Rouge? 

Ms. SMITH. No, that was actually in Bell Chase, Louisiana which 

is Plaquemines. 

Chairman MANZULLO. Okay. Go ahead. That’s where my dad is 

from. 

Ms. SMITH. Oh, really. 

Chairman MANZULLO. Yes. He was born in Donaldsonville. 

Ms. SMITH. Not Plaquemines, Louisiana. Plaquemines Parish. 

Chairman MANZULLO. Okay. And then he moved there to-but go 

ahead. 

Ms. SMITH. But the SBA person told me that not only should I 

apply for a business loan, but that I should apply for a loan for my 

home and I said I don’t really need one for my home. I really want 

to focus on getting help for my business. He said, ‘‘No, no. Trust 

me. Apply for both of them. You don’t know that you might not 

need it.’’ 

These days I’m not so happy that everyone’s being told to apply 

for a loan whether you need it or not, but I went through that process and I applied for the loan. He told me to fill out the application. 

It told you a lot of attachments you needed to have. I had four 

years history of the company showing the growth. He told me to 

25

make copies of all of my three years tax returns because it would 

make the process go faster. 

So I did that. I took all of that over a period of days while I’m 

trying to get my business going and pay bills. I brought that back 

to him. He checked my packet over and said he would overnight 

that I think through the Baton Rouge office. So that was my next 

contact. 

Chairman MANZULLO. Do you recall what the date was? 

Ms. SMITH. September 19th. 

Chairman MANZULLO. Okay. Go ahead. 

Ms. SMITH. So at this point, I can tell you. We were very, I guess, 

hopeful thinking we were depressed, we were overwhelmed, but we 

were hopeful. It’s a real mix. I heard someone say that it was really months that businesses were really maybe not back, what to do, 

still overwhelmed. It’s true. It really was true. 

Truthfully, I don’t think that the SBA needs to be in there Day 

One because you’re not ready. But when they do get contacted, 

they need a fast response. Because when they told me three weeks, 

I said, ‘‘Okay. That’s difficult, but I can plan my business around 

a schedule.’’ Understand. He’s not just talking about a home, but 

I have employees that I had to let go and I was trying to decide 

do I keep them. These aren’t employees that just work in a retail 

establishment. These are 30 year engineering people. These are 

people with electronics and audio-video skills. These are not just 

something that you just find. A business like mine, key employees 

and losing them is important. 

So after about four weeks, I called, I tried to call the SBA. I 

could get them. I actually emailed them to find out the status. 

Chairman MANZULLO. It was the same individual you tried to 

contact. 

Ms. SMITH. You don’t have an individual. There isn’t anybody 

that, there’s nobody assigned to your case which is the problem of 

not having a champion. You don’t get somebody assigned. You just 

get different people. 

Chairman MANZULLO. The person that took your application 

didn’t tell you to check back with him. Was that it? 

Ms. SMITH. No, in fact you can’t. There’s a number you’re told 

to call which is very busy. You can reach it. So I was eventually 

able to send an email. I did have a nice lady that called me back 

and told me, yes, they had the application. 

Chairman MANZULLO. Did you apply to any other agencies in the 

state, any banks for any bridge loans or anything? 

Ms. SMITH. No, I didn’t apply. There was a $25,000 bridge loan. 

The problem is, and you all know this, is that $25,000 bridge loan, 

I would have to pay that back. Well, I already had mortgages that 

I had to pay back and we were worrying about the continuation of 

the business. I have lost my property. I had mortgaged my home 

to buy the property. 

Chairman MANZULLO. You had to pay back the SBA loan also. 

Ms. SMITH. Right. 

Chairman MANZULLO. Was the bridge loan paid back faster? 

Ms. SMITH. I don’t really know the terms, but it wasn’t enough. 

Anyone that knows about borrowing, you borrow not just the minimum amount needed. 

26

Chairman MANZULLO. Just wasn’t enough to take care of you. 

Ms. SMITH. Right. 

Chairman MANZULLO. Okay. 

