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S. HRG. 112–892 

AN EXAMINATION OF SBA PROGRAMS: 

ELIMINATING INEFFICIENCIES, DUPLICATIONS, 

FRAUD, AND ABUSE 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS AND 

ENTREPRENEURSHIP 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JUNE 16, 2011 

Printed for the Committee on Small Business and Entrepreneurship 

( 

Available via the World Wide Web: http://www.fdsys.gov 
(II) 

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP 

ONE HUNDRED TWELFTH CONGRESS 

MARY L. LANDRIEU, Louisiana, Chair 

OLYMPIA J. SNOWE, Maine, Ranking Member 

CARL LEVIN, Michigan 

TOM HARKIN, Iowa 

JOHN F. KERRY, Massachusetts 

JOSEPH I. LIEBERMAN, Connecticut 

MARIA CANTWELL, Washington 

MARK L. PRYOR, Arkansas 

BENJAMIN L. CARDIN, Maryland 

JEANNE SHAHEEN, New Hampshire 

KAY R. HAGAN, North Carolina 

DAVID VITTER, Louisiana 

JAMES E. RISCH, Idaho 

MARCO RUBIO, Florida 

RAND PAUL, Kentucky 

KELLY AYOTTE, New Hampshire 

MICHAEL B. ENZI, Wyoming 

SCOTT P. BROWN, Massachusetts 

GERALD W. MORAN, Kansas 

DONALD R. CRAVINS, JR., Democratic Staff Director and Chief Counsel 

WALLACE K. HSUEH, Republican Staff Director 
(III) 

C O N T E N T S 

OPENING STATEMENTS

Page 

Landrieu, Hon. Mary L., Chair, and a U.S. Senator from Louisiana .................. 1 

Snowe, Hon. Olympia, a U.S. Senator from Maine ............................................... 10 

Paul, Hon. Rand, a U.S. Senator from Kentucky .................................................. 12 

WITNESS TESTIMONY

Panel 1 

Gordon Mills, Hon. Karen, Administrator, U.S. Small Business Administration ........................................................................................................................ 13

Gustafson, Hon. Peggy E., Inspector General, Office of Inspector General, 

U.S. Small Business Administration .................................................................. 20 

Panel 2 

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

U.S. Government Accountability Office .............................................................. 44 

Baron, Kevin, Director of Government Affairs, American Small Business 

League ................................................................................................................... 70 

Dehaven, Tad, Budget Analyst, Cato Institute ..................................................... 80 

Pastore, Fran, Chief Executive Officer, Women’s Business Development Council, Stamford, CT .................................................................................................. 90 

Clarkson, Greg, Executive Vice President—SBA Lending Division of BBVA 

Compass Bank and Chairman of NAGGL Board of Directors ......................... 97 

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Association for Enterprise Opportunity 

Prepared statement .......................................................................................... 141 

Baron, Kevin 

Testimony .......................................................................................................... 70 

Prepared statement .......................................................................................... 73 

Clarkson, Greg 

Testimony .......................................................................................................... 97 

Prepared statement .......................................................................................... 99 

Dehaven, Tad 

Testimony .......................................................................................................... 80 

Prepared statement .......................................................................................... 82 

Gordon Mills, Hon. Karen 

Testimony .......................................................................................................... 13 

Prepared statement .......................................................................................... 16 

Responses to post-hearing questions from Ranking Member Snowe ........... 122 

Gustafson, Hon. Peggy E. 

Testimony .......................................................................................................... 20 

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

Landrieu, Hon. Mary L. 

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

Article titled ‘‘Small-business contracts under scrutiny from several federal agencies’’ ................................................................................................ 2 

Article titled ‘‘SBA suspends major contractor GTSI from government 

work’’ .............................................................................................................. 5 

Article titled ‘‘SAB suspends two firms alleging contracting abuse’’ ........... 8 

Jobs Agenda map .............................................................................................. 119 
Page

IV 

Pastore, Fran 

Testimony .......................................................................................................... 90 

Prepared statement .......................................................................................... 92 

Paul, Hon. Rand 

Opening statement ........................................................................................... 12 

Shear, William B. 

Testimony .......................................................................................................... 44 

Prepared statement .......................................................................................... 46 

Snowe, Hon. Olympia 

Opening statement ........................................................................................... 10 

West, Dennis 

Prepared statement .......................................................................................... 148 
(1) 

AN EXAMINATION OF SBA PROGRAMS: 

ELIMINATING INEFFICIENCIES, 

DUPLICATIONS, FRAUD, AND ABUSE 

THURSDAY, JUNE 16, 2011 

UNITED STATES SENATE, 

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP, 

Washington, DC. 

