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42–587 PDF 2008

S. HRG. 110–547

OVERSIGHT: GULF COAST DISASTER LOANS AND

THE FUTURE OF THE DISASTER ASSISTANCE

PROGRAM

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JULY 25, 2007

Printed for the use of the Committee on Small Business and Entrepreneurship

(

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

(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JOHN F. KERRY, Massachusetts, Chairman

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

MARY LANDRIEU, Louisiana

MARIA CANTWELL, Washington

EVAN BAYH, Indiana

MARK PRYOR, Arkansas

BENJAMIN L. CARDIN, Maryland

JON TESTER, Montana

OLYMPIA J. SNOWE, Maine,

CHRISTOPHER S. BOND, Missouri

NORMAN COLEMAN, Minnesota

DAVID VITTER, Louisiana

ELIZABETH DOLE, North Carolina

JOHN THUNE, South Dakota

BOB CORKER, Tennessee

MICHAEL B. ENZI, Wyoming

JOHNNY ISAKSON, Georgia

NAOMI BAUM, Democratic Staff Director

WALLACE HSUEH, Republican Staff Director

(III)

CONTENTS

Page

OPENING STATEMENTS

Kerry, Hon. John F., a United States Senator from Massachusetts ................... 1

Snowe, Hon. Olympia J., a United States Senator from Maine .......................... 4

WITNESS TESTIMONY

Thorson, Hon. Eric M, Inspector General, U.S. Small Business Administration, Washington, DC ........................................................................................... 7

Martin, Gale B., former loan officer, U.S. Small Business Administration,

Office of Disaster Assistance ............................................................................... 22

Shear, William B., Director, Financial Markets and Community Investment,

U.S. Government Accountability Office, Washington, DC ................................ 26

Preston, Hon. Steven C., Administrator, U.S. Small Business Administration,

Washington, DC ................................................................................................... 52

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Kerry, Hon. John F.

Opening statement ........................................................................................... 1

Post-hearing questions posed to Hon. Steven C. Preston and subsequent

responses ....................................................................................................... 83

Post-hearing questions posed to Eric M. Thorson and subsequent responses ........................................................................................................... 134

Post-hearing questions posed to William B. Shear and subsequent responses ........................................................................................................... 138

Landrieu, Hon. Mary L.

Prepared statement .......................................................................................... 78

Post-hearing questions posed to Hon. Steven C. Preston and subsequent

responses ....................................................................................................... 94

Post-hearing questions posed to Eric M. Thorson and subsequent

responses ....................................................................................................... 135

Post-hearing questions posed to Gale B. Martin and subsequent

responses ....................................................................................................... 140

Post-hearing question response by Brad Durtschi ......................................... 150

Post-hearing question response by anonymous loan officer .......................... 150

Lieberman, Joseph I.

Post-hearing questions posed to Hon. Steven C. Preston and subsequent

responses ....................................................................................................... 91

Martin, Gale B.

Testimony .......................................................................................................... 18

Prepared statement .......................................................................................... 22

Response to post-hearing questions from Senator Landrieu ........................ 140

Additional statement ........................................................................................ 165

Preston, Hon. Steven C.

Testimony .......................................................................................................... 52

Prepared statement .......................................................................................... 56

Response to post-hearing questions from:

Senator Kerry ............................................................................................ 83

Senator Snowe ........................................................................................... 84

Senator Lieberman .................................................................................... 91

Senator Landrieu ...................................................................................... 94

Senator Vitter ............................................................................................ 104

Page

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Shear, William B.

Testimony .......................................................................................................... 26

Prepared statement .......................................................................................... 28

Response to post-hearing questions from Senator Kerry .............................. 138

Snowe, Olympia J.

Opening statement ........................................................................................... 4

Post-hearing questions posed to Hon. Steven C. Preston and subsequent

responses ....................................................................................................... 84

Thorson, Hon. Eric M.

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 10

Response to post-hearing questions from:

Senator Kerry ............................................................................................ 134

Senator Landrieu ...................................................................................... 135

Senator Vitter ............................................................................................ 137

Vitter, David

Post-hearing questions posed to Hon. Steven C. Preston and subsequent

responses ....................................................................................................... 104

Post-hearing questions posed to Hon. Eric M. Thorson and subsequent

responses ....................................................................................................... 137

SBA documents included:

‘‘Triage Project’’ (SBA Loan Closing Project Procedures) .............................. 99

‘‘90 in 45 Campaign’’ ........................................................................................ 100

Buffalo letter #1 (SBA loan cancellation letters to borrowers) ..................... 101

Buffalo letter #2 ................................................................................................ 102

Standard 14-day Letter .................................................................................... 103

SBA production and performance standards for loan officers ...................... 106

SBA production and performance standards for team leads w/

exhibits .......................................................................................................... 111

COMMENTS FOR THE RECORD

Capital One .............................................................................................................. 154

Glenn Trainor, SBA loan applicant ........................................................................ 160

Statements of former SBA loan officers:

Durtschi, Brad ......................................................................................................... 172

Response to post-hearing questions from Senator Landrieu ........................ 150

McClure, Steve ......................................................................................................... 185

Robison, Melissa ...................................................................................................... 196

Russell, William ....................................................................................................... 181

Simien, Wallie .......................................................................................................... 198

Smith, Jennett S ...................................................................................................... 186

Young, James A ....................................................................................................... 188

Anonymous loan officer (current) ........................................................................... 202

Response to post-hearing questions from Senator Landrieu ........................ 150

(1)

OVERSIGHT: GULF COAST DISASTER LOANS

AND THE FUTURE OF THE DISASTER

ASSISTANCE PROGRAM

WEDNESDAY, JULY 25, 2005

UNITED STATES SENATE, COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP, WASHINGTON, DC.

The Committee met, pursuant to notice, at 10:08 a.m., in room

SR–428A, Russell Senate Office Building, Hon. John Kerry (Chairman of the Committee) presiding.

Present: Senators Kerry, Landrieu, Snowe, Vitter, and Thune.

OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY,

CHAIRMAN, AND A UNITED STATES SENATOR FROM MASSACHUSETTS

Chairman KERRY. Good morning. We will come to order, although I have never seen a more orderly room.

Anyway, I apologize for being late. I had to go to the Finance

Committee, which was starting a hearing, and I am trying to balance between them. So I thank you for your patience.

We are going to do things a little differently here today, both at

the request of the Administrator, but also with my enthusiasm, because I often think that, at these hearings, there is a sort of procedure by which the Administration testifies first, and then others

come in, and you do not really get the kind of give-and-take and

exchange that I think could be most helpful to the Committee. And

since this is about getting good information and laying out the

facts, I think it is helpful to everybody to have the Administrator

go last. So I welcome the Administrator’s willingness to do that,

and I look forward to it.

We are here today to take a close look at the SBA’s Disaster Assistance Program. This program serves as the Federal Government’s primary source of long-term financial assistance to small

businesses that have been hit by a disaster of one kind or another.

A couple of years ago, we became all too familiar with what is

wrong with the program: The lack of adequate planning, the lack

of adequate staffing, and other kinds of problems that accompanied

the massive failure of delivery of services across the board in the

wake of Katrina. And that taught us something.

I think a lot of people, however, are unaware of how frequently

the SBA does respond to various disasters around the country,

some small, some large. And in fact, the SBA’s Disaster Assistance

Program plays an integral role in rebuilding homes and towns and

businesses in communities all across the country.

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In my home State, the city of Uxbridge recently experienced a serious mill fire, and some 135 homes and businesses were destroyed.

A lot of damage was done, and some 300 jobs were lost. And this

mill had become a major magnet, if you will, for business in a community that has been hurt over the last past several years by businesses going abroad and the transition of our economy.

So SBA stepped in, and I want to thank the Administrator for

the fast response of the Agency. Agency personnel were on the spot

Sunday afternoon for a fire that occurred on Saturday, did their

evaluation, and by Monday we had a designation and were able to

move.

And that is terrific. That is an important message to send to people. That is the way it ought to work. Not every disaster can receive, or does receive the same kind of response. And certainly

there are some places where we have not seen such swift response.

Next month marks the 2-year anniversary of the most devastating natural disaster that we know of in the history of this

country. The impact of Hurricane Katrina was nothing less than

catastrophic on the State of Louisiana and on surrounding communities in the Mississippi also. Thousands were killed, hundreds of

thousands were displaced, and many of them are still struggling to

recover from the impact.

At every step during the response and recovery process, the Federal Government was shown to be unprepared and unable to respond. And I want to emphasize: This was not on Administrator

Preston’s watch. He came in to try to clean up some of this, and

I think he has done an admirable job of trying to tackle a lot of

that, but at no agency was the lack of preparedness more evident,

or incompetent, frankly, than what happened within the SBA. Insufficient staffing, slow response, lack of coordination, lack of leadership, lack of vision, and an inadequate processing system led to

the Agency’s absolute failure to respond to the needs of the Gulf

Coast victims.

Nearly 8 months after the storm hit, Mr. Preston’s predecessor

resigned, leaving an enormous mess to clean up, frankly. On that

day, more than 31,000 loan applications remained unprocessed,

and just 10 percent of the money that was approved for disaster

victims had actually been disbursed.

By all accounts, Administrator Preston made it his top priority

to get this program on track. In the fall of 2006, he set a goal of

reaching each and every one of the roughly 90,000 loan applicants

who had been approved for a loan, but had not received their

money.

This aggressive goal did have an immediate impact, and to date

the Agency has disbursed nearly $6 billion to the victims who waited so many months to rebuild their homes and their lives.

Today, during the course of this, and it is inevitable—and I want

to emphasize—this is not a ‘‘gotcha’’ hearing. This is an educational

accountability hearing. It is what Government ought to do; it is

what the Committee ought to do; it is what all of us ought to be

involved in. But notwithstanding the success generated by Administrator Preston’s efforts, there were some serious concerns in some

quarters with some of the methods that were used to carry out that

effort.

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Earlier this year, I received two letters from former SBA loan officers which I sent to the Agency’s Inspector General, Eric Thorson,

to consider as part of what was already an ongoing investigation

into the Agency’s Gulf Coast response. And I think we should emphasize, it is good that we are having that kind of evaluation so

we understand what did go wrong and do not repeat those mistakes, and we would be criticized if we did not, every single one

of us.

Today, we will hear from Mr. Thorson regarding several of the

allegations made in these letters.

And we will hear from Gale Martin, a former SBA loan officer

who wrote one of the letters alleging misconduct on the part of superiors.

As Chairman of the Committee, obviously I am concerned by

those allegations and by the findings, but I admire the qualities in

SBA Administrator for his willingness to be accountable and to establish accountability, and to submit to that accountability. I think

it is admirable, and I think it is important, and I am confident we

are going to see that exhibited here today.

The goal of this hearing, and the goal of each Senator on the

Committee and for each witness, is to ensure that no victim falls

through the cracks, that no one who is relying on the Government

for a loan to rebuild a business or home is left wondering why the

Government let them down, and that we know what happened so

that these kinds of things do not happen again.

As we have done since the day Katrina struck, Senator Snowe,

Senator Landrieu, and Senator Vitter and I have worked, and we

will continue to work to make sure that he SBA leaves no stone

unturned in providing relief to small business owners and homeowners who are still struggling to make ends meet.

And I know I do not need to, but I will encourage Administrator

Preston to continue to work with the Inspector General in the

months ahead to address the concerns raised in those reports.

More importantly, I believe an effort needs to be made to ensure

that no loan applicant who was approved for a disaster loan was

left with an undesired or unrequested cancellation. If there are victims of this storm who were approved for assistance, but were later

turned away against their wishes, then I think we have a responsibility to go back and try to find out whether things can be made

right, within obviously, the rules and normal standards by which

those decisions are made. I am confident that Administrator Preston will make a serious effort to do that.

Just as we have to continue to look at what could be done for

the people of the Gulf Coast, we have to put in place the tools that

prevent another Katrina-like response. The SBA recently briefed

Congressional staff on its Disaster Recovery Plan which establishes

a framework for how the Agency will respond to future events, and

we look forward to hearing from the Administrator regarding the

specifics of the plan.

We are also going to hear from William Shear of GAO, who has

made several recommendations through two published reports regarding what steps the SBA needs to take to address the shortcomings that we will discuss.

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Finally, we are meeting today, 4 months after this Committee

voted unanimously to report a bill that addresses many of the holes

in SBA’s capacity to execute effective disaster response. I emphasize capacity: Capacity depends often on the law itself, on staff, and

other things.

This bill creates an expedited disaster response program to get

money in the hands of victims quickly. It authorizes private banks

to make disaster loans so that local banks can get involved immediately with the response effort—I might add—in a place where

they know the people, know the players, know the facts, and have

a stake.

It also creates a new level of declaration for the Administrator,

a declaration of catastrophic national disaster, to allow for businesses outside of the geographic reach of a disaster access to low

interest loans if they are adversely impacted.