Ms. SMITH. So why have to turn that around and pay that back? 

It didn’t handle it. But I did apply for grants. I was reading a lot 

about anyone that had any kind of loan. I contacted Louisiana 

Business and Industry, applied for grants with them. 

Chairman MANZULLO. I need to interrupt you because I want Ms. 

Velazquez to have some time here before we’re called off for some 

votes and hopefully we’ll get the rest of your story out here. Thank 

you. Ms. Velazquez. 

Ms. VELAZQUEZ. Thank you. Thank you, Ms. Smith, for sharing 

your story with us. I would just like to ask you. If you have gotten 

this loan in the first three weeks like you were originally led to believe, how would things have been different for your business? 

Ms. SMITH. I would not have lost those key employees. I really 

could have continued and planned. I have a backlog of workload. 

I can’t keep up with it. I don’t have those people. You can’t just 

say ‘‘Oh, well maybe I’ll be able to keep you on.’’ You can’t just say 

‘‘Hang in with me and don’t make any money.’’ I needed to know 

the plan and I needed some help with that or either I had to decide 

to let them go. 

Ms. VELAZQUEZ. So you were here and you listened that Administrator said that they are meeting the challenges in responding to 

Hurricanes Katrina, Rita and Wilma. Do you agree? 

Ms. SMITH. No, he doesn’t understand the challenges and I’m not 

being ugly because truthfully I listened to a lot of what he said and 

you know I think he means well. I really, really do. I wanted to 

give him some feedback, but he’s not. And I heard a couple people 

ask questions that have been there, that have seen as you call your 

constituents. But he almost doesn’t have a clue. 

We look at it as the SBA has all the wrong measures and goals. 

The mission of the SBA, truthfully I’m not sure what it is and I’m 

not sure that he has a clear understanding. Probably if we went 

around this room here, we might all think of it for different things. 

If you don’t have a clear mission, then you’re not going to be able 

to succeed. Well, you asked a lot of other questions that I could 

comment on. 

Ms. VELAZQUEZ. What sort of specific reasons did SBA provide 

you regarding your denial? 

Ms. SMITH. Okay. It was a little confusing because first of all, 

they started with looking at the depreciation method used on my 

property which was flooded. So it wasn’t a valuable asset anyway, 

but since my accountant had taken a 50 percent depreciation the 

year prior because our income was up enough, so from a tax standpoint, we needed to take that depreciation. So he told me that if 

I had not taken a 50 percent depreciation on that building, that I 

could have gotten a loan. 

But he then followed up and said ‘‘You’re going to receive a letter 

saying that you’ve been denied for lack of repayment ability ’’ and 

that’s what I’ve gotten in the letter. 

Ms. VELAZQUEZ. And what follow-up did SBA do after they denied you? 

27

Ms. SMITH. Oh, well, they didn’t do anything, but they mistakenly told me to go apply to FEMA for a grant. At that point, I’m 

thinking maybe this was a blessing. Maybe this is a good thing. So 

I had to get paperwork in order for them because they want to 

compare with what’s going on in your insurance. I contacted FEMA 

to find out. FEMA doesn’t do anything for businesses. They were 

like ‘‘Are you crazy? Who told you that?’’ I said, ‘‘The SBA told me 

to come see you.’’ And they said, ‘‘No, we can’t help you with that.’’ 

Ms. VELAZQUEZ. SBA’s Collateral Policy in 13 CFR 123.11 states 

that SBA will not decline a loan if the applicant lacks a particular 

amount of collateral as long as it is reasonably sure that you can 

repay the loan. With this standard in mind, do you believe that you 

were treated fairly? 

Ms. SMITH. Not on purpose. I don’t know if it’s because they 

brought new people in. But they didn’t discuss with me pledging 

any type of collateral. That was not something that was discussed 

at all. In fact, that’s the problem until this day is that no one has 

talked to me about what do we need to get this loan to get the help. 

There is no one out there doing that. They keep handling paperwork and getting one or two more questions answered. 