The committee met, pursuant to notice, at 10:05 a.m., in Room 

SR–428A, Russell Senate Office Building, Hon. Mary L. Landrieu 

(Chair of the committee) presiding. 

Present: Senators Landrieu, Pryor, Snowe, Risch, Paul, and 

Brown. 

OPENING STATEMENT OF HON. MARY L. LANDRIEU, CHAIR, 

AND A U.S. SENATOR FROM LOUISIANA 

Chair LANDRIEU. Good morning. I would like to call the Small 

Business meeting to order. The purpose of our meeting this morning is to review duplication, inefficiencies, fraud, abuse, and exploitation in programs run by the Small Business Administration. I 

want to thank Administrator Mills and Peggy Gustafson for being 

with us this morning, and we are looking forward to a second panel 

as well. 

I thank you for joining us today. I, along with members of this 

Committee, have made it a priority to ensure that all SBA programs are running efficiently, effectively, and free of exploitation. 

In a December 2010 letter to SBA Administrator Karen Mills, 

Ranking Member Snowe and I expressed our deep concern with the 

allegations of some fraud and abuse in small business contracting 

programs, as highlighted by recent Washington Post articles—there 

were two that I am going to submit for the record—and GAO reports that I will also submit for the record. 

I would like my staff to present the document that we are working off of. This is a review of the last 5 years of all of the reports 

done by GAO and the Inspector General. We have reviewed these 

reports, we have summarized these reports, and we are going to 

submit them. Of course, they are already part of the record, but we 

will refer to them today, if necessary. 
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Chair LANDRIEU. We requested that Administrator Mills provide 

this Committee with a detailed plan for addressing and rectifying 

some of the problems that have been brought to her for her review. 

We are looking forward to that report this morning. 

In addition, in subsequent letters Administrator Mills and SBA 

Inspector General Peg Gustafson were asked to make recommendations for eliminating or substantially reducing programs within the 

SBA that were duplicative, ineffective, or redundant. I will report 

this morning that, as a result of at least the initial review, two programs—Community Express and the Coverdell Drug-Free Workplace Program—have been or are in the process of being eliminated. 

We are here today to further examine actions that can be taken 

to reduce or eliminate inefficiency or fraud or abusive operations. 

Even as we take on this task, we must be careful to act in a manner that does not undermine the SBA’s ability to serve the needs 

of the 26 million small businesses in our country that are the backbone of our economy and counting on the SBA to do its job and do 

its job well. 

On Panel 2 we will hear testimony from representatives from the 

GAO, the American Small Business League, the National Association of Government Guaranteed Lenders, the Cato Institute, and 

the Women’s Business Development Council in Stamford, Connecticut, that will add their voice to this debate. 

I welcome an opening statement by Ranking Member Snowe and 

look forward to hearing the testimony today. 

OPENING STATEMENT OF HON. OLYMPIA J. SNOWE, A U.S. 

SENATOR FROM MAINE 

Senator SNOWE. Thank you, Chair Landrieu, for holding this critical hearing to assess and to analyze inefficiencies, duplication, 

waste, fraud, and abuse in the programs of the Small Business Administration. Clearly more can and must be done to eliminate these 

obstacles that prevent the agency from reaching its full potential. 

We are fortunate today to have with us the SBA Administrator, 

Karen Mills, who is truly on the front lines of this issue. Administrator Mills has shown strong and outstanding leadership by putting a framework in place to help prevent illegitimate firms from 

siphoning away contracts from rightful small businesses trying to 

compete for Government contracts. 

Additionally, on the first panel we have Inspector General Peggy 

Gustafson, whose testimony in March provided this Committee valuable insight and recommendations for the SBA in the area of procurement fraud, and we appreciate our second panel of witnesses 

representing the Government Accountability Office and the small 

business community. We are anxious to hear everyone’s suggestions for streamlining programs and efforts while reducing fraud 

and improving the agency’s effectiveness. 

There cannot be any clearer impetus for us to find ways to eliminate inefficiencies, duplication, and waste across the Government 

than the current economic crisis. Our national debt will reach 100 

percent of GDP by the end of 2011. 