I want to emphasize—because some have expressed some concern about a new level of disaster assistance—it can only be done

with the Department of Homeland Security and Presidential, and

other appropriate sign-offs. So it is not as if it were some great new

permissive discretion, and only in the face of, obviously, a legitimate disaster.

Despite broad bipartisan support in the Senate and a letter of

support from the Administrator, this bill remains stalled. We need

to pass this bill now, so that funds are available if and when the

SBA needs to respond to another large-scale Katrina-size disaster.

So we are here today because we have to get this right. We are

almost 2 months into another hurricane season which is projected

to be a busy one. The National Oceanographic Atmospheric Administration projects 13 to 17 named storms, with as many as 10 becoming hurricanes.

I think it is irresponsible of Congress to continue to count on

luck to carry us through having seen what we have lived through

in the last years. So I hope we are going to break that logjam, and

I call on my colleagues to help us do that.

I now turn to Senator Snowe.

OPENING STATEMENT OF THE HONORABLE OLYMPIA J.

SNOWE, A UNITED STATES SENATOR FROM MAINE

Senator SNOWE. Thank you, Mr. Chairman, and thank you for

holding today’s vital hearing on disaster loan oversight, and for

your continued leadership on this crucial matter which has required tremendous effort by this Committee to follow up on a number of initiatives that developed in the aftermath of Hurricane

Katrina.

I certainly want to welcome SBA Administrator Preston. I want

to thank him for both his countless hours and efforts on this issue.

I understand he has just passed the 1-year anniversary of his tenure at SBA, and I wish to congratulate him.

And we are especially anxious to hear the progress that he is

making. I know, during his confirmation hearings just a year ago,

he indicated his commitment to focus on disaster-related issues

that we unfortunately and tragically discovered. When it was time

for the SBA to respond to the disasters that occurred in the region,

they were not on the front lines as they should have been. I know

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the SBA has responded with numerous initiatives such as the 90-

in-45 Campaign to address those issues. And obviously, we need to

learn about what has worked and what has not worked, and we are

going to continue to persevere and to make sure that we resolve

any outstanding issues in which these programs are administered.

I also want to welcome Inspector General Thorson, Mr. Shear,

and Ms. Martin today. Thank you for your participation and your

perspectives on what the SBA can do better, what needs to be done

now, and what is not working. Clearly, as the Chairman indicated,

we have to get this program right.

As we learned all too well in the aftermath of the devastating

2005 Gulf Coast hurricanes, it is absolutely imperative that Government programs on the front lines are fully prepared when called

upon to aid disaster victims.

Admittedly, the SBA’s Disaster Loan Program faced herculean

challenges in the wake of Hurricane Katrina, but to the detriment

of all concerned, the Agency made too many costly mistakes, leaving disaster victims waiting months for loans to be processed, or

their money to be disbursed.

As we all well know, in the numerous hearings that were held

by this Committee between 2005 and 2006, as well as this year, we

found the collective record was devastating in terms of the failure

of the SBA to respond appropriately and swiftly to the disaster that

has occurred in the region, particularly in New Orleans.

The SBA’s recently released Disaster Recovery Plan is a step in

the right direction toward correcting these problems, yet I am deeply alarmed by reports the Inspector General will share with us

today. I am specifically concerned with allegations that suggest $1.5 billion in SBA loans were awarded to applicants who lacked repayment ability, that loans may have been improperly canceled, and

that SBA staff altered quality assurance reports in order to avoid

penalties.

Hopefully, this new recovery plan equips the SBA with the tools

required to avoid making the same egregious errors in the future.

We have to do everything that we can to redouble our efforts to

make sure that SBA successfully disburses loans after a catastrophic disaster.

As for this Congress and this Committee, I can tell you that during the last 22 months, we have worked hand-in-glove to craft bipartisan disaster legislation which would assist the SBA to respond

effectively and swiftly to future disasters.

In fact, the reauthorization we passed in the last Congress included disaster-related legislation—and passed unanimously by

this Committee. Unfortunately, we never were able to get similar

action by the House of Representatives.

We then had a product of consensus and compromise among

Chairman Kerry, Senator Landrieu, Senator Vitter, and myself, as

well as other Members of this Committee. The Small Business Disaster Response and Loan Improvements Act of 2007, again, passed

unanimously by this Committee, providing the SBA with more resources to aid the victims of future catastrophes, taking into account our review of what has worked in the past and how Congress

could help SBA’s preparedness for future disasters.

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I have long championed one such provision, the private disaster

loans which would allow private banks the ability to partner with

the SBA to offer disaster loans. We cannot overstate the necessity

of both making additional resources available and increasing access

to capital for business owners and homeowners immediately following a disaster.

Also addressed in this bill is an issues that emerged in our hearings, bridge loans are an absolute necessity until the SBA can be

on the front lines in administering the loan program. It is important that small businesses get immediate assistance so they can

begin to recover from the disaster.

What has disheartened and disappointed many in this Committee is that Congress has yet to pass our disaster-related legislation. How long do we have to wait? How devastating does the

storm have to be for our Nation’s small business owners to receive

support from this Congress. This disaster package is very much essential to not only dealing with the past, but also the future. And

as the Chairman said in his statement—with every indication that

we will have above normal hurricane activities this season—we

must be prepared.

I know in my State of Maine alone, during the month of April,

heavy rains took their toll on the southern part of the State, and

we had disasters as a result of catastrophic flooding for the second

time in less than a year.

So Mr. Chairman, as you will agree, the failure to pass this legislation makes no sense. It is certainly not controversial. It is everything that we have worked on, explored, and examined in every dimension. There is broad support for this bill including the Administration, the SBA Administrator, and Members of this Committee on

a bipartisan basis. This is not something that should have been

held up in the United States Senate.

It is a consequential matter. It makes a difference, and it will

continue to make a difference in the Gulf region and any other

areas that might be affected by a devastating hurricane. This is

certainly an issue around which we all should be able to coalesce

and show support.

We hope that we will be able to move this bill forward so that

this legislation can be signed into law. This hearing represents a

forward-looking effort to collaborate with the SBA for a more comprehensive and aggressive response to future disasters.

It is paramount that we bolster the Agency’s capacity for assisting this country’s small business community with the same dedication to excellence exemplified by the entrepreneurs it strives to

serve.

So I thank you, Mr. Chairman. I thank the distinguished panel

of witnesses who are going to be here today to help and guide us

in finding solutions to improve the disaster response by this vital

agency.

Thank you, Mr. Chairman.

Chairman KERRY. Thank you very much, Senator Snowe.

Our first witness is Eric Thorson, the Inspector General of the

Small Business Administration. He has served in this role since

April of 2006 and previously served as the Chief Investigator for

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both the Senate Permanent Subcommittee on Investigations and

the Senate Committee on Finance.

Also Gale Martin, former loan officer, Small Business Administration. Ms. Martin has 25 years of experience in accounting, tax

preparation, and small business management. She became a public

servant with the U.S. Small Business Administration’s Office of

Disaster Assistance in Fort Worth, Texas in December 2005, and

remained with the SBA through late November 2006.

In addition, William Shear, Director of Financial Markets and

Community Investment at the Government Accountability Office.

Mr. Shear has directed substantial bodies of work addressing SBA,

Federal Housing Administration, and Rural Housing Service Community Economic Development Program.

So we are grateful to have the experience and commitment that

is represented in the panel, and look forward to your testimonies.

Mr. Inspector General.

STATEMENT OF THE HONORABLE ERIC M. THORSON, INSPECTOR GENERAL, U.S. SMALL BUSINESS ADMINISTRATION,

WASHINGTON, DC

Mr. THORSON. Thank you, Chairman Kerry and Ranking Member

Snowe.

I appreciate the invitation to appear before you to discuss our

work on the effectiveness of the efforts made by the Small Business

Administration (SBA) to cope with the aftermath of Hurricanes

Rita and Katrina.

Debra Ritt, the Assistant Inspector General for Auditing, Mr.

Hickok and Mr. Houle both of the audit staff conducted a series of

audits of disaster relief procedures that are the subject of my testimony today.

I will try to give you a very short summary of these reports, but

I would request that my full statement be entered into the record.

Chairman KERRY. And without objection, it will be.

Mr. THORSON. Shortly after assuming the position of Inspector

General, I personally visited the New Orleans area and walked on

the deserted streets of the worst-hit areas, surrounded by total devastation. It was dramatically apparent that our oversight work

would need to begin immediately and cover nearly every aspect of

the SBA disaster loan process.

Within 90 days of my visit, the Office of Inspector General had

established a new office in New Orleans, putting both investigators

and auditors at the scene.

In the fall of 2006, faced with a backlog of loans that had been

approved, but not yet disbursed, SBA initiated a 90-in-45 Campaign designed to contact approximately 90,000 borrowers within

45 days to resolve any issues that may prevent closure. The audits

that I will discuss today were initiated in response to complaints

by SBA employees about problems allegedly resulting from this

campaign and other efforts to expedite the loan disbursement process.

While certainly problems arose, this does not diminish the Agency’s great effort which increased disbursements from only $2 billion

in August 2006 to $5.5 billion by the end of the year.

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And as you said, Mr. Chairman, no one in our office approached

this from a ‘‘gotcha’’ mentality. This was really done in an effort

to contribute to lessons learned.

As a referral from this Committee, we received disturbing written allegations that indicated thousands of already approved disaster loans were canceled in what appeared to be an effort to improve statistics that focused negative attention on the huge backlog

of approved, but undisbursed loans.

We have just issued a draft report to SBA on this topic. Our

audit focused on the first 2 weeks of September 2006, during which

time over 12,000 loans were canceled. We determined that close to

8,000 of them were canceled without any prior notification to the

borrowers. These were loans primarily for homeowners and renters

who planned to use the loans to rebuild homes and replace personal property destroyed by the hurricanes.

At the time, SBA procedures required that borrowers be sent a

14-day letter before a loan could be canceled, outlining steps needed to prevent the cancellation; however, no 14-day letter was sent.

The direction was given to make three attempts to call each borrower within 24 hours. If they could not reach the borrower, they

were to cancel the loan.

The director of the Fort Worth Center stated to our audit staff

that these instructions were intended to get the loans off of SBA’s

books.

Our audit disclosed that, in many cases, SBA made only one attempt to reach the borrower before canceling the loan. A letter of

cancellation was sent informing the borrower, and sometimes that

the cancellation was at the borrower’s request, even though no

such request had been made. The normal disaster loan commitment expires in 60 days. In this case, the loans were past 120 days.

While we recognize the effort made by the Agency in allowing an

extension to 120 days, given the drastic situation in this area, cancellation within a 24-hour timeframe, even if beyond this 120-day

deadline, does not appear to be a fair or prudent course of action.

In fact, as we near the 2-year anniversary, I have no doubt that

there are many cases where it is still difficult to assemble the documents that might be required to close a disaster loan.

In October, the Buffalo Center attempted to re-contact the nearly

8,000 borrowers they were previously unable to reach. Of the 4,500

that they eventually did contact, about 1,200 requested that their

loans be reinstated.

The urgency of this audit is that we recognize, unlike many audits where the numbers portray a level of efficiency or productivity,

these numbers represent individuals and families who have faced

a tragedy most of us cannot imagine.

A second audit responded to an employee complaint that SBA

was not taking proper steps to protect its interest in collateral on

secured loans. We found nearly 5,000 uncashed checks received

from borrowers for recording and filing fees. This indicated that

SBA had not recorded the liens on any of the loans related to these

checks. Almost 3,000 checks were over 90 days old, and SBA had

to request new checks before the liens could be recorded. We estimated that SBA disbursed $368 million in loan proceeds on over

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3,000 loans without timely perfecting liens on property or completing UCC filings.

A third audit was prompted by employees who alleged that a supervisor altered the results of a quality assurance review over the

loss verification process. Loss verifications provide initial damage

estimates for repair or replacement of property used to determine

the amount of a disaster loan. Our audit found that an SBA official

did materially alter the results of quality assurance reviews in 72

of 246 cases, apparently to meet required performance parameters.

The final audit looked at a pilot program that SBA started in November 2005 to expedite loan decisions. By making a loan based

primarily on a borrower’s credit score rather than the normal analysis of ability to repay, SBA expedited nearly 70,000 Gulf Coast

disaster loans, totaling $3.7 billion. We estimate over 21,000 loans totaling $1.5 billion, or about 32

percent of the sampled loans, were made to applicants who lacked

repayment ability. While many of these loans processed under the

program may default, we also believe that many of these individuals should have been referred to FEMA for consideration of a

grant instead of a loan.

After we briefed SBA on our findings, the Agency terminated the

program on April 9, 2007. We commend SBA for quickly acting on

these findings.

Our audit staff has accomplished a great deal of work on the disaster loan process in a very short period of time. I would be remiss,

however, if I did not mention the outstanding efforts that our

criminal investigators have made as well. With no presence at all

in the region 1 year ago, as of today, we have obtained nine indictments, one conviction, and prevented losses to the Government of

millions of dollars. I am very proud of the work our criminal investigators do each day to help ensure that the money allocated for

victims is not lost to theft or to fraud.