But as far as the whole collateral side of that, there’s a lot of 

things that we have. I mean you could ever do a pro forma. In general business loans, you could do a pro forma. But I have IRAs. I 

may and I probably will end up taking my IRA money. 

Ms. VELAZQUEZ. What is your perspective on SBA’s encouraging 

individuals to apply for loans? 

Ms. SMITH. That to me, and I heard this a lot about the number 

of individual loans applied for, during a disaster is not the time 

necessarily to be doing that. Okay. What they’ve done is that 

they’ve created a large queue of people that are waiting for assistance and there’s no real separation between business and how it’s 

affecting economy versus someone that wants to improve and 

change the siding on their house so that it will withstand the next 

hurricane and there’s clearly a difference between those two. And 

they continue to encourage more and more people to this day to 

apply for SBA loans. 

Ms. VELAZQUEZ. So would you say that there was a lack of planning for a large disaster like the one that we encountered here? 

Chairman MANZULLO. I think her answer is obviously. Mr. Bradley. 

Mr. BRADLEY. Thank you very much. I’m having somewhat of a 

difficult time understanding how in a disaster situation the depreciation schedule is assumed to be a non disaster situation I guess 

and well, maybe comment on that first. 

Ms. SMITH. The wordMr. BRADLEY. Because isn’t that your problem? Isn’t that key 

problem why you were denied? 

Ms. SMITH. Confusion is the key problem in some cases because 

at first, that’s what I thought. But then it says lack of repayment 

is the idea and collateral versus lack of repayment could necessarily be the same, but is not necessarily the same and we all 

know that. They related the two as they are one and the same. I 

could not, and I challenged the guy when he told me this. I said, 

‘‘I don’t understand what the paper depreciation of my business 

28

that’s flooded has anything to do with a disaster loan.’’ And his answer was, ‘‘I’m sorry. If you hadn’t done that, we could have given 

you a loan.’’ 

Mr. BRADLEY. So to go from your case to the larger case here and 

generalize it and where we can go from here because I think that’s 

why you’re here, SBA has to show more flexibility on the box, to 

begin with just the depreciation. Right? Wouldn’t that be No. 1? 

Ms. SMITH. I think that’s true because if we all look at what a 

true disaster means it’s almost nothing left. Right? So in that 

sense, you have to be looking at what the future or the potential 

holds and not necessarily what the current assets are. 

Mr. BRADLEY. Because it’s all based on repayment schedules in 

the future and your potential earnings capability. 

Ms. SMITH. Exactly. 

Mr. BRADLEY. Which you were able to prove based on your eight 

year track record. 

Ms. SMITH. That’s what I would have assumed. 

Mr. BRADLEY. Right. 

Ms. SMITH. But that’s the point they never discussed. 

Mr. BRADLEY. And it seems like, Ms. Smith, listening to your testimony that one of the real significant problems that you had was 

that there wasn’t one person to help you, walk you, through the 

process and that you kept banging up against brick walls not only 

in terms of like the box of how your loan was going to get looked 

at but one person to help you through the maze of problems. Is 

that it? 

Ms. SMITH. That is very much correct. In fact, what you heard 

is a portion of the story. I may have talked to a dozen SBA people 

at different times for different things. It really gets a whole lot 

worse than I painted. 

Mr. BRADLEY. And you said a couple of different times that you 

had to wait a couple of weeks just to get a phone call answered and 

didn’t have internet capabilities. I don’t know if that was on your 

end or on the SBA end, but either way there was not one person 

and seemingly incapable to being able to communicate quickly. 

Ms. SMITH. Yes. You know the point is that you try to tell people 

‘‘Just keep trying. Just keep calling them and you’ll eventually get 

through.’’ So you go ‘‘Okay. Am I sitting around doing nothing? No, 

I’m not. I’m trying to succeed on my own. I’m trying to handle my 

customers. I’m trying to do my payroll. I’m trying to do my taxes.’’ 

So you’re constantly trying at different times and it takes quite a 

while and the internet service down was on our part. Internet was 

months before it came back. 