The bottom line is that our Nation’s revenues and spending are 

vastly misaligned. We cannot and must not finance operating ex-
11 

penses with perpetual deficits. It is through this lens that we must 

examine every taxpayer dollar our Government spends and utilize 

our Nation’s small businesses to spur private sector job growth. 

Today’s hearing is truly a piece of a much larger puzzle. Congress has been reviewing a 345-page report issued in March from 

the GAO that outlines Federal programs, agency offices, and initiatives with duplicative goals and activities. As revealed by this report, there is no shortage of waste to identify. 

What is so remarkable about these efforts is that the Federal 

government could cut spending without eliminating programs it 

services by simply implementing solutions such as sharing resources or collaborating among departments. For instance, the 

GAO report exposed massive duplication throughout our Government, such as 80 economic development programs across four Federal agencies, including the SBA, which administers 19 of the programs. Of those programs, the GAO identified that 52 either exclusively or in part address entrepreneurial efforts. The total 2010 

funding for these 80 programs alone amounted to $6.5 billion. 

While I am eager to hear the SBA’s response to the GAO report, 

I also would want to know what changes the SBA is actively considering as it reviews all of its programs for replication, such as 

working with other agencies to consolidate programs and resources 

to help eliminate duplication. 

To date, the SBA has taken some modest first steps with regard 

to streamlining or eliminating programs. Last January the Chair 

and I sent a letter to Administrator Mills and Inspector General 

Gustafson soliciting their insight as to how the agency recommends 

eliminating wasteful spending, and I want to thank the Inspector 

General for her in-depth response. 

I know the SBA has responded by deferring to the President’s fiscal year 2012 budget request which proposed eliminating the Prime 

Technical Assistance Program, the Drug-Free Workplace Program, 

and several special purposes counseling grants for the Small Business Development Center Program. I hope that we can be able to 

do more in that category. 

In addition, today’s discussion of making the agency more efficient will also explore efforts to eliminate fraud and abuse in any 

of the SBA’s programs. Our Committee held a March hearing to 

discuss steps to remedy the findings of the recent GAO reports that 

revealed 14 ineligible firms receiving $325 million sole-source contracts and set-aside contracts, even though these firms were not eligible for the 8(a) program to begin with. At my request the SBA 

sent two letters outlining actions taken against these 14 firms, as 

well as creating a special task force focused on strengthening enforcement actions. I appreciate the timely and comprehensive response Administrator Mills provided my office and believe these administrative changes present additional deterrence to those who 

perpetuate fraud against the Government. 

It is our duty in Congress to provide the statutory tools necessary to create additional deterrence against fraud. That is why 

I recently introduced, together with Chair Landrieu and a number 

of my colleagues on this Committee, the Small Business Contracting Fraud Prevention Act to bolster fraud prevention at the 

SBA. This bill includes provisions specifying damages sustained by 
12 

the Government in cases of fraud, aims to standardize the certification processes, and increases transparency when the Government 

takes enforcement actions against such firms. 

Simply put, we must remain vigilant in assuring that all of the 

SBA’s contracting programs are running efficiently, effectively, and 

free of exploitation. 

Additionally, collaboration must extend to other agencies such as 

the Department of Justice for enforcement of punishment of any 

bad actors found to be fraudulent. This week I sent a letter along 

with Senator Grassley, the Ranking Member of the Judiciary Committee, to the Attorney General inquiring why the Department of 

Justice is declining to prosecute cases that were referred from the 

SBA’s Inspector General, including 20 cases since October of 2010 

to March. In any event, we know that strong punitive actions and 

strong enforcement will result in, I think, a very strong deterrent, 

and that is what we have to accomplish as well. 

So I am hopeful that we will hear from our witnesses here today 

about how best we can do that in identifying all the waste and inefficiencies that may continue to exist and also to implement many 

of the ideas that the GAO has recommended. 

Thank you, Madam Chair. 

Chair LANDRIEU. Thank you. 

Senator Paul. 

OPENING STATEMENT OF HON. RAND PAUL, A U.S. SENATOR 

FROM KENTUCKY 

Senator PAUL. Thank you. Thank you, Chair Landrieu and Senator Snowe for allowing me to participate and to bring a witness 

from the free market think tank of Cato today. I am happy to be 

here. 

I was pleased last night to meet Ms. Mills, and we had a great 

conversation, and I hope we get to continue that today in public. 