We hope these comments have been both helpful and constructive. It is our most sincere desire to use these audits to work further with the Agency to help fix the problems that I have outlined

above.

Thank you.

[The prepared statement of Mr. Thorson follows:]

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STATEMENT OF

HON. ERIC M. THORSON

Inspector General, U.S. Small Business

Administration

Before the

Committee on Small Business and

Entrepreneurship

United States Senate

July 25, 2007

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Chairman KERRY. Thank you very much, Inspector General. We

appreciate it.

Ms. MARTIN.

STATEMENT OF GALE B. MARTIN, FORMER LOAN OFFICER,

U.S. SMALL BUSINESS ADMINISTRATION, ARLINGTON, TX

Ms. MARTIN. Good morning, Senator Kerry and Ranking Member

Snowe. Thank you for inviting me to testify in front of the Senate

Committee on Small Business and Entrepreneurship.

My name is Gale Martin. I am a former loan officer of the Small

Business Administration’s Office of Disaster Assistance in Fort

Worth, Texas. I loan processed for the SBA from December 5, 2005

to the end of November 2006, which was directly after the Katrina

and Rita disasters.

I am currently employed with the Communications Department

of the Federal Emergency Management Agency in Denton, Texas.

I am here today to hope for about a million people. These are the

people who were unjustly sent away without anything at all, after

applying for disaster loans in the wake of Hurricanes Katrina and

Rita.

We—this group of nine concerned loan officers, and former loan

officers—are especially concerned with the home applicants. They

were the tragedy of the badly done processing within the SBA in

2005 and 2006. These are the people whom we would like to see

given a second look, which is to say, another chance for a loan.

Everyone knows that the system didn’t work: The loans weren’t

written, applicants left empty-handed, we have an excess of, at the

time, $6 billion on the worst natural catastrophe the United States

has ever had to mend, and that did not seem to make sense.

I brought with me the testimonies of eight other loan officers. We

join together and we all agree that we were being forced by management to cancel, decline, and withdraw applications unnecessarily and unjustly in order to make the numbers look good for the

public, the press, and Congress.

We could not process each of these loans to a correct decision in

the amount of time that we were given. We were being forced to

rush files through at a ridiculously unreasonable rate, or be faced

with losing our jobs immediately. The bar of daily production

quotas was raised often, and directly correlated with the amount

of bad press the Agency was receiving. Senior loan officers and loan

officers alike were scrambling daily, looking for any way to increase

their numbers of completed loans just to hold onto their jobs.

It takes almost no time to withdraw, decline, or cancel a file.

There are many, many reasons to be doing this. It also takes less

time for a senior loan officer to concur or agree with a file that has

been declined or withdrawn. This moves the entire staff’s focus and

motivation to finding quick declines and withdrawals to meet their

daily production quotas, and had very little to do with helping the

approved files for the disaster applicants.

Here is an example of an extraordinary measure used by the

management to push things through. We were told we could withdraw a file after three attempts to get in touch with the applicant

in a 24-hour period. That meant one call in the morning, one call

in the afternoon, and a third call in the afternoon of the second

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day, and by the close of business on that second day, that file could

be withdrawn. If we did manage to get in touch with the applicant,

the applicant would then be given 48 hours to fax in all requested

documents, or again, they could be withdrawn or declined.

Remember, these people had been waiting in line for 4 to 7

months just to talk to a loan officer. This was a standard practice.

This is how we were told to treat the applicants.

There were call-out projects that called thousands of people who

were given a few hours to make a final decision on their loans or

their loans would be canceled. A lot of these people were still undecided as to whether they could or they should even rebuild. If they

accepted the loan, they would have to start making their agreedupon payments on the loan at the full amount, even if the loan

could not be disbursed.

If the applicant asked for an extension of time, it was refused.

They had only the choice of accepting the loan or having it canceled. They were told they could come back in if they reapplied

within a 6-month period, but what they were not told is that they

would have to go through a complete income reverification and requalification, and the full approval process again, using their most

current information.

Any time a file was withdrawn, canceled, declined or, in some

cases modified, the applicant was faced with a complete

reverification. This meant all their documents had to be updated,

their income had to be reverified, new tax transcripts secured, and

insurance proceeds double-checked for any additional duplication of

benefits. The approval guidelines used directly after Katrina and

Rita were very relaxed in comparison to what they are using now.

Many of these applicants would probably not be able to qualify for

a loan again.

The applicants were never given any information: They were

rarely sent their decline letters, cancellation letters, or withdrawal

letters. I used to receive phone calls from applicants 3 or 4 months

after I had called them with my decision on their file. They were

still waiting for a copy of their letters.

Applicants only have 6 months to come back in. They were told

to wait for their letters before they reapplied. The clock started

ticking from the day the loan officers made their decisions on a file.

The applicant usually did not know this. If they waited a while before calling for a copy of their letter, they probably would not have

enough time to remedy the deficiencies on the file and secure any

additional paperwork necessary before the clock would run out.

This was another way to get rid of files.

An excellent example of an applicant not being informed of anything on their case, being put through sheer agony to secure a loan,

and then being forced into a cancellation of their loan is the case

of Alice.

I wrote a relocation loan for Alice in July of 2006, and I have

been following her progress since then. Alice had been waiting in

line for relocation processing for over 4 months. Of course, she had

called in to talk to customer service but, as usual, they refused to

give her any information about what would be needed in processing.

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When I first spoke to Alice, she was horrified to find that she

needed to have a purchase contract in hand or I would have to

withdraw the file. This is the policy with relocation loans. She

thought she would have some time to make the purchase after I

informed her of the amount that she would be eligible to borrow.

This situation was a common occurrence within the relocation department. The borrower was never informed of what was needed

prior to talking to a loan officer. They would wait in line for

months just to be kicked out immediately again for not having a

purchase contract.

In this case, I agreed to hold on to her file because of her hardship circumstances with her 94-year-old mother who was wheelchair-bound. Alice hopped on the project of looking for a house,

driving from Florida to Georgia with her 94-year-old mother in tow.

Every day she would call in, or every other day, and inform me

of the progress on her file. Unfortunately, Alice’s file had been in

process for 271 days, and this was the time when the Agency was

being very embarrassed for aged files. I was told to withdraw her

file twice—fairly politely—and then threatened by the department

head about it.

Fortunately, Alice found a home in that week and we were able

to write her loan. However, the purchase did not work, and Alice

found herself on the phone with a loan officer recently who refused

to give her an extension and insisted on canceling her loan. He said

she could come back in if she reapplied within 6 months, but he

did not explain that she would have to go through a complete requalifying for that loan.

This all happened in early April, and by the end of June, she still

had not received a cancellation letter. He also neglected to tell her

that the clock started ticking from April. When she called in to inquire, she was then sent a letter stating that the loan was canceled

at her request.

This is an example of every error that I have just been trying to

communicate to you. Very little was done well on the file, and Alice

is still fighting to get her loan back.

As I explained above, we were also simply ordered to withdraw

files. During the main thrust of each of the four production campaigns, we were not allowed to hold files beyond a week’s time.

Please bear in mind that the public had lost absolutely everything

in the world. They could not give us the documents necessary to

process their files within that time period.

An example was during the business loan processing campaign

which ended in March. We were very behind in securing tax transcripts for applicants from the IRS. Up to this period, the applicant

was not considered responsible for securing their own tax transcripts. We were suddenly ordered to inform our applicants that

they would have to secure their own transcripts within 5 days or

their files would be withdrawn. Applicants were frantically calling

in, crying and begging for the files not to be withdrawn. We simply

gave them a direct line number to the IRS and suggested that they

call and recall the IRS until they found a sympathetic ear who was

willing to process their request before the deadline. For the most

part, the applicants were told by the IRS that it would take up to

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6 weeks to process their transcript request. As a result, these files

were unreasonably withdrawn.

The applicants were rarely notified of decisions made on their

files. The written testimony of two of the reconsideration loan officers spells it out. Loan officers would simply lie in the chronological

comments in order to close off the file and include it on their daily

production reports. Over and over again, reconsideration letters

from the applicants would come back having stated that they had

not been informed of the changes made on their cases.

I also witnessed this myself while working in the legal escrow department. If I saw that a file had been withdrawn, I always made

it a point to call the applicant and ask if they were aware that the

file had been withdrawn. The answer was always no.

I remember one poor lady was on vacation in California. She

ended up having her daughter in Mississippi break into her house

to get me the documents I needed to reinstate her file since I could

only hold the file for 24 hours.

Another poor woman who had been withdrawn and not notified

had to exit her apartment within 2 weeks of my call. Her landlord

had already given her a one-time extension and refused to give her

a second. She thought everything was in place for SBA to complete

her closing in 2 weeks. Instead, her file had been withdrawn with

no apparent reason.

By the way, my orders in Escrow were simply to fix a legal stipulation on the withdrawal, not to reinstate the file. We did manage

to save her home purchase and get her home closed in time, but

we had to scramble to do it.

The statement below was made by a former reconsideration loan

officer. I thought it was worth including in my oral testimony.

‘‘What follows are a few examples of why fundamental change is needed at the

Agency: I was told to change the dates on the DCMS system to reduce the aging

time of the files. The Reconsideration Department withheld hundreds of files for 2

weeks that had been recommended for approval, to make the total number of the

files not processed a smaller number, thereby making the numbers process look better. The head of the same department asked a new employee, ‘Why do you care?’

when a loan officer showed some concern for his applicants. Another supervisor said

he would use a 3-minute egg timer, and when it went off, that was the maximum

time that his group of employees were allowed to be on the telephone with their

applicants. A 15-year SBA vet, SLO, talked to his group of employees, and the topic

of conversation was: ‘How to get rid of files.’ ’’

I could go on and on for hours here, but the truth is that only

the wealthy moved through the system easily. People with credit

issues who owed the Government even a little bit of money, who

had lost their documents, or just moved around would probably not

be given a loan, and if they had, they would probably have to fight

to keep it.

In closing, it was the decision of the Agency to force files through

the system at a rate that did not allow for proper processing. Their

concentration was on making the numbers look good to the public

and Congress at the expense of possibly over 100,000 applicants.

Thank you again for allowing me to testify, and I look forward

to answering any of your questions.

[The prepared statement of Ms. Martin follows:]

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Chairman KERRY. Thank you very much, Ms. Martin.

Mr. Shear.

STATEMENT OF WILLIAM B. SHEAR, DIRECTOR, FINANCIAL

MARKETS AND COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC

Mr. SHEAR. Mr. Chairman, Senator Snowe, and Members of the

Committee, it is a pleasure to be here this morning to discuss

SBA’s response to the 2005 Gulf Coast hurricanes.

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

Comptroller General’s authority.

The first report, which was released in July 2006, discussed

SBA’s planning for and implementation of the Disaster Credit

Management System, called DCMS, which the Agency uses to process disaster loan applications.

The second report, which was released in February 2007, discusses SBA’s disaster planning for other logistical areas, such as

hiring and training a capable workforce and acquiring necessary office space.

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

catastrophic. SBA faced unprecedented demand for its disaster loan

services as a result of the hurricanes.

In summary, we identified several system and logistical challenges that SBA experienced in responding to the Gulf Coast hurricanes that undermined the Agency’s ability to provide timely disaster assistance to victims.

For example, the limited capacity of DCMS restricted the number of staff who could access the system at any one time to process

disaster loan applications.

In addition, SBA staff who could access DCMS initially encountered multiple system outages and slow response times in completing loan processing tasks. As of late May 2006, about 9 months

after Hurricane Katrina struck the Gulf Coast, SBA processed disaster loan applications, on average in about 74 days, compared

with its goal of within 21 days at that time.

While the large volume of disaster loan applications that SBA received clearly affected its capacity to provide timely disaster assistance to victims, we found that the absence of a comprehensive

planning process beforehand limited the Agency’s initial response.

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

relied on historical data such as the number of loan applications

that the Agency received after the 1994 Northridge, California

earthquake. SBA did not consider disaster scenarios that were

more severe, or use the information available from disaster simulations developed by Federal agencies, or catastrophe models used by

insurance companies to estimate disaster losses. The SBA also did

not adequately monitor the performance of the DCMS contractor or

completely stress test the system prior to its implementation.

Moreover, SBA did not engage in comprehensive disaster planning

prior to the Gulf Coast hurricanes for other logistical areas, such

as workforce planning or space acquisition.

We made recommendations to SBA in both our July 2006 and

February 2007 reports.

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For example, we recommended that SBA first reassess DCMS’s

maximum user capacity, in light of lessons learned from the Gulf

Coast hurricanes, information available from catastrophe risk modeling firms disaster simulations, and related cost considerations.

Second, strengthen its DCMS contractor oversight and further

stress test the system.

Third, analyze the disaster loan process and identify ways to

more efficiently process loan applications, including an evaluation

of the feasibility of implementing a secure internet-based application feature for home loan applicants.

And fourth, develop timeframes for completing key elements of

the Disaster Management Plan.