Mr. BRADLEY. In the couple of minutes that I have remaining, 

are there any other issues that you think would improve the situation out of your experience in how you interacted with the SBA? 

Ms. SMITH. The champion you keyed on, I think that’s key. That 

is very key, but it’s not just one person there. I think whoever 

heads the SBA needs to be a champion for business. Okay. I really 

do, you all. They can’t be a champion for themselves so they look 

good. All right. And people don’t do that because they’re trying to 

beat the system or do a bad job. They just don’t want to fail. But 

the problem is he has to measure his success by the success of the 

businesses. 

29

I heard someone say ‘‘You’re giving me, you’re bragging on statistics and the loans.’’ Would it be nice if we’d heard him bragging 

about the number of businesses they helped to bring back? That’s 

probably the key. 

And then I’ve heard things about the planning process. That lack 

of planning process is evident. It is clear to me. I can see that. 

They don’t have processes. They don’t have measures. You know 

they don’t have the right goals. So that’s why we can sum up that 

there isn’t the correct mission statement for that company. 

Disaster planning, which I have a background in by the way because I’m on the IT side, isn’t something that is not easy to do and 

I understand that. But I guess I expect it of a government agency 

and the problem is that we have to quit saying how wonderful 

we’re doing and saying ‘‘Oh, gee. I’m trying to do good’’ and let everybody admit ‘‘Okay. I’m trying to do good, but we can’t handle 

disasters.’’ But let’s use that and learn from that for the future. 

Mr. BRADLEY. I just have one more quick question, Mr. Chairman. I think you said in your initial testimony that by no means 

were you the exception to the rule, that your story is very similar 

toMs. SMITH. It may be similar. It might actually be better. I’m 

still there. Many aren’t. 

Mr. BRADLEY. Okay. 

Chairman MANZULLO. Thank you, Ms. Smith. I’m going to ask 

Herb Mitchell to take the stand up there and you can stay there, 

Ms. Smith. You’re sitting next to the man in charge there if that’s 

okay with you. Could you please state your name and your capacity 

at the SBA. 

Mr. MITCHELL. Herbert Mitchell. I’m the Associate Administrator 

for Disaster Assistance at SBA. 

Chairman MANZULLO. And you’ve been there for how long? 

Mr. MITCHELL. I’ve been with the Agency for a little over 28 

years, been in the Office of Disaster Assistance for ten, been head 

of the Disaster Loan Program for five. 

Chairman MANZULLO. Okay. Mr. Mitchell, you’ve heard Ms. 

Smith’s very compelling testimony. Is there anything that you want 

to add to that? 

Mr. MITCHELL. First of all, I certainly apologize for some of the 

confusion and one of the challenges in every disaster is that for the 

first part of it, and this is what a lot of people don’t understand, 

most of the time when you go to buy a house or buy an automobile, 

we don’t fill out applications in this country in terms of our loan 

process. It’s the real estate agent or the finance folks working with 

us and recognize that. What we try to do is to make sure we have 

customer service representatives in the disaster recovery centers, 

in the field locations, to help people through that process. We try 

to enlist the aid of the Small Business Development Centers to 

help people through that process. 

But it is challenging. I’ve gone there and I’ve seen the expression 

on people’s face in terms of just the confusion of what does all of 

this paperwork mean, what does it mean that I can’t use the 

money that I got from my insurance recovery to pay off my mortgage and if I do that, I’m not qualified for an SBA loan. It can become very confusing. 

30

Just quickly. Congresswoman Velazquez is absolutely right. 

There is no requirement. There is a requirement for collateral only 

best available. If you have no collateral, you should not be declined 

and nobody in SBA should tell you that, one. 

If the issue, and I’m not sure what the issue around depreciation 

schedule, the primary factor in getting an SBA disaster loan is 

cash flow. One of the things that has to happen is that the loan 

officer needs to evaluate how much cash flow is available to make 

the loan. So if you’re reporting a net income of let’s say $100,000, 

but you’ve written off say $50,000 in taxes, they only need to know 

that depreciation amount because that amount gets added back to 

the cash flow to determine how much is available in terms of actual cash. That should be happening in the process. 