As I told Ms. Mills last evening when we met, I am a great believer in the free market, and the thing about the free marketplace 

and capitalism in general is it is a place where you have voluntary 

interaction and people get to vote every day. So in the marketplace, 

people vote with their dollars, with their loans. Everybody gets to 

vote and everybody gets to choose, so it is really about choice. 

And to me, whether the Government makes the loans or the private marketplace makes the loans, it is really about choice, and it 

is whether or not we are going to say that our choice is somehow 

superior to the market’s choice. 

As Ms. Mills told me, she thinks that there is market failure, 

and I will let her describe that when we get to that. 

The problem I think I have with that, with saying that the market fails in giving loans is that you basically are bringing your 

opinion to bear to say that the market is failing. It could be that 

the market is just choosing other people that you would rather 

choose, you know, certain people to get a loan and the market is 

choosing other people to get a loan. 

Frederic Bastiat was a philosopher back in the 19th century and 

a French parliamentarian, and he wrote several books, and he was 

a critic of mercantilism and protectionism. But one of the things he 

talked about, that he is famous for talking about, is the seen and 
13 

the unseen. The seen is very easy. We can show a small business 

loan, and we can say Mr. Smith got this loan and look at this 

bright, shiny new building that he has built and how good this is 

and how he created these jobs. But the unseen is the money came 

from somewhere. You know, he had to either tax somebody or he 

had to borrow it. There are costs to Government loans. But basically really what you have done is you have changed who gets to 

choose—private individuals choosing where the money goes or Government, select Government. 

And then there is the possibility that the loans end up going to 

your friends or your contributors, and I am not saying anything 

about this Administration or anyone, but there is the potential for 

Government abuse where the loans go to friends and go to maybe 

windmills because we like windmills better than coal companies or 

certain people might make those decisions. There is possibility for 

politicization of the loans. 

But the unseen is where the person who did not get the loan because the loan was distributed by the Government, that money is 

taken out of the marketplace, and that money would have gone to 

someone else. So I do not think it is enough to argue that we have 

these great multipliers. Everybody argues this. You know, every 

business organization says, ‘‘Oh, we created this one job with this 

small business loan, and it created ten other jobs.’’ Well, so do all 

jobs that are created. I mean, that just means that you have created it, but the private marketplace may have delegated or designated the money to go somewhere else, and it would have the 

same multipliers of employing other people. The main difference is 

that a private loan would have gone to—basically the decision is 

democratic capitalism. We all vote every day on where those loans 

go. 

And so I would just make a pitch and like to have the viewpoint 

known that there are people who believe that the marketplace and 

individuals should freely interact and make the decision where 

loans go and that really Government should not be in this business 

at all. 

Thank you. 

Chair LANDRIEU. Thank you so much. 

Ms. Mills. 

STATEMENT OF HON. KAREN GORDON MILLS, 

ADMINISTRATOR, U.S. SMALL BUSINESS ADMINISTRATION 

Ms. MILLS. Well, thank you very much, Chair Landrieu and 

Ranking Member Snowe and members of the Committee, Senator 

Paul. Thank you for inviting me to testify today. Half of the people 

who work in America own or work for a small business. That is 26 

million small businesses. And as you all know, two out of every 

three jobs are created by small business. 

Over the past 2 critical years, the SBA has helped put $53 billion 

in lending support and $195 billion in Federal contracts in the 

hands of these small businesses. And at the same time, we have 

counseled and trained and mentored over 2 million Americans who 

have turned to us to start or grow their business. We have also delivered on our promises, such as this Committee’s request to re-
14 

invent SBA’s website, and we launched it in January. So far it has 

attracted over 3 million unique users in just 6 months. 

Our focus remains twofold: number one, to deliver proven tools 

directly into the hands of small businesses; and, number two, to 

give taxpayers strong oversight of their dollars and the best possible bang for their buck. 

We do this across our 3 Cs—capital, counseling, and contracts— 

and I am going to touch briefly on the latter two. 

Often, the first interaction a small business has with the Federal 

government is with our field offices and counseling partners. We 

are the front door. 

Let us say you walk into the Tacoma Business Center in Washington State. If you have a simple business idea, you will be referred to the Tacoma SCORE chapter to help you flesh it out and 

test its feasibility. Nationwide, 12,000 SCORE volunteers helped 

400,000 people last year, three-fourths of whom were just starting 

out, and the cost of all of that program is $7 million. 