The SBA has taken steps to enhance its capacity to respond to

potential disasters and we are encouraged by SBA’s agreement

with our recommendations. However, the process is ongoing, and

continued commitment and actions by Agency managers are necessary.

As of July 2006, SBA officials said that the Agency had completed an expansion of DCMS’s user capacity to support a minimum of 8,000 concurrent users, as compared with 1,500 concurrent users supported for the Gulf Coast hurricanes.

Further, in June 2007, SBA released a disaster plan. While we

have not evaluated the process SBA followed in developing its

plan—consistent with recommendations in our reports—the plan

states that SBA is incorporating catastrophe models into its planning process, an effort that appears to be at an early stage. SBA’s

plan also anticipates using 400 staff who are not normally involved

in disaster assistance programs to provide backup support in an

emergency. We will monitor SBA’s efforts to implement our recommendations.

It is a pleasure to present our work before this Committee. I

would be happy to answer any questions.

[The prepared statement of Mr. Shear follows:]

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Chairman KERRY. Thank you very much, Mr. Shear. Let me try

to come right back to you, and then I will go back to the others,

because your’s is a testimony focused more on process, and I want

to get at it for a minute.

You have had a fair amount of experience in assessing SBA’s internal capacity over a period of time. What is your judgment here?

Is it that SBA doesn’t have the people, the personnel, the structure? Give us the net bottom line in a hard fashion, if you will.

Mr. SHEAR. The point that we observe that I think is most relevant to the question you just asked is, over the years, we have

looked at what is called SBA’s transformation efforts, and we are

very glad to be initiating our work at your request to look at transformation.

And we get into questions as far as how siloed the Agency is. So

in terms of the ability of the Office of Disaster Assistance to interact with other parts of SBA to get the right expertise to the table

is something that certainly is a concern of ours going forward, generally with the Agency, and specifically with respect to disaster assistance.

Chairman KERRY. What do you think that they have to do that

has not been done, in your judgment?

Mr. SHEAR. Well, first there has to be greater, I would say, communication and transparency within the Agency to make sure that

when they submit a plan—for example, for disaster assistance,

there is buy-in from the Agency, and you are looking across the

Agency.

And then I think the agency is rather siloed in terms of looking

at, what do we have to do to really provide quality disaster assistance, in terms of reaching out to other entities, such as FEMA,

such as the geological survey, such as other partners in disaster assistance. So these are among the things that we are more globally

looking for from the Agency.

Chairman KERRY. Are you satisfied that SBA is working to incorporate your recommendations?

Mr. SHEAR. We are hopeful that they are. We are glad that they

agree with our recommendations. We have initiated some discussions, and we are basically waiting for them to come to us to document what is behind their plan which they just released recently

to the Congress to make sure that there is substance behind it.

This is our role as an audit agency. So we are hopeful. We think

they are working constructively with us, but we really have not

looked at the details behind the actions that they have taken because we have not been yet provided with what we call the details

that would make us really confident, as far as SBA’s capacity going

forward.

Chairman KERRY. Well, it has been a year since the report was

published. So I take it that when you say you’re being hopeful at

this point, you are saying to me that you think things could have

been embraced faster.

Mr. SHEAR. We would hope they would be faster, and to some degree, what we have been dealing with—sometimes we ask, is it a

communication problem between SBA and us, or between or different parts of SBA? And that would, in a sense, be the best sceVerDate 11-MAY-2000 09:46 Oct 27, 2008 Jkt 042587 PO 00000 Frm 00044 Fmt 6633 Sfmt 6601 C:\DOCS\42587.TXT DianeA PsN: DianeA
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nario that basically, the Agency is further along than we think

they are.

But to some degree, it causes us some pause that we really have

not been provided that much information on what has happened.

Chairman KERRY. Do you think that they have the personnel, either type of personnel, or numbers necessary?

Mr. SHEAR. The personnel—one of the things that I think is

hopeful, and again, getting behind this—is that during the course

of our work, we pointed out that disaster assistance—especially in

response to catastrophes—requires some redundancy; it requires

infrastructure in place for when the catastrophe occurs.

There seems to be now some recognition of what should happen

in terms of reserve corps, in terms of office space, that you have

to be prepared and have infrastructure in place. There is a recognition of that. As of yet, we do not know to what degree that will be

carried out over time. And that is something that I think, for this

Committee and for our work, will be ongoing over time.

For example, you could see that the reserve corps right after

9/11, had a lot of people in their reserve corps, but then that dissipated over time. So what causes me to think that we will be constantly monitoring this component, even if the reserve corps are

adequate today, if they are adequate next year, what will happen

if we go through a few years without major disasters, as far as

readiness? That is part of our concern.

Chairman KERRY. Ms. Martin, you described a fairly—I guess the

word to describe it is chaotic, haphazard process.

You’re shaking your head.

Ms. MARTIN. No. No, it was not chaotic or haphazard. They knew

what they were doing. They knew where they were taking it to.

There are some extremely skilled people there. Everyone, everyone was burdened with production; that was the goal.

Chairman KERRY. Say that again. They knew what they were

doing?

Ms. MARTIN. They knew what they were after.

Chairman KERRY. They were after what?

Ms. MARTIN. They were after files to be pushed through quickly.

Chairman KERRY. So you are saying to the Committee that they

just wanted the files cleared and out of the way, that 90-in-45

drove the process.

Ms. MARTIN. Absolutely. And I worked with 90-in-45. I was in

the Legal Escrow Department looking at the files. They were an

absolute mess. A lot of them should not have been passed.

We did not have time to clean them up. I did try for the first 3

weeks or a month, and I was ordered by my SLO to just push them

through. If they say fix the stip, fix the stip, and that is what I

did. They needed correction.

People had been pushing these through way too quickly. There

was not enough documentation. Insurance needed to be revisited

one more time.

Chairman KERRY. Well, is there a balance here—let me ask you

in fairness, is there a balance here in good faith, if they are trying

to give the benefit of the doubt to the folks in that dire situation,

that there may have been a situation—since we do not have a

42

grant program—that they were effectively going to use the loans as

a bridge to help people get on their feet?

Is that a legitimate way to look at it or not?

Ms. MARTIN. Well, obviously, they wanted the money out in the

field. People, in fact—I can cite another situation—had up to September of 2006 only received $10,000. They were under a lot of

gunfire for that, and the decision was made—right or wrong—to

get it out there. They figured they could do the cleanup later,

which is what is going on in the Collateral Department at the moment. I think that was, perhaps, a wise choice, and yes, I think

they were trying to help.

Chairman KERRY. Why could you only hold a file for 48 hours?

Ms. MARTIN. Because they wanted the file to be pushed through

quickly.

Chairman KERRY. So they specifically—wait, you——

Ms. MARTIN. Now, in Legal Escrow, during the 90-in-45 Campaign, it was actually 24 hours, not 48. I pushed the point to hold

it for 48. We were given 24 hours to move a file out of our queue.

And basically, as I said, I am looking at a file with several problems on it——

Chairman KERRY. Were you also not—was that 24 hours notwithstanding whether you had been able to contact the person.

Ms. MARTIN. Oh, absolutely. If I could not contact the borrower,

the file was withdrawn.

Chairman KERRY. It was automatic.

Ms. MARTIN. Absolutely. Absolutely. As soon as——

Chairman KERRY. No matter what the rationale for not being

able to reach the borrower.

Ms. MARTIN. It did not matter. I mean, simply, the whole purpose was to prepare this file for disbursement. If the borrower

could not be contacted, it was withdrawn.

Chairman KERRY. Senator Snowe.

Senator SNOWE. Ms. Martin, did anybody lose their job, or were

they threatened with the loss of their position if they failed to meet

this standard and this goal?

Ms. MARTIN. Absolutely. If you will read—which, excuse me, I

would like to enter into the formal record the testimonies of the

nine loan officers including myself.

If you will read through the testimonies, that a couple of them,

yes, actually were.

[The testimonies of the former officers appear in Comments for

the Record on page ??.]

Senator SNOWE. Yes. I did not have the benefit of that.

Ms. MARTIN. Yes, they did.

There were many of us trying to pressure back, fighting to hold

onto files. We were simply called into the office and threatened.

Senator SNOWE. And what was your understanding, and the others who have submitted their statements with respect to where

these instructions were coming from?

I mean——

Chairman KERRY. Can I just interrupt for 1 second?

Senator SNOWE. Yes. I am sorry.

Chairman KERRY. I need to go to Finance to ask some questions

of one of the nominees there, important to our State.

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So Chairman Landrieu will Chair in my absence, and we will

just continue. I will be back.

Thank you.

Senator SNOWE. Ms. Martin, was there an understanding, or did

any of your superiors or fellow colleagues have an understanding

in terms of where these instructions were derived?

I mean, who was issuing these instructions beyond your direct

superiors?

Ms. MARTIN. I have to complement the immediate staff in SBA.

I worked for some very lovely people, some very nice people. They

were being given orders from outside the Agency, above Fort

Worth.

They were in danger of losing their jobs if they did not obey. But

who—but shall we say Washington, I have no idea. But I understood, just from working with them and how truthfully they were

eager and they were hopeful to help these applicants themselves,

that they were being bound by what was being requested of them.

Senator SNOWE. Right. And I assume that you and others expressed to your superiors the devastating impact that this was having.

Ms. MARTIN. Absolutely.

Senator SNOWE. I appreciate what you are saying here today, because I can only imagine the horrendous circumstances that these

disaster victims were confronting: loss of their business and their

homes. And we had many of those witnesses before our Committee,

so we certainly understand the dimensions of their tragedy. For

them to amass the necessary information for verification would be

overwhelming, under the best of circumstances, but under these

unimaginable circumstances it would be nearly impossible.

So obviously you expressed that to your superiors. And what did

they say in response?

Ms. MARTIN. They were a little worried about my attitude from

the simple reason that, at the end there, especially in the Escrow

Department, I became somewhat of a little bit of a threat, because

I seemed to be taking notes as to what was going on, and that was

that I had already made the decision to turn this over to you, the

difference being that—this could not be allowed. This was not acceptable. The money was appropriated. These people have a right

to the loans. After listening to 6 months of crying borrowers, either

screaming or crying, begging for help, living in FEMA trailers,

what were we going to do, leave them there?

Something had to be done. Their hands were tied. They could not

do anything more than just say, Gail, just fix the stips. Just fix it.

I said, but there are 18 things on this file that are wrong. Just fix

the stipulations.

I was hollered at quite a—several times by department heads

who were trying to move me into more of agreement with what

they were actually trying to do.

Senator SNOWE. I see. And you were a temporary employee, as

I understand.

Ms. MARTIN. I was a long-term temporary.

Senator SNOWE. You were a long-term temporary.

Ms. MARTIN. Yes.

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Senator SNOWE. And did that include the others who were working in your department?

Ms. MARTIN. All of us. All of us are long—there are people who

have been there for 17 years and they are still considered longterm temporaries.

Senator SNOWE. Long-term—really? OK.

Ms. MARTIN. There are very few core employees.

Senator SNOWE. Well, I certainly appreciate the facts that you

have presented, and your willingness to present that information

to this Committee, because we certainly want to take any corrective actions. And on behalf of those who submitted testimony, as

well, because obviously that is not the way that we would want to

handle those circumstances.

It is one thing to meet goals, but there is a way in which to accomplish it, and we will just have to get to the bottom of it.

Mr. Thorson, are you looking into this issue as the subject of one

your reports?

Mr. THORSON. We had not looked into some of the things that

came out in today’s testimony which did definitely get my attention.

There were some very serious statements made here today.

Senator SNOWE. Yes.

Mr. THORSON. And I think, given what we did find, on the basis

of what we have looked into, I think we are going to have to take

another look at some of these things.

Senator SNOWE. I see. So you have begun a process in any event,

but you have not had the opportunity to talk to Ms. Martin and

others?

Mr. THORSON. We got the letter that the Committee sent us, and

there have been some communications, but not to the extent that

we heard today. And we certainly are looking at things, for instance, the withdrawals. That is ongoing.

But Ms. Martin touched on a number of very serious issues

today.

Senator SNOWE. So you are surprised by what you are hearing

today.

Mr. THORSON. Absolutely.

Senator SNOWE. Then clearly it is going to be critical for this

Committee to be appraised of your findings on this question, because we obviously want to get to the source of the problem and

take any corrective measures. So I appreciate that.

Mr. THORSON. Absolutely.

Senator SNOWE. To what extent do you think the SBA, Mr.

Thorson, has taken the steps to address and to remediate some of

the issues that you have raised here today, because that is critical.

I am trying to determine if they are making the progress that is

necessary, especially in direct response to some of the specific

issues, like the loan cancellations, the lack of security collateral.

Mr. THORSON. I think you have two different things that you

have heard.

One is the more technical aspects, which are the cancellations

and how many days were allowed. How many calls are made in 24

hours? Should they be canceled? And that sort of thing.

45

And then you have some very serious management issues that

Ms. Martin just raised that are really separate from that. And it

comes down to a leadership aspect and management of how people

are treated that are doing this work. What focuses—certainly, a lot

of attention on this is, of course, the seriousness of the work they

were doing and the people they were trying to help.