I haven’t had a chance to take a look at your application. I know 

that the credit history is excellent. I know that there may be some 

challenges in terms of how the cash flow is being calculated. You 

have my personal commitment that I plan to personally take a look 

at that application to make sure that it’s done correctly. 

But I certainly apologize if there was any confusion around the 

fact that that somehow you’re being declined because of the 50 percent depreciation. That is not the case and should not be the case. 

It’s only a matter in terms of finding out that number to determine 

what the exact cash flow is available to repay the loan. 

Chairman MANZULLO. Thank you. Ms. Velazquez, do you have 

any questions you want to ask? 

Ms. VELAZQUEZ. Mr. Mitchell, will you do that with the other 60 

percent that has been declined? 

Mr. MITCHELL. I can tell you this. This past weekend I have personally answered 12 emails. On the average I get probably about 

anywhere from 15 to 20 cases referred to me personally every day. 

I will try my best to make sure that those cases are reviewed properly and make sure that people get a response. 

Ms. VELAZQUEZ. Thank you. And I hope that you understand my 

frustration. My frustration is that too many families are suffering 

that lost their businesses. She was lucky because she is still there 

standing. But you know that they made a mistake because contrary 

to the statute, they’re saying that she needed collateral. How many 

others were denied for the same reason? 

Mr. MITCHELL. I’m not acknowledging a mistake. What I’m saying is that if she was declined for lack of repayment ability, that’s 

the reason. If there was any communication around the fact that 

you were declined because of lack of collateral or the 50 percent depreciation rule, then that’s miscommunication and that’s what I 

plan to clarify. 

Chairman MANZULLO. I think Ms. Smith wanted to add something. Ms. Smith, go ahead please. 

Ms. SMITH. Thank you very much. When I was listening to your 

explanation, it also goes back to the right measures in trying to 

help businesses through disaster and I’m hoping maybe we’ll get a 

chance to talk because you can apply not only for your loss of property, but an economic injury loss. Now I’ll ask you this. Why is 

there on the form for the SBA that you can apply for an economic 

injury loss as well as for your loss of assets when what they’re saying is that ‘‘Okay, you lost your assets. Maybe it shouldn’t be that 

31

we’re looking at your loss of assets but as long as you show repayment.’’ From what they looked at for repayment for us was that immediate ‘‘okay, we don’t have any income.’’ And I know we didn’t 

have any income. We had applied for economic injury loss also at 

that time. 

So I think while I know we’re trying, I think someone needs to 

revisit that with the spirit of what we want businesses to succeed. 

I mean if you look at the overall success for me, the taxpayer, what 

I really would like to see is the economy grow. And do I agree that 

you can invest money? Yes. Do I agree that you should throw it 

away? No. So I think there needs to be some procedure, but at the 

same time, we’re talking about disaster loans for getting businesses 

back and up and I think there is a lot of confusion and even maybe 

within the SBA about that. 

Ms. VELAZQUEZ. Ms. Smith, we have, the Committee, to reauthorize the Disaster Loan Program. Based on your own experience, 

what would you tell us that we need to do to fix how the program 

has been run? 

Ms. SMITH. I would bring in a few people that truly understand 

the problems. All right. I would not just bring in this disaster planning expert that they referred to earlier because they don’t really 

see the impact. Let’s look at this just like you might take any process to try to fix this and say what is the outcome that we want to 

try to achieve. Have a team of people that sit there and develop 

a plan. Let them start with a mission statement and I think this 

Committee probably should approve that mission statement and 

give them some guidelines on how to proceed. 

I think we need a revamping of the whole SBA process if you 

should think that the SBA should be involved in disaster loans. 

Now maybe you make the decision that they shouldn’t be involved 

in disaster loans. 

Ms. VELAZQUEZ. If you allow me. When I address the issue of 

having a planner in charge of the natural disaster and then the 

Administrator said that Mr. Mitchell is the person in charge, I said 

he is running the Disaster Loan Program. That is not the same to 

be the person in charge of planning the response. 