If you had a home-based small enterprise already running, but 

you needed more guidance, the Tacoma Women’s Business Center 

would be your best bet. Nationwide, 110 Women’s Business Centers 

served over 160,000 clients last year, with a budget of just $14 million because of public-private partnerships. They are strategically 

located in easy-to-access, underserved areas. 

And maybe you had an established business that needed help 

with commercialization or exports. You would be referred to our 

Small Business Development Center. Nationwide, we have about 

900 SBDCs, often located at universities and community colleges. 

They helped nearly 600,000 clients last year, about half of which 

were established businesses. The cost was about $110 million. 

As Administrator, I have been all around the country. I have 

been to 34 states over the past 2 years, and I visited with these 

resource partners and small businesses in every area. 

This is our bone structure. Our doors are open to small businesses in the places where they live and work. That is important 

because our data shows that long-term counseling leads to better 

sales and more longevity. We leverage this bone structure to collaborate, as Senator Snowe described, across the Federal government with the Veterans Administration to serve veteran small 

business owners, by cross-training our people with the Department 

of Agriculture in serving rural business, with the Department of 

Commerce to serve small exporters, and with many other Federal 

partners. 

Finally, we remain, as you described, strongly committed to oversight of taxpayers’ dollars. I committed to this Committee to get aggressive on fraud, waste, and abuse, and I committed to remove 

fraud, waste, and abuse in our contracting with a three-pronged 

approach. 

First, up-front certification. We now have much stronger requirements for 8(a) and HUBZone applicants. 

Second, with continued surveillance and monitoring. For instance, we made a dramatic increase in the site visits in our 

HUBZone. Six months before I came, we had done seven site visits. 

In the last year, we have done 1,200. 
15 

And, finally, with aggressive pursuit of misconduct. We have removed many firms, suspended, or proposed for debarment dozens 

of bad actors. 

As the front door for small business seeking help in any industry 

at any stage of growth, we will continue to ensure that the benefits 

of all SBA programs flow directly to small businesses so that they 

can do what they do best: create jobs. 

Thank you. I look forward to your questions. 

[The prepared statement of Ms. Mills follows:] 
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Chair LANDRIEU. Thank you very much, and will you submit to 

the record the list of the companies that you have just debarred 

and disqualified? 

Ms. MILLS. Yes. 

Chair LANDRIEU. Thank you. 

Ms. Gustafson. 

STATEMENT OF HON. PEGGY E. GUSTAFSON, INSPECTOR GENERAL, OFFICE OF INSPECTOR GENERAL, U.S. SMALL BUSINESS ADMINISTRATION 

Ms. GUSTAFSON. Chair Landrieu, Ranking Member Snowe, Senator Paul, good morning. I want to thank you for inviting me again 

to testify in front of your Committee. 

As you know, I head the SBA Office of Inspector General, which 

is a statutorily created independent office established to deter and 

detect waste, fraud, abuse, and inefficiencies in SBA programs and 

operations. 

My verbal testimony today is going to focus on three areas: an 

update of my testimony from the March 3rd hearing of this year 

regarding fraud in SBA’s preferential contracting programs; our 

concerns about fraud and abuse in SBA’s business loan programs; 

and some areas of potential cost savings in SBA’s programs, as 

mentioned in the letter that we had sent to you in March. 

As noted in my March 3rd testimony, my office remains very concerned about fraud in SBA’s preferential contracting programs. The 

bottom line is that when ineligible companies are fraudulently obtaining Federal contracts that are meant for small and disadvantaged companies, the congressional intent behind these programs is 

thwarted and legitimate companies are deprived of the contracting 

and the business development opportunity that these programs are 

supposed to provide. 

Therefore, I want to commend the Chair, the Ranking Member, 

and other members of this Committee for their support and sponsorship of S. 633, the Small Business Contracting Fraud Prevention Act of 2011. I believe this is very important legislation that 

will greatly assist my office’s efforts in deterring, detecting, and 

prosecuting false statements made to obtain these contracts. 

I also want to recognize SBA’s recently introduced plan to promote suspensions and debarments. This plan provides for greater 

training of SBA personnel to recognize suspicious activity and envisions better processes for ensuring that this suspicious activity is 

referred to my office and to agency suspension and debarment officials for necessary action. 

Since my testimony in March, my office has referred an additional 14 contracting cases for suspension or debarment to SBA. As 

of this morning, the agency has acted to debar or suspend the 

wrongdoer in seven of these cases, and we have been advised that 

the agency will proceed shortly with final decisions on the remaining referrals. 