And of course, from a management point of view, how disillusioning this is to the people trying to do this work. And that is—

as I sat here and listened to that, I have a great concern.

So we have two different things here that we are going to have

to sit down and address.

Senator SNOWE. Yes. The specifics and the overall approach and

how this culture developed.

Mr. THORSON. I think you really hit on it when you call it a culture. And I have seen that before in various bureaucracies that we

have looked.

The culture really has to be one of really wanting to assist and

help the individuals. And certainly, when I went to Louisiana—and

I have also been in Mississippi—but you see the people working out

on the scene, on the ground, the volunteers, et cetera. They are

great people. They are really doing tremendous work, and you owe

them excellent management and leadership.

Senator SNOWE. I agree.

Mr. THORSON. That is what we are going to have to be talking

about.

Senator SNOWE. Unfortunately, the result was sort of cold, calculating and dismissive. And knowing what we know, and certainly

the two Senators here, Senator Landrieu and Senator Vitter, who

were on the front lines of the State that was so devastated, to hear

what Ms. Martin is saying today is tragic, because people are facing enormous problems.

I mean, the whole idea of just assembling all that information.

It would be virtually next to impossible, not to mention the timeframes that were demanded as well.

So I appreciate your efforts in looking into this, as well as getting

back to us.

I know my time is up. I will be back to you, Mr. Shear, but I

know the Madame Chair is here, and we will go on to the next

round.

Thank you.

Senator LANDRIEU [presiding]. Senator Vitter.

Senator VITTER. I just want to thank all of the witnesses for

their work and their testimony, and I am really eager to get to the

Administrator and talk with him. So I will wait for that.

Thank you.

Senator LANDRIEU. I do have a couple of questions. And I want

to thank the Chair and Ranking Member for calling this hearing.

Gulf Coast recovery has been something that they have really

stayed focused on from literally the first weeks of Katrina and Rita

in a very bipartisan way. Together my colleagues have worked to

try to find a better to serve the constituents that we represent who

are in such—were and still are in such desperate situations.

To have an agency that has the title of ‘‘Small Business Administration,’’ and then to see that it was not administrating anything

46

very well—at a time of great need for our constituents—was very

disappointing. Not only do we want to fix it for the people we still

can help at home along the Gulf Coast, but we want to make sure

that, when this happens again—and rest assured it will—that SBA

is better prepared. For example, either a tsunami will hit Seattle,

or a Hurricane will slam into Long Island, or an earthquake will

occur in California or Memphis, and thousands upon thousands of

businesses will be disrupted.

When those business owners, large and small, turn to their Government that they have paid taxes for, put the uniform on—

served—we owe it to them that this Government will respond better than it did the last time.

Before I ask my question, I must say how terribly disappointed

I am that a bill to fix many of the issues that are being raised

again today is being held up on the floor of the Senate.

And I am going to, with the Chair and the Ranking Member,

pursue the focus of this hold to try to see what we can do to move

a bill forward that can correct some of these issues, and then, of

course, to continue hearings like this to find and draft additional

legislation that is necessary, as well as asking for changes to be

done at the administrative level that do not require legislation.

I have one question, but I want to comment to Mr. Thorson.

Thank you for going down to New Orleans at my request. And the

tour that you did, I got tremendous positive feedback about your

really going down, kicking the tires, talking to both people who had

received loans and those that had not, the Loan Office, et cetera.

And I think that experience will certainly help you and help us to

reform the situation that we are finding.

My question may be, I am not sure—may be, Ms. Martin, to you.

It was apparent within several months of the storm that applicants were sent fairly quickly a $10,000 check.

Ms. MARTIN. Yes.

Senator LANDRIEU. But at the same time, they were required to

begin paying on the full amount of their loan, or at least that is

what was told to me, that they would be paying on the full amount

of the loan approved.

So if they had $150,000 loan approved, they had only received

$10,000. They were being immediately billed for the amortization

schedule, I guess, of the full amount; is that true?

Ms. MARTIN. Absolutely.

Senator LANDRIEU. Why did that happen, and has it been

changed?

Ms. MARTIN. It hasn’t been changed, which is why, in the cancellations, the applicants would have canceled their loan.

What was happening is, they have received $10,000; they are

still not able to rebuild; they are still waiting for relocation processing. They were given a 12-month deferment only. The clock

started ticking from the day they signed the final loan papers. That

is day one of their 12 months. At the end of that, they have to

make full payment. They have received 100—maybe they have receive their personal property, the $40,000, but they have not been

funded over for the rebuild yet. They will be making their $1,200

payments.

47

When I talked to a senior loan officer, she said, well, they have been qualified at $1,200. They will simply be re-amortized at the

end of the note. So that has not changed.

And this is why a lot of these people would have decided to—I

don’t even know if I can rebuild—decided to let go of the note.

Senator LANDRIEU. I need to get this clear.

You are testifying that, when the final loan document was approved, the clock started ticking——

Ms. MARTIN. It started ticking from the day they signed their

final loan document.

Senator LANDRIEU. So they sign the final loan document and the

clock starts ticking, and they have 12 months, and then, at the end

of that 12 months, they have to start paying a full monthly——

Ms. MARTIN. Full payment.

Senator LANDRIEU. Full payment on the whole amount, whether

they have receive it or not?

Ms. MARTIN. Absolutely.

Senator LANDRIEU. Now, when they signed their final loan docu- ment, did they, on that day, receive their $10,000 check, or did the

check come later?

Ms. MARTIN. No. The $10,000 was sent out, usually, within 2 to

3 months of their initial application. The theology was they could give them a $10,000 unsecured loan,

so——

Senator LANDRIEU. So they received their $10,000 loan—excuse

me—before they actually signed the final document?

Ms. MARTIN. Yes.

Senator LANDRIEU. When they applied, they could receive at least $10,000.

Ms. MARTIN. There was an initial disbursement of $10,000, because the rules of the game for a $10,000 loan meant they could

actually justify, under law, a $10,000 loan that was unsecured.

So if the applicant later turned around and said, no, I have decided I don’t want to collateralize my new home and the old home,

they could pull it back down to what they had already disbursed

to the applicant.

Senator LANDRIEU. And two more questions.

Is it still the law of the SBA, or the rule, that when a person

in Louisiana—and maybe Mississippi, but I know this to be true,

I think, in Louisiana—receives their Road Home grant, that they

must repay, in full, their SBA loan, Ms. Martin?

Ms. MARTIN. Not repay in full, however, I had outlined a specific

case where—they are counting it as a duplication of benefits, meaning that it is raking it straight off the top of their eligibility.

If they have $200,000 worth of eligibility and receive $100,000,

their new eligibility is $100,000. Instead of giving them this ability

to refinance their loans—and many of them have one or two loans

that are still out at 8 percent on the damaged property—instead

of giving them this ability to refinance and then taking the grant

and putting it against the entire eligibility and the entire loan, basically they are removing their ability to refinance and just taking

it dollar for dollar against the loan—if I managed to get that point

across.

The problem is——

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Senator LANDRIEU. Could you explain it one more time? That

was a little complicated.

Ms. MARTIN. Yes, I understand that.

The applicant’s eligibility to refinance their note is directly pro- portional to their eligibility. So they may be eligible for a $200,000

note. That makes them eligible for $200,000 of refinancing of the

note on their damaged property which is usually at a much higher

percent interest rate—10 percent, let’s say.

What they are doing with the grants is they are removing their eligibility by $100,000, or in many cases, $130–$140,000, which

also removes their eligibility to refinance that note by the same

amount.

What happens is the poor applicant is stuck with their old notes

at 8 and 9 percent. They do have the grant, but their eligibility has

been pulled down directly proportional with the amount of the

grant. It is actually crippling the applicant in some cases.

Senator LANDRIEU. And I am going to state for the record—and

I may ask for a letter from the Coordinator of Gulf Coast Recovery

to express the position of his office on this, because this has been

a singular bone of contention with me.

When this Congress passed the block grant funding, it was in

recognition that what we had available for these disaster victims

may be not enough, given the catastrophic nature of this situation.

It was the expressed intent of the appropriators, of which I am

one, to provide residents with the funds they need to fully rebuild

their homes. Our great attempts are being thwarted by administrative rules that, despite our restated position of the Congress and

the Administration to rovide badly needed help to victims, they are

still being held to the standard of grants being a duplication of benefits with loans. It is intended to be a duplication—for people to be

able to get a low interest loan, and on top of that, if they are

deemed eligible by the State and have additional needs to receive

whatever they are entitled to by the way these grants are being

fashioned by the Governor and the staff of Mississippi, and the

Governor and the staff of Louisiana. And I intend to make that the

way this operates—to provide necessary resources for housing recovery.

Mr. Shear, do you want to add anything?

Mr. SHEAR. I cannot—based on our work, I cannot respond specifically to that situation. So much of our work was geared toward,

how do you handle loan applicants rather than looking at some of

the issues involving the CDBG funds.

Senator LANDRIEU. One more question, and then I see Senator

Thune may have questions and statements.

When we have a disaster or catastrophic situation, as we have

just had, is it not possible for the SBA to get copies of tax returns

from the Federal Government, as opposed to asking disaster victims to go search in a home that is crumpled and destroyed for

their old copies?

Ms. MARTIN. May I answer that, as a processor?

Senator LANDRIEU. Yes, go ahead.

Ms. MARTIN. We, up to the end of the business loan campaign,

would not have—we would accept what they were saying, but we

had to have it verified by the IRS in absolutely every case.

49

It was an extraordinary measure to ask the applicant to go to the

IRS directly. Normally, that is never done. And the only reason

we——

Senator LANDRIEU. Excuse me. What is normally done?

Ms. MARTIN. Normally, we send in a tax transcript request to the

IRS, and we would only accept something coming directly back

from the IRS.

Senator LANDRIEU. But in this case?

Ms. MARTIN. There was a flood. It was tax season. There were

a flood of requests from us, and we could not process them in time.

Senator LANDRIEU. So normally, when you have to process your

loan applicants, you—since you are a Federal agency, it would

make sense—you normally go to another Federal agency and say,

would you send me Mrs. Jones back 3 years of taxes so we can

process her SBA loan?

But in this case, that was not done for a Mrs. Jones. She had

to go find her own tax returns?

Ms. MARTIN. She had to find her tax transcripts; it is a

reverification.

She could have given us her original copies if she had them, but

we would not have accepted that. They had to be verified. It has

to be a third-party verification coming directly from the IRS in

every case, in every case.

The difference was we were asking her to go to the IRS for us

and to get the tax transcripts directly sent to us.

Senator LANDRIEU. So a person that had lost their home, lost

their school, and did not have a church to pray in on Sunday, did

not have a trailer to leave, you—our Government—requested that

they contact the IRS and get copies of their taxes and then have

them verified by a third party?

Ms. MARTIN. No. That is the third party.

The IRS—we would accept—if it were fine for the transcripts to

be even faxed in to the applicant, they are in a format that we accept. She would then fax them in to us.

They are the third party, but we had to have the IRS verifying

the information. They were not quick enough for us, so we went to

the applicant and made them do it. And if they couldn’t get it in

in time—all of those—all of those were withdrawn.

In that second or third week of March—I believe it was—anyone

who did not have their tax transcripts in had their files withdrawn.

Senator LANDRIEU. Mr. Shear, do you have a comment about this

nonsense?

Mr. SHEAR. Oh, yes.

When our team visited the Gulf Coast, we heard nightmarish

stories such as these and based on the focus of our work, especially

the focus on the use of DCMS and the loan process, these were

among some of the reasons that we said that SBA should look for

the feasibility of using an internet—you know, a secure way of

making loan applications, because people are going through nightmares with submitting home records, tax records, other types of

records, those being misplaced during this long chaotic process.

And so those were among the reasons why, based on our focus

at the time we were visiting the Gulf Coast, we said, there has to

be a better way to do this.

50

Senator LANDRIEU. OK.

Any other final comments, because we have a second panel, and

then Senator Thune may have a——

Mr. THORSON. I think, as a victim, one of the last things I would

want to be told is to contact the IRS. This is probably not something that I think most people were prepared to do, wanted to, or

really—it actually goes against, as was pointed out, the procedures,

which was to receive those directly from the IRS to the SBA, so

they knew that there were no changes made.

But like I said, as a victim, that would not be something that I

would want to hear.

Senator LANDRIEU. Senator Thune.

Senator THUNE. Thank you, Madam Chair. I thank you for calling this hearing. I think it is important that Congress, on an ongoing basis, take a look at things that we can learn and things that

we can do better, and hearings like this one are an effective forum,

I think, for Members of Congress to reflect on and remember the

Gulf Coast disaster, and more importantly, give us an opportunity

to better understand the mistakes that were made, and what steps

have and still need to be taken to be better prepared for future disasters of all sizes.