Ms. SMITH. Where I come from, every department has their own 

disaster plan. Every company, every department, has that. The 

head of that department should be responsible for its disaster plan 

and being able to succeed in its mission. Just the fact that you say 

that someone else handles disaster planning doesn’t mean that 

that is going to effect how the SBA should operate. 

Ms. VELAZQUEZ. Thank you. Thank you, Mr. Chairman. 

Chairman MANZULLO. Did you want to respond to that? 

Mr. MITCHELL. Well, just a couple things. There’s no question 

that throughout the Federal Government there have been lessons 

learned and we need to do a better job of planning and doing contingency planning. But the SBA already has a lot of flexibility already built in to terms of how we respond to disasters. 

We have special authority in terms of how we hire and how we’re 

able to get people on board quickly. We have contracts in place that 

allow us for example. We not only hired an additional 4,000 people, 

but we were able to equip them, get space. We have special arrangements with GSA in terms of how to do that. I have special 

32

authority in getting priority for telecommunications equipment. So 

we have a lot of that. 

The question is what do we need to do to deal with catastrophic 

events beyond what we currently have in place to deal with. 

Chairman MANZULLO. Anybody else have any questions or comments? Good. Mr. Akin. 

Mr. AKIN. Thank you, Mr. Chairman. I’ve been trying to be a 

good listener here and I guess I sense a little bit of kind of almost 

two different stories about what’s going on. I’m not quite clear. The 

first thing that I got the impression of, Patricia, was that you gave 

us the impression that there were lots and lots of small businesses 

that needed help and needed loans and couldn’t get them. Is that 

fair to say? 

Ms. SMITH. It’s correct. It’s too difficult and it’s not timely 

enough. You have to make a decision to keep your employees and 

let them go. You can’t wait months. 

Mr. AKIN. So you’re saying that perhaps the specific reason that 

you didn’t get your loan may have been more unique. But what is 

not unique is that there is lots and lots of small business that 

needed loans in a disaster situation and couldn’t get them. Is that 

a fair summary of what you said? 

Ms. SMITH. That’s a very fair summary. In fact, one of the things 

that I’ve heard is there’s a statistic that very early in the process 

a number were denied and they’re saying that was given artificially, I was quoting a Rich Carter who is a spokesmen, high rejection rate. I thought if you read that, he’s expecting that they’re 

going to have some rejections early on because the businesses 

aren’t back and going again. 

Mr. AKIN. Okay. I just want to make sure I wasn’t putting any 

words in your mouth. This is what I’m trying to reconcile. Now 

what I think I heard you say, Herb, was that the fact that the businesses in a disaster situation and that threatens their ability to 

repay the loan is not in and of itself a reason to deny a loan. Is 

that correct? 

Mr. MITCHELL. That’s exactly right. 

Mr. AKIN. Let me try and do it one thing. I’m kind of slow at 

working through this. Be patient with me. So if that’s not a reason, 

now next of all, would you say that it’s true that there are lot of 

people that wanted loans down there that you weren’t able to give 

them loans? 

Mr. MITCHELL. I don’t know the exact figures for the decline rate 

on the business side but I would say it’s probably well over 50 percent that have been declined. Yes. 

Mr. AKIN. So if you have people who are applying for loans and 

50 percent of them were told no, then that would corroborate what 

Patricia is saying, wouldn’t it, to some degree? 

Mr. MITCHELL. Well, there’s no question. First of all, I think we 

sent out over 300,000 applications and we’ve gotten back a little 

over 50,000. So obviously, there’s a gap between those who initially 

expressed a need and those who actually applied and there being 

a lot of reasons of why they didn’t apply. 

Mr. AKIN. Okay. So there is a need for these loans. Now is part 

of the reason why they’re denied just because you’re buried down 

there because you talked about personally you met with all these 

33

people. Are you just overwhelmed by the demand or is the fact that 

50 percent of them were denied. Why would the other 50 percent 

be denied? 