I want to mention an audit my office recently conducted of the 

SBA surveillance review process, which are the on-site reviews that 

the agency conducts of procuring agency contract files to determine 

whether procuring agencies are properly awarding and monitoring 

these preferential contracts that are supposed to be going to small, 
21 

disadvantaged, and the other preferential contracting programs. 

This review found that SBA had only evaluated a limited number 

of procuring offices over the past several years, and it was not 

using a systematic, thorough, or consistent approach in conducting 

these reviews. 

We also found that these review teams were not generally evaluating whether small businesses and 8(a) firms were performing the 

required percentage of work on set-aside contracts. 

I was very happy to note that the agency has agreed with most 

or all of our recommendations, but I would note that there is one 

final step in the audit process, which is the management decision, 

which is where SBA tells us what they are going to do to implement these recommendations. And I would gently note that these 

management decisions are overdue as of today, and it is pretty crucial that we get these management decisions, and I look forward 

to them because they will really be a framework for what happens 

next. 

Another priority for my office is investigating SBA’s 7(a) and 504 

business loan programs. Our investigations run the gamut from 

false statements made by borrowers to get these loans to fraud by 

lenders or fraud by third parties who are involved in the loan process. 

From October 1, 2008, to the present, in criminal cases related 

to business loan programs, we have opened 84 investigations of alleged fraud and obtained 114 indictments, 82 guilty pleas and convictions, and restitution, civil fraud, and asset forfeiture recoveries 

in excess of $91.5 million. 

We remain concerned about fraud by third parties in 7(a) loans, 

notably loan brokers, loan packagers, consultants, and other loan 

agents. Although loan agents often serve a very valuable purpose 

in the loan process because they work with the borrower to connect 

the borrower to a lender who will help them with the SBA loan and 

help them get an SBA loan, there have been unscrupulous agents 

who have exploited the program through sometimes very far-reaching fraudulent schemes. In the last decade alone, my office has obtained convictions and guilty pleas in cases involving loan agent 

fraud, where the amount of loans involved were hundreds of millions of dollars. 

We have had for several years a management challenge that the 

SBA track the loan agent activity and institute some enforcement 

processes to kick bad agents out of the program. They are getting 

there. They are beginning to track the activity. They do have the 

enforcement process in place, but this has to be a big priority for 

SBA, and we look forward to this getting finished. 

As noted, I did submit a letter in March with some suggestions 

for savings. I believe that letter was submitted with my written 

testimony, and I welcome any questions, and again, thank you. 

[The prepared statement of Ms. Gustafson follows:] 
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Chair LANDRIEU. Thank you. 

Let us go ahead and start with the loan agents issue. Ms. Mills, 

what would your response be? Do we know how many loan agents 

are out there? Are they certified by your office? What actions are 

you all taking to crack down on loan agents that are acting inappropriately securing loans to small businesses? 

Ms. MILLS. Well, Senator, as you know, we have implemented 

the same three-part process that I described for contracting fraud, 

waste, and abuse on our loan fraud, waste, and abuse. So we are 

making sure that those who come to get our loans are, in fact, eligible, that we have oversight along the way in the process, and that 

we go after bad actors. 

This falls in the third category where we have partnered on this 

loan agent issue very closely with the IG’s office to ramp up the 

aggressive enforcement against bad actors, in this case these loan 

agents. 

We are of like mind and aggressively pursuing this and will not 

stand for it. This has been a problem that existed quite a bit in the 

past, and when we came on board, we went after it quite seriously. 

Chair LANDRIEU. Do we have any idea how many loan agents, 

unscrupulous loan agents, there may be out there, Ms. Gustafson? 

Ms. GUSTAFSON. It is really early in the process to have a handle 

on that. As noted, we for several years said what we need is a central database such that should SBA or one of our criminal investigators find a loan that just has all kinds of problems, it would be 

incredibly helpful to know whether there was an agent involved in 

that process, because sometimes the fraud is happening with the 

agents. And it has been, I think, 7 years coming that it has been 

a management challenge, and there is no doubt that the agency 

agrees with us now that Administrator Mills is very supportive of 

this process. 

My understanding of where we are is they are finally beginning 

to capture that information. It is finally somewhere. It is beginning 

to be somewhere. As a side note, at first they were not capturing, 

for example, the loan numbers along with the loan agent. That becomes not very useful. But that has been fixed. 

Chair LANDRIEU. Because we