I do want to take a moment to thank Administrator Preston and

the SBA for the work that they have recently done in my home

State of South Dakota. I know that the severe storms and the tornadoes and the flooding that occurred this past year near Aberdeen, South Dakota do not compare in size or scope to the hurricanes that ravaged the Gulf Coast in 2005, but they nonetheless

impacted families and businesses.

And after visiting South Dakota following the flooding, there was

no question in my mind that the assistance that came from FEMA

and the SBA was crucial to the cleanup, to the repair, and the recovery for that area. So I am pleased to say that SBA has made

available low interest disaster loans to homeowners, renters, businesses of all sizes, and private non-profit organizations to help

them rebuild.

And while the last day to apply for disaster assistance does not

close until next Monday, thus far, SBA has approved more than

$16 million in low interest loans to South Dakota’s residents and

businesses in need. So I know that there are many South Dakotans

that are very grateful for the assistance that they have received,

both from FEMA and the SBA, and I would again thank the SBA

and the Administrator for their help in that regard.

I know that, with regard to the issue before us today, there has

been a lot of work that has gone in to trying to determine the answers to some of the questions that were raised as a result of what

we went through with Hurricane Katrina.

And I guess what I would like to ask Mr. Thorson if his office

did any audits on the handling of duplication of benefits, and if so,

what were the findings on that?

Mr. THORSON. That is something that we have ongoing as far as

the duplications. And we have worked with the HUD IG as well on

that issue. So it is something that is ongoing now.

Senator THUNE. So you do not have any findings currently that

you can report about that?

51

Mr. THORSON. Not at this time, no.

Senator THUNE. OK. The second question I have is, at the end

of your testimony, you discuss briefly some of the indictments and

the conviction that the criminal investigators made last year.

Can you provide the Committee any more details about that?

Mr. THORSON. On some, where the cases are closed, we can certainly provide the details. I do not have them with me today, but

there are a number of cases that have been completely processed.

We obviously do not talk about any ongoing criminal cases.

We do work with the Justice Department and their Katrina

Fraud Taskforce. We are a full partner in that effort, and the work

that is being done down there is, in my opinion, outstanding. These

are good people. The U.S. attorneys are exceptionally cooperative

in that effort in trying to stick to a zero-tolerance policy, and we

are making great strides down there to keep the money where it

belongs.

Senator THUNE. Let me just, if I, Madame Chair, conclude.

Again, I appreciate your holding the hearing. I thank the witnesses

for their testimony, and I look forward to working with my colleagues on this Committee on this important issue and making

sure that we are meeting the needs of future disaster victims, and

obviously, hoping we can take a page out of the lessons that were

learned with regard to this disaster.

So thank you, Madam Chair.

Senator LANDRIEU. Senator Snowe, do you have any additional

questions before we move to the second panel?

Senator SNOWE. I think, given the time, I will submit my questions, thank you.

Thank you all very much. We really appreciate it.

Senator LANDRIEU. And I just have one.

Mr. Thorson, how many criminal investigations have been prosecuted successfully? Can you at least mention the number?

Mr. THORSON. Is it——

Senator LANDRIEU. I am following up with Senator Thune.

Mr. THORSON. The number?

Senator LANDRIEU. The number. Can you at least testify——

Mr. THORSON. I believe we had one conviction and, I think, nine

indictments, is what I mentioned in the statement.

Senator LANDRIEU. Nine indictments and one conviction-——

Mr. THORSON. One conviction, and then——

Senator LANDRIEU [continuing]. Two years later.

And how many total applications did we have?

Mr. THORSON. I——

Senator LANDRIEU. Approximately.

Mr. THORSON. I want to make sure I give you that number properly. It will not take long.

Senator LANDRIEU. Ms. Martin, do you know approximately how

many applications?

Mr. Shear, approximately?

I think it was between 400–500,000.

Ms. MARTIN. Four Hundred twenty-two thousand was the number of applications associated with the three hurricanes.

Senator LANDRIEU. Four Hundred twenty-three thousand applicants. We have one conviction and nine cases.

52

I most certainly want to prosecute fraud, and I assure my colleagues we will. The greatest fraud was perpetrated by the Agency

itself.

Ms. MARTIN. Thank you. Yes, it was.

Senator LANDRIEU. And I would just like to go on record at this

Committee, I will go on the floor, the greatest fraud perpetrated

was by the Agency itself.

So please continue. I am sure you have to prosecute people who

took money they should not have, but the real fraud is the failing

of the Agency.

Thank you and we will hear from Mr. Preston.

Mr. Preston, we are happy to have this morning, and let me

begin by saying that my experience so far has been that you are

committed to change and reform.

I want to say, for the record, that you have been very responsive

to my office, and I thank you for that, but I will also say—based

on the testimony this morning and the continued work that we are

doing on this—that we have a long way to go.

But if you would just begin with your opening statement, and

then we will go through a round of questions.

STATEMENT OF THE HONORABLE STEVEN C. PRESTON, ADMINISTRATOR, U.S. SMALL BUSINESS ADMINISTRATION,

WASHINGTON, DC

Administrator PRESTON. Great, sure. All right. First of all, is the

mike on? OK.

Good morning. Thank you, Chairman Kerry, Senator Landrieu,

Senator Snowe, Senator Thune.

Thank you also for your kind words starting out. I would also

like to thank Eric Thorson. He has been a good partner of ours at

the Agency.

Bill Shear has done some terrific work through the GAO report.

And of course, Ms. Martin, it is never easy for a front line employee to come forward and testify in a situation like this.

I would like to say, and I think this is very important, as I listened to the testimony and the answers today, there is a long

timeline that has been discussed here. A lot of the issues that were

brought forward in these discussions preceded the re-engineering

work that has taken place at the SBA. And so it is very important,

when you think about what you heard today, I think, to put in it

the proper context, because it is a different agency today.

I came to the agency just over a year ago in July 2006. Prior to

coming into the position, I took a trip to New Orleans, on my own

time, to see and listen to the issues first hand; to see—like everybody, I think, who has been down there firsthand—what an incredibly devastating, overwhelming situation it was.

So after coming into the job, my second week on the job, I went

down to New Orleans. I went immediately to the processing centers

where we process disaster loans. It was clear to me, at that time,

that we had very significant operational and service issues, many

of which you heard about today.

Our staff was overwhelmed. I think our staff was losing heart.

We had severe backlogs in a number of critical areas. Over 100,000

disaster victims were still in our process. And in order to tackle the

53

greatest backlogs right away; we immediately reassigned staff to

focus on those key areas.

Then we undertook an extensive re-engineering effort to accelerate responsiveness to people in the Gulf, and to ensure a dramatically better response in the future.

In order to get to the root of the issues, we interviewed our customers; we interviewed our employees, we talked to people in many

of your offices. We gathered performance metrics that had not been

gathered before. We hired a small team of experts in rapid results

process improvement to support us.

In August, armed with our findings and analytical support, I convened a meeting of 20 top Agency officials from our processing centers, from our disaster operations, and from headquarters. We

started this session by listening to a video that I had our people

make of our customers telling us about their stories.

Some stories were good. They elaborated on how much money

they had received, and how it not only helped them get their lives

back, but it also helped others in the Gulf get services like daycare

and taxi services.

Others told us of the ongoing confusion and difficulties that they

had experienced in dealing with the SBA, becoming one more

source of despair, unfortunately, for many of them.

At the conclusion of that meeting, we resoundingly resolved that

the effort we were undertaking would be in the interest of the people we served: The disaster victims of America. That was our primary focus.

Following this meeting, the team launched into a detailed redesign process that would involve totally redefining how we went

about the business of making a disaster loan: To make it faster, to

make it more efficient, and to become much more helpful to the

customer, while also providing greater consistency from a perspective of standards and oversight.

In September, a number of things happened: We physically

moved 1,300 people and redesigned our workflow from a production

line with backlogs, inadequate communication between functions

and higher error rates, to case teams where loan officers, attorneys,

and case managers worked collaboratively.

Customers were reassigned to those teams based on the characteristics of their loans to ensure that they received high-quality

service. Every borrower, for the first time ever, received a case

manager—a single point of contact, a human being on their side

who could help them.

There were 33,000 customers at that point who had not sent in

their closing documents. Most of them were past their expiration

date. We did not have records from the borrowers indicating that

they wanted to proceed. Previously, those people would have simply

gotten a letter in the mail telling them that they were canceled and

that they could reapply within 6 months.

Under our new process, these customers were assigned to a

triage team in our Buffalo call center with the mission of getting

people the help they needed, whether that assigning the customer

to a case manager to assist in closing and disbursement, extending

the closing date if the customer still was interested, but was not

sure of his or her plan, or canceling the loan if the customer was

54

no longer interested or responsive. The plan specifically stated that

it was to ensure customer satisfaction at every point.

Most people were contacted, and we proceeded based on the customers’ wishes. In 9,000 cases, people were not ready to close, so

we gave them a case manager to help them close. Over 3,000 were

ready—I’m sorry, 9,000 were not ready to close. We put them in

a closing team. Over 3,000 were ready to close, so they got a case

manager tailored to their circumstances. About 4,000 requested

cancellation and about another 4,000 requested an extension. That

extension was granted. About 7,700 borrowers who were past their

expiration date and who, according to our records had not requested an extension, received a cancellation letter which indicated

that they could reinstate the loan for 6 months.

Because of our commitment to speak with those borrowers under

the new system, a week after the campaign ended, we began calling all 7,700 borrowers again. We reached almost 5,000 of those

borrowers. One thousand two hundred had their loans reinstated.

As a result, they were given a case manager for the first time, and

they were put on a path to disbursement of those loans on a much

more accelerated basis.

By Thanksgiving, the backlogs were largely eliminated, and our

response time had dramatically improved. Along the way, as with

any major change of a large operation experiencing tremendous

challenges, we encountered unexpected challenges, but we have

been able to address many of them quickly because of better

metrics, better early warning indicators, much better communication across the Agency, coordination across functions and problem

resolution teams.

One of my biggest responsibilities as a leader is to try to keep

an open line of communication with managers, front line employees, and most of all, our customers, not only to lay out the vision,

but also to listen. I have done this by listening both to employees

and customers. I go down to that facility in Fort Worth; I kick the

managers out of the room, and I bring in people on the front line

and listen to them. Every one of them has my e-mail address; a lot

of them use it. I hear a tremendous amount of front line feedback,

and that is an important way that we make changes at the SBA.

Specifically, the issues in the Inspector General’s report on collateral had persisted for some time. Those rose in prominence because

of our re-engineering efforts. We had identified those. And as it

noted in the report, today we have a new process in place to ensure

better controls before closing, and we had made a lot of process by

the time we got in there.

Additionally, during a meeting with employees at the processing

center, I learned that we did not have consistent standards that

were being applied before disbursing loans. We are addressing

those types of issues now through a renewed policy team, and better focus there.

From talking to customers, we learned that many people in the

Gulf Coast had loans that were not enough to cover the costs of repairing damages because of rising construction costs. We made adjustments to our estimates at the end of last year, and we put in

place a process to expedite review of loans where people did not

have enough money to increase the amount of the authorization.

55

As both Louisiana and Mississippi became to roll out their CDBG

grant programs, we needed to get information from the SBA to help

them out. We knew we needed to be responsive to those important

programs. We put in place a process which resulted in information

requests being turned around in a matter of hours for both of those

programs.

Today, we not only have a redesigned closing and disbursement

process, which we needed to complete our work in the Gulf, we

have also redeveloped the way SBA responds to future disasters.

On June 1 of this year, we presented you, the Committee, with

a copy of our Disaster Recovery Plan. After months of deliberation,

countless hours of work, we have documented the critical steps

taken by the Agency to respond and recover from natural disasters

of all levels. It includes a surge plan, which we have implemented.

It clarifies personnel actions, space management plans, information

technology matters, as well as an in-depth communication plan and

coordination plan with external groups.

It gauges the SBA network of district officers as never before,

and it puts in place a model for much greater coordination with,

and support from other governmental agencies and non-governmental support organizations.

Our disaster operation has undergone dramatic transformation

over the last year. It leaves the Agency in a significantly improved

position to serve Americans in the future.

I also have a couple of members of our staff here, if you have

questions for them: Perry Pedini, from our Buffalo call center,

which is a subject of one of the IG reports; Celia Horner, from our

Fort Worth facility; and we also have Herb Mitchell here, who runs

Disaster Assistance.

I would also like to ask permission to have some letters regarding our efforts included in the record, one from the advisor to the

president of the city council in New Orleans talking about our efforts, and one from Parish Clerk offices, talking about specific efforts that we have put in place to assist them with their work flow.

Administrator PRESTON. Thank you.

[The prepared statement of Administrator Preston follows with

attached letters referenced above:]

56

57

58

59

60

61

62

63

64

65

66

Chairman KERRY. [presiding.] Thank you very much, Administrator Preston. We appreciate it.

So help us understand—you have described an enormous amount

of change, which we respect and certainly acknowledge. There have

been a lot of changes. But the 90-in-45 campaign has obviously run

into its rough spots; would you agree with that?