Mr. MITCHELL. The primary reason for denial is lack of repayment ability. You don’t have sufficient cash flow to repay the loan 

or the unsatisfactory credit history. Those are the two primary reasons for declines. 

Mr. AKIN. So your lack of ability to repay, I would think that 

storm damage would be the main thing that would effect that. 

You’re saying you don’t put that into the equation and they still 

couldn’t repay. In other words, if we went to a time before the 

storm and they asked for a loan, you’re saying they wouldn’t get 

one then either. 

Mr. MITCHELL. The disaster programMr. AKIN. Is that what you’re saying? 

Mr. MITCHELL. No. The Disaster Program is very unique in that 

regard. We’re taking the risk and we’re basing the repayment ability on predisaster financial condition. 

Mr. AKIN. Okay. 

Mr. MITCHELL. So we’re not holding anything that impacted 

them as a result of disaster against them. It’s all predisaster. 

Mr. AKIN. So you’re saying of these businesses that have applied 

for loans then, the situation is that prior to the hurricane half of 

them financially were shaky enough that you just couldn’t give 

them a loan based on the parameters that you either grant or don’t 

grant loans. 

Mr. MITCHELL. If they had cash flow prior to the disaster and 

their credit history is satisfactory prior to the disaster, they qualify 

for a loan. 

Mr. AKIN. Okay. So that may be an explanation. Now in your 

particular case, Patricia, you could have gotten a loan beforehand, 

couldn’t you? 

Ms. SMITH. Well, that’s a good question. I took out a loan when 

I bought my property and I borrowed against my home in order to 

buy my property. So in that case, would I say I could go out and 

get another loan? No, but I didn’t need it. My business was operating fine. I was expanding just on current cash flows. I was using 

day-to-day cash flows just to make my expansions happen. 

Now could I have afforded to go and get a loan? No. I didn’t see 

any revenues coming in for that. The whole issue was this was a 

disaster. I lost my building and now I needed help. Prior to the disaster, I didn’t need help. That’s the difference and maybe that’s a 

measures issue. 

Mr. AKIN. So we’re talking this is where the two trains seem to 

be passing each other a little bit. On the one hand, you said I can 

run my business, but I might not have qualified for a loan before 

the hurricane. After the hurricane, I can’t run my business without 

a loan and I’m hearing SBA, Herb, saying the parameter we’re 

using is you had to qualify ahead of time and that could explain 

half of the places where we’re not able to help. That sounds like 

something we probably should focus a little attention or energy on. 

But see that little red light. You know they have a shocker in 

our chair if we go beyond the time. 

34

Chairman MANZULLO. Let Mr. Mitchell go ahead and respond to 

that. 

Mr. MITCHELL. And what you’re raising is the challenge in every 

disaster. Obviously, there is a disaster and certainly businesses 

and individuals have been impacted and the federal design right 

now is the loan program. So there’s a balance between the two and 

obviously, certainly we’re taking risks that no other lender would 

take. We have very lenient criteria, but at the end of the process 

it is a loan program. 

Chairman MANZULLO. I just have one question. You’ve been very, 

very patient, Ms. Smith, and I appreciate your time. Did the person 

that gave you this 50 percent, whatever, depreciation, I don’t understand it because when my brother ran his restaurant he didn’t 

depreciate anything because he had all used equipment that had 

been paid for for about 40 years. Did that person tell you or did 

the documents say that you had the inability to repay the loan and 

that’s why you’re being turned down? 

Ms. SMITH. The document that I received said lack of repayment 

ability. 

Chairman MANZULLO. And then if you had gotten the loan, how 

much had you asked for? 

Ms. SMITH. At that time, I have to tell you I haven’t reread the 

paperwork, but it was $250,000 in property losses and I think 

$100,000 in economic injury losses. 

Chairman MANZULLO. And did you have the ability to repay that 

$350,000 if after the disaster the business picked up to where it 

was prior to the disaster? 