Administrator PRESTON. I think a lot of what you heard today

preceded that program. And I think what we did when we came

in—first of all, it is a broader initiative. We call it the Accelerated

Disaster Response Initiative.

We had a 45-day initiative to call 94,000 borrowers who are

somewhere in our system to find out what they needed and how

to get them to the right place.

Chairman KERRY. Why put a 24-hour curfew on that?

Administrator PRESTON. Well, the 24-hour issue is something

that came out in Eric Thorson’s report.

And the issue there was, we had 33,000 people that had expired

loans. We had not canceled them, and we wanted to get to them

to understand what to do. So a call effort was put in place to reach

all of them, and instructions were to try and get to people in 24

hours.

In retrospect, frankly, I would have preferred for it to be a week

or several days. But you have to understand, if they didn’t get

called and they were past their expiration date, they got a letter

that said, ‘‘Your loan has been canceled. Contact us in 6 months

if you would like to be reinstated.’’ And then we recalled all 7,700

people and reached 5,000 of them.

So when you look at that whole body of activity, there were very

few people who ultimately were not reached. Now, the inconvenience is that there were about 1,200 people that we sent a cancellation letter to; then a week later we called them and they said, I

didn’t want to cancel. So that is where the inconvenience was.

But what happened once we did contact them is they had never

had a case manager before and they got an expedited closing and

disbursement process. So they got put into the flow.

Chairman KERRY. You contacted, I think, some 7,700-plus folks,

right?

Administrator PRESTON. We contacted in the campaign 94,000.

Seven thousand seven hundred were the ones who were past due—

who were expired, that we couldn’t get on the phone, and they got

a cancellation letter.

The instructions that we had given people——

Chairman KERRY. Right, but of the 7,700 who were contacted,

some 1,200 said, whoa, wait a minute. I still want my loan.

Administrator PRESTON. Yes. Initially, we couldn’t get them——

Chairman KERRY. So what does that tell you about the rest of

the universe that has not been——

Administrator PRESTON. Well, out of the 7,700——

Chairman KERRY. One thousand two hundred out of the 7,700

said, I wanted to stay there. I assume there are a lot of people out

there who have been canceled who do not want to be canceled.

Administrator. PRESTON. Well the universe of people canceled

that we did not reach during that call campaign was about 3,000

people.

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They got a letter. They got messages left for them 1 week. They

got a letter saying, we are going to cancel you, but call us in 6

months if you want to reinstate. Then they got another call and,

in most cases, had phone messages left for them.

So that group of 3,000 people or so had several outreaches made

to them, and we have not heard back from them, or if we have, we

have reinstated them.

Chairman KERRY. Is it accurate what the Inspector General asserts, that the standard letter notifying a borrower 14 days prior

to cancellation was not sent?

Administrator PRESTON. Yes. It was not sent because, in those

cases, we allowed their expiration to elapse. We did not cancel

them.

Typically, what happens is, if your elapses in 2 weeks, you get

a 14-day letter ahead of time. We were not canceling anybody’s

loans. We knew this situation was horrible, and the instructions

that we gave our people were, do not cancel any loan until you talk

to a human being, or you hear from them. And by virtue of calling

these 94,000 people, that was the process we used to talk to them

and get them to the right place in the organization.

So when they didn’t get reached— OK, when we were not able

to reach them, they were already past their expiration date. Rather

than saying, your expiration date is coming in 14 days, we sent

them a letter that said, effectively, your expiration has passed. Call

us in 6 months if you would like us to reinstate.

Chairman KERRY. Mr. Preston, when you first came in here for

confirmation, we talked about what has happened to SBA over the

course of the last years, and the Ranking Member, likewise, when

she was Chair, beat on this significantly.

I mean, it has been a source of concern to this Committee the

degree to which the SBA budget has been reduced, and how that

has affected personnel.

Is it your judgment at this point, that the ability of the Agency

to be able to respond to this has been affected by what has happened to that budget, to personnel over the course of the last few

years?

Administrator PRESTON. No. I think you all have been terrifically

accommodating of this Agency through the supplementary budgets,

as we have needed funds for these larger disasters. So most of our

funding has not come through the typical budgeting process.

Chairman KERRY. Except that you do not have a permanent staff

in place to do the planning and put the procedures in place and

guarantee that you do not have these bumps.

Administrator PRESTON. We have staff in place that does that.

We do not have a position that is called that, but we have teams

of people that work on that everyday.

Chairman KERRY. Well, if that is true, then why did Katrina get

the response it got?

Administrator PRESTON. Well, it is hard for me to—I do not think

at that point the Agency had a surge plan in place that we do

today that contemplated the type of requirement that we had.

We had systems that could not handle it. We had dramatically

fewer people on staff. We did not have plans in place to be able to

ramp that large. We did not have back up facilities plans. We did

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not have a plan in place to engage our district network like we do

today. We had many, many fewer reserve people trained as compared with today.

So when you look at that—and I know your staffs have gotten

a briefing on it—what you see in that disaster plan is something

that is in place today with people, names, facilities listed, arrangements in place, work that has been done by our district offices. It

is an entirely different concept around preparedness. And it is an

entirely different concept around how we process a loan.

Chairman KERRY. With respect to that Disaster Assistance Plan

that you mentioned in your testimony also, were outside experts

consulted in the formation of that plan?

Administrator PRESTON. Yes. We worked with an outside consulting firm who is very well thought of in this area.

We consulted with other outside organizations to look at their

disaster preparedness plan. We showed our plan to a number of

other Federal agencies to take a look at those.

Chairman KERRY. Were the reports issued by GAO and SBA considered in that process?

Administrator PRESTON. Yes. Now, the GAO reports really—

many of the issues addressed in the GAO report have been adjusted through the operational improvements.

The big issue, I think, that the GAO report came forward with

is to enhance our predictive capability which we have expanded

through the use of modeling that is used in other Federal agencies.

Chairman KERRY. And final question, or couple questions, the

issues raised by Ms. Martin in her testimony, unless I misheard

them, clearly apply to the 90-in-45 period of time.

And it is pretty strong testimony that there was sort of a, ‘‘let’s

get rid of these; let’s move these out attitude,’’ and certainly her

testimony at least, is that some superiors were clear and intent on

that.

What is your response to that?

Administrator PRESTON. Well, I think one of the things she focused on a lot had to do with title documents. And this was exactly

one of the things that Eric Thorson’s report focused on, which was

getting the paperwork together to close it and move it on.

Eric’s report showed that, in many cases, there was insufficient

documentation in place on certain pieces of collateral. We think

there are many circumstances that would support what we did in

some cases, and other cases, we did not have what we needed.

What I would tell you is the circumstances that she alluded to

were highlighted in the 90-in-45 re-engineering initiative. And as

part of that, the redesign of those processes were kicked off. They

were not completed as part of the campaign, and I think she left

in November of last year, so she would have left toward the end

of the campaign.

But today, the IG’s recommendations in that area have been fully

implemented, and the backlog of the problems that were in place

are largely worked out.

So frankly, I would love to have seen Ms. Martin’s testimony a

year ago when we were kicking this off, because as I have learned

listening to these stories to see how people act, what their motivaVerDate 11-MAY-2000 09:46 Oct 27, 2008 Jkt 042587 PO 00000 Frm 00072 Fmt 6633 Sfmt 6601 C:\DOCS\42587.TXT DianeA PsN: DianeA
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tions are, and how it all fits together, is one of the best pieces of

insight a leader like I can have as we look at fixing it.

The other thing I want to mention is, before we changed this, we

had a big production line effectively set up with how we did loans.

If there were problems, often, they went down the production line.

Backlogs occurred in many areas of that production line. There was

insufficient coordination, and as a result—and there was no single

point of contact for the borrower.

When we totally redesigned this process to put in place case

teams, it provided an opportunity for all these teams to work together to resolve these issues jointly, to improve coordination for

the borrower, and then to give them a single point of contact.

So many of the issues that she brought up, I can envision how

they would have occurred under the old process, and even during

the transformation of the process.

Chairman KERRY. What about the last point, the important point

that she made, I thought, about the intimidation and actual encouragement of the declining of the loan, or the withdrawal of the

particular application?

Do you think some folks just kind of—now, I am not directing

this, but I know how bureaucracies work sometimes, how it can go

up and down the chain of command, and some people can get overly enthused, or lazy, and/or—just in the course of business, want

to get it done the simplest, easiest, fastest, least inconvenient way.

Administrator PRESTON. Well, what I would tell you is, when it

comes to the approval of a loan, those were prior to these—I mean,

loans had generally been all approved by the time we had kicked

off this initiative. The issue was, the loans had been approved and

they were not getting closed and out the door.

I think you can appreciate, the Agency never came under attack

for not getting the loans through the door. They came under attack

for not disbursing loans. The only financial incentives that were in

place in that facility had to do with disbursing loans. There was

no incentive whatsoever, I think, for people to cancel loans.

Now, the other thing I want to mention is Mr. Thorson’s report

dealt with the call campaign in Buffalo, Ms. Martin worked in Fort

Worth. So those were different sets of activities. I can envision how

somebody working on the front line with a team lead who wants

to get through work can get heavy handed.

She did make one comment that I thought was an important one.

She said, we were—she used the comment, the number of files we

processed. Prior to re-engineering this organization, a lot of what

we looked at were things like files processed. Now, what we look

at are things like, how long has it taken us to turn around a borrower request? How long are our backlogs in getting back to customers? We have details on every single borrower on why we

haven’t closed their loan. It is one of the reasons we found out people were having such a horrible time getting title documents, and

we sent 12 people into the Parish Clerk’s office in New Orleans

Parish to help them with their backlog.

So the types of things we measure are much more about customer response and customer wait times than they are about moving something through a process, because those old metrics, I

think, focused people on the wrong things.

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Chairman KERRY. Can I say to you, Mr. Administrator, that I

know from experience, and when you hear this kind of testimony,

that—I have no question that you are trying to institute that

change in the culture. I have no question of the bona fides of the

reforms that you want to put in place, none whatsoever. And I

think Ranking Member Snowe would agree with me, this is a very

different hearing from the hearing we would have had with your

predecessor.

But I did hear Ms. Martin say that one of the measurements was

still processing cases, and therefore, it just may be that what you

are sending down the chain is not getting to every part of that

chain, and I think it is important——

Administrator PRESTON. I think that is great——

Chairman KERRY [continuing]. To make sure the metrics are in

fact——

Administrator PRESTON. Well, I do see the metrics. And frankly

Senator, I, in many cases, designed a lot of them myself.

I would highlight that Ms. Martin has not worked at the Agency

since last year—November. A lot has changed since then. There

was an overlap during that 90-in-45.

Chairman KERRY. So this fundamental change, you are saying,

has been put in place since that period of time.

Administrator PRESTON. A lot of the tracking tools were put in

place through that campaign and are in place today.

Chairman KERRY. Fair enough. I accept that. And we will obviously continue to work with you.

I do want to express my appreciation for your willingness to

come in here and be part of this. I think it is helpful, and I think

we will all benefit. I- think the Agency can ultimately be stronger

for it, but I certainly appreciate the way in which you have addressed the questions that we had before the Committee.

Administrator PRESTON. Well, thank you. And once again, your

staffs have been in the centers. Some of them have—we welcome,

at any point, anytime your staff want to come down and talk to our

employees, talk to—walk the floors and see for themselves.

I think this is an exciting story about people who really care and

who are working like crazy to be excellent service individuals for

America’s disaster victims.

Chairman KERRY. Thank you.

I will turn it over to Senator Snowe now. I need to go back to

where I was, but Senator Snowe will close out the hearing at her

discretion.

Senator SNOWE [presiding]. Administrator Preston, I want to

thank you. I know it has been a difficult challenge that you inherited a little more than a year ago. When you became Administrator

of the Agency, the disaster program required massive restructure.

Regrettably, it wasn’t working well at a very difficult time for the

Gulf Region and for this country.

We have heard testimony on a number of issues today, but I

want to start with Ms. Martin’s testimony.

Obviously, it is troubling. She testified today on what took place

in Fort Worth, Texas from December 2005 through November 2006,

and I found her testimony deeply disturbing.

Administrator PRESTON. Absolutely, yes.

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Senator SNOWE. Have you ever heard of the types of episodes described in Ms. Martin’s testimony?

It does not matter when it happened, the fact is that it happened. Given what she has indicated, you need to be concerned

that a culture might be developing.

Administrator PRESTON. Yes.

Senator SNOWE. And I was just wondering, were you aware at

all, of these kinds of charges?

Administrator PRESTON. As I mentioned earlier, every employee

has my e-mail address, and many of them use it.

And so, periodically, I have gotten e-mails from employees—a

number of months ago, I would say, I got a handful of e-mails from

employees who indicated that decisions were not being made consistently in some cases. And usually what I would do is I would email the person back and say, can you get me details on how that

works.

And what I did was I went down to the Fort Worth Center shortly after that, and I cannot give you the month, but it was early this

year, and spoke to the employee base, and said—which I have done

a number of times before—and said, look, this is all about serving

people. You are doing God’s work here. Thank you so much, but let

me tell you, if you ever have a concern, if there are ever issues, if

you ever asked to do something that you do not think is appropriate, contact me.

And then I also held a number of sessions with front line employees with no managers in them. And you might think that they may

be intimidated by those meetings, but what I can tell you is they

view it as just a great opportunity to vent.

And what I learned was a couple of things. And probably most,

I think, poignant of which was, we had consolidated four different

centers. They did not all do business the same way. When they got

consolidated there was inconsistency in certain practices; there was

sometimes friction. And whereas a lot of the policies had been unified, they had not necessarily been adopted in the organization.

So we put in place a policy and procedure team, asked them to

redouble their communication efforts, and began taking what I had

heard from employees to get that out there and ensure that was

the case.

I think the most troubling thing has to do with Ms. Martin’s testimony was sort of the attitude and the view that potentially people

were pounding their fist and it was just about production. What I

can tell you is, in all the documents where we talked about the reforms, we consistently communicated to people that what was in

the past was in the past. Let’s look forward, and let’s think about

serving people compassionately and effectively.

And what ended up happening was, when I would meet with case

managers, they became the customer advocate. It was no longer

about getting their stuff done. I would hear people saying, we have

a practice over here that I am concerned is a problem. We really

need to fix it. So I can envision how an organization, especially

many people working 7 days a week, we had double shifts going,

some of the facilities that they were in were not what you would

call A-class facilities. I can envision how that could have happened

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in many cases. I absolutely could not comment on whether or not

that was widespread in the Agency at that time.

Senator SNOWE. Did you issue instructions in conjunction with

this new effort to accelerate the process and to make these 90,000

calls?

Administrator PRESTON. Yes, we had——

Senator SNOWE. Did you issue instructions on how to conduct

themselves and what the guidelines should be?

Administrator PRESTON. We had call scripts, in fact, for—I was

looking through it the other day, and it is interesting. I was looking

through some of the e-mails from the Buffalo call center. And Perry

Pedini is here, and Perry may not realize it, but I looked at an email from him to his calling staff right around the time of the call

campaign.

Quoting from it: ‘‘Thousands of disaster victims are relying on

these funds to rebuild and complete their recovery. The importance

of this project cannot be understated.’’

Some of our people were chomping at the bit to get these calling

campaigns going. The head of our Fort Worth center sent Herb

Mitchell an e-mail, wanting to get started. This is an extremely important task because it is going to define the universe of those who

want to close and those who want to seek disbursement. And what

happened is, after we determined that, we gave them their case

manager and they got along the way. The call scripts provided different categories of customers and encouraged people to get them

to the right place so that they could get the right kind of help.

And then I was looking at the executive briefing document with

the stated objectives for that particular call campaign: ‘‘Assign files

to a loan team for disbursement. Extend loans if the customer is

interested. Cancel loans if they are no longer interested or responsive. Ensure customer satisfaction at every interaction.’’

So the communication that was going out—and certainly the culture we have been trying to build in the organization is much more

about customer-facing. And if you look on many of the walls in the

SBA, you will see the second point—there will be four points, customer-focused.

Senator SNOWE. So has that been translated there? I mean, are

you sure that no longer exists?

Based on what you have heard here today, how do you followup?

Administrator PRESTON. Oh, certainly how I would follow-up

is——

Senator SNOWE. I want to make sure, because obviously, given

the circumstances, you want to make sure that this does not continue to exist.

Administrator PRESTON. Yes.

Senator SNOWE. I mean, it wasn’t just several calls, it was many

calls.

Administrator PRESTON. Yes.

Senator SNOWE. So I think it is important——

Administrator PRESTON. Absolutely.

Senator SNOWE. The people, especially given the devastation that

they faced, it is hard to imagine having their circumstances further

73

compounded by a horrible call from SBA demanding that they respond immediately with all of their information.

So I am just wondering, how you know that has changed?

Administrator PRESTON. I think, certainly what I think I will do

following this hearing is to make sure to convene the leaders in

that organization to go through the issues, go through the concerns.

I have—I will tell you, I have talked to many of them one-on-one

to say, what do you think the mind set was at the time? What do

you think people are going through? I have heard people say,

where we were a year ago, it is a different place today. It is a different feeling. It is a different level of morale.

I think you also have to understand——

Senator SNOWE. I think that these are specific cases.

Administrator PRESTON. These are specific cases.

Senator SNOWE. Yes. So I think that it is important to get to the

specifics of the issues that Ms. Martin raised with those who work

there, it seemed to be the norm rather than the exception at that

moment in time.

I just think it is important to make sure what happened—and I

know Mr. Thorson will be looking at it, but just to make sure it

doesn’t happen again.

Administrator PRESTON. Absolutely.

Senator SNOWE. We need to find out what transpired and all the

details associated with it, because it really is important. You do not

want that episode to be repeated. You really should find out why.

Administrator PRESTON. Yes. Although I would emphasize one

more time. Many of these circumstance, many of these circumstances preceded the re-engineering work we have done.

But I think your comments are absolutely on target, Senator.

Senator SNOWE. Yes, because it was November of 2006 that Ms.

Martin was referring to. So that is not all that long ago.

How many outstanding loans do you have now?

Administrator PRESTON. In the Gulf, we have got—I might be off

by 1,000 or so, but about 17,000 that are in the process of getting

disbursed, and about 1,000 that have not been disbursed.

Those are generally situations where people have taken initial

disbursement and just do not know yet what they are going to do.

So we call them regularly.

I have to tell you, I was in New Orleans a few weeks ago doing

an on-camera piece, and the cameraman and the producer in the

studio came up to me and said, you guys are professional. You guys

are terrific to deal with. I have never seen this from a Federal

agency before. And as they described the circumstances that they

had in dealing with us, it was—I really felt like I could envision

how the changes we have made had begun to take. And that is why

I think it is so important—I have a couple of letters from officials

in New Orleans that are on the ground.

Senator SNOWE. I appreciate that, and I think that is critically

important in making that turnaround, given as I said, the enormous undertaking that it requires—the thousands and thousands

of loans, and all the other issues related to it.

And speaking about the SBA’s 6 month reinstatement policy.

Now, I gather that if they do not get their loan reinstated within

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6 months they are limited in terms of Federal assistance they can

receive once they reapply?

Administrator PRESTON. No. What we have done is we have extended that another 6 months. And our practice right now is, if

people call us, we extend them. So we have continued to be very

flexible with the Katrina situation.

We get a handful of people everyday that call us up, and we reinstate them.

Senator SNOWE. And what is it that they are required to do in

order to be reinstated, to have all of their information verified?

Why should they go through that process once again?

Administrator PRESTON. Well, what we ask for to reinstate them

is—we ask for a form that allows us to get information from the

IRS to see if there is a new tax form.

And our policy right now—although in other situations we have

required more documents—is simply to ask people to give us their

signed promissory note and their loan authorization, and if they

can just do that we will reinstate them. So it is a relaxed standard

right now.

Senator SNOWE. OK. And if their loan was improperly canceled

by the Agency——

Administrator PRESTON. Oh, they can call us up today, and we

will reinstate it.

Senator SNOWE. You will?

Administrator PRESTON. Yes.

Senator SNOWE. Without a reverification process?

Administrator PRESTON. Well, if their circumstances have

changed dramatically—what we need to do is get updated tax information, but we do that—we get that from the IRS.

And I, unfortunately, cannot speak to the circumstance that Ms.

Martin mentioned that—right after the storm. I am just not familiar with it.

We are also working with the IRS to try to increase the level of

automation between our two agencies to get that more seamless.

Administrator PRESTON. I will tell you Senator, a lot of our letters are drafted by attorneys, who want to make sure the letter of

the law is followed. And we have, in many cases, looked at some

of these letters and try to make the language softer and more compassionate to the borrower.

Senator SNOWE. I know that Mr. Thorson mentioned something

about $1.5 billion worth of loans were given to those high-risk individuals that should really, essentially, go into FEMA.

And also we heard in testimony here today that FEMA actually

referred many disaster loan applications to SBA that represented

a high risk, as well.

Administrator PRESTON. Yes.

Senator SNOWE. Is there a way of working together on this?

Administrator PRESTON. There are two things there, and both of

them have been taken care of.

One of which is our interaction with FEMA during the storm was

not what it needed to be. And so we have simplified and approved

the process of getting people to us from FEMA, and I can go into

that a little bit more chapter and verse.

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The issue that Mr. Thorson brought up was, shortly after the

storm. To accelerate the loan approval process, the Agency rolled

out a pilot where the approvals were based much more heavily on

credit scores. So they didn’t do as much analysis of their financial

information.

As a result, the IG audit report showed that a lot of people that

were approved at that time would have been unlikely to have been

approved under our more detailed cash-flow analysis process.

That pilot was discontinued, and we now have in place a methodology that does more extensive work. His numbers extrapolated

that to about $1.5 billion in loans.

Senator SNOWE. Now, in his testimony today, in mentioning all

the loan cancellations, the expedited loan program, the lack of collateral, sufficient collateral—all those issues—have they all been

addressed so far?

Administrator PRESTON. Yes. The collateral issue has been addressed. The expedited loan process has been addressed. I think we

have talked about the cancellation—the 1,200 people that got a

cancellation letter and then we reinstated. I do want to mention

that is fewer than 1 percent of our approvals, although anybody

who is disrupted is a problem.

And there was one other, which is a new report on the quality

review of the loan verifiers—or the loss verifiers, rather—that we

have just gotten, and we need to look into.

That is more about having a good process in place for internal

oversight than financial risk or customer service.

Senator SNOWE. Is SBA prepared to handle a similar situation in

the future? Hopefully we do not have one.

Given the lessons learned, are you prepared?

Administrator PRESTON. I remember very clearly——

Senator SNOWE. Would you say that SBA is prepared to handle

another catastrophic disaster?

Administrator PRESTON. Yes. I remember very clearly our first

meeting when you said this was an opportunity for the Agency to

shine, and they did not.

I would say, I think the Agency has shined in the last 6 months.

And I want to say the very people who were leading that Agency

during that period of time and who were overwhelmed are the

ones, I think, that have rallied and really put this Agency on the

right track, and I am very proud of them.

I would also tell you—and I know some of your staff who were

over in our briefing, when you look at how we are ready for whatever may happen, it is a very clear pathway with very clear understanding of how we get there in terms of people, facilities, technology, and coordination. We already have every one of our district

offices with contact plans for local and State officials filled out and

completed and ready to go. We are training 400 people in our own

field; about half of that has been done.

So a lot of what we have talked about has been getting the funds

in the hands of people in the Gulf, but at the same time, we have

taken all those lessons learned and designed an entirely different

way, not only to process, but to plan and implement a surge.

So you know, I think we are in a very, very good position today

as a result.

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Senator SNOWE. I appreciate it.

Well, I thank you, Administrator Preston, and I know it has been

a significant effort on your part and those at SBA, and we are

pleased to hear that you are making some major reversals from

where we were from the onset in the aftermath of Hurricane

Katrina.

Administrator PRESTON. Thank you.

Senator SNOWE. We really appreciate it. And we want to work

in a constructive fashion to resolve any of the additional questions,

the issues that Ms. Martin raised——

Administrator PRESTON. Right. Absolutely.

Senator SNOWE [continuing]. To get this right for now, and for

those who have been directly affected by any improper decisions or

behavior.

And then, second, to make sure it works well in the future.

Administrator PRESTON. Yes.

Senator SNOWE. Hopefully we do not have to utilize this disaster

response, but if we do, the SBA is now in a position to shine at

a time in which people are facing some very troubling situations,

as we saw in the Gulf 2 years ago.

Also, I hope we get to pass a disaster loan package through the

Senate as quickly as possible.

Administrator PRESTON. Thank you, yes.

Senator SNOWE. We appreciate your expressions of support for

this legislation, and hopefully we can overcome some of the objections of our colleagues here in the Senate, because clearly, this

package has been thoroughly evaluated and examined over the last

year-and-a-half when we first initiated that effort here in the Committee. It was part of the overall reauthorization. Not much has

changed. It passed unanimously then, and it has passed the Committee again under the Chairman’s leadership, and it is unfortunate we have not moved this forward.

And anything that you can do to assist in that effort, we greatly

appreciate.

Administrator PRESTON. Thank you, yes.

You should also know that we have already begun to work on

some of the provisions in the bill in contemplation that it will pass.

And I also want to say your staff, Senator Kerry’s, Senators Vitter’s

and Landrieu’s staffs have been terrific partners of ours in understanding the issues in the Gulf, getting us to the right people, and

giving us great insights along the way. So I cannot tell you how

much I appreciate that.

Senator SNOWE. Well, thank you.

This hearing is adjourned, but the Committee will leave the

record open for 2 weeks for any additional comments and questions.

[Whereupon, at 12:17 p.m., the hearing was adjourned.]

(77)

APPENDIX MATERIAL SUBMITTED

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(153)

COMMENTS FOR THE RECORD

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Æ