Ms. SMITH. Well, when I applied for the loan, I said I don’t just 

want to apply for a loan. I want to talk about terms. I want to talk 

about repayment schedule and that was the first thing and that’s 

when they told me just fill out the paperwork and in three weeks 

someone will call you. I’ve never had that discussion. 

Chairman MANZULLO. So no one told you how long it would or 

any terms. 

Ms. SMITH. No, I eventually found out that you have 12 months 

to repay it and then that’s when I told them, I said, ‘‘You understand right now’’-By the time I got, that’s in November now, many 

months after. I said, ‘‘Do you understand now if I start fixing that 

building back, the construction process, construction is crazy right 

now in New Orleans, that construction process may take longer 

than that.’’ So now in November, I told them, ‘‘I’m not sure that 

I want the loan.’’ 

I said, ‘‘You know you have to understand. It was important to 

me when I had my key people on board. I’ve let people go now and 

now you’re talking about a loan. I have to plan this. I can’t say I’ll 

take the money. If you’ll award me that loan, I have to relook at 

this.’’ And that was an issue for me of how to repay that back. But 

no one said, ‘‘You qualify for X number of dollars.’’ No discussion 

with that. That’s what I would have expected in a disaster loan. 

Chairman MANZULLO. So you were turned down based on inability to pay $350,000 but if you would have gotten perhaps $150,000, 

you would have been able to do that. 

Ms. SMITH. Probably get the building corrected. 

35

Chairman MANZULLO. I think you probably needed somebody to 

talk to to walk you through it. 

Ms. VELAZQUEZ. But, Mr. ChairmanChairman MANZULLO. In that case, you may not even have decided to take the loan. That would have been your option at that 

point. 

Ms. SMITH. It would have been my option. Right. 

Chairman MANZULLO. Okay. 

Ms. SMITH. I would have probably matched it with my IRA 

money to it easier on myself. 

Chairman MANZULLO. Okay. 

Ms. VELAZQUEZ. You said that an employee told you that you 

have only 12 months to repay. 

Ms. SMITH. Yes. Before you start paying the loan. 

Ms. VELAZQUEZ. Okay. But isn’t it true that you have up to 30 

years to repay? 

Mr. MITCHELL. Yes, the maximum term can be up to 30 years. 

What we do is for this disaster we’ve already authorized a 12 

month deferment period before payments start. On an individual 

basis, that can be extended based on how long it takes to actually 

rebuild that particular business. So the field can extend up to 24 

months in terms of the first payment due. 

Ms. VELAZQUEZ. Isn’t it true that it can be deferred up to two 

years? 

Mr. MITCHELL. Under current process, the field office can defer 

payments for two years. Anything over that comes to Headquarters 

and certainly we can take a look at that on a case-by-case basis. 

Ms. SMITH. That would have been helpful. 

Chairman MANZULLO. Well, thank you very much. Maybe you 

can help out the folks at SBA with some planning. You’ve certainly 

had a lot of experience. Are you operating now, Ms. Smith? 

Ms. SMITH. Yes, I am. 

Chairman MANZULLO. How did you get up and going? 

Ms. SMITH. That’s hard to say. We eventually just started getting 

customers calling, saying they needed. We’re somewhat in the construction industry, but we were new construction. Our market has 

changed severely, but they now have people that are trying to 

bring their houses back and in that case, we do the lighting and 

automation and all the control systems in there. So you would 

think they would want it fixed. In addition to that, now people 

while they’re fixing their homes, maybe they want to put some of 

those systems in. They want to improve the lighting. They want 

the home theaters to come in. So we’re getting that work. 

It’s just I’m struggling because I don’t have my key people back 

fully yet until I can kind of plan all of that. I’m a planner. Okay. 

I want to plan my strategy out and that’s why I’ve been asking to 

sit down, in the queue applying for my loan. How can we work? 

What kind of repayment schedule? So I can kind of get this next 

phase because right now, I’m out of pocket for the work I’m doing 

on my building. 

Chairman MANZULLO. Okay. Thank you very much for coming. I 

appreciate it very much. 

[Whereupon, at 4:45 p.m., the Committee was adjourned.]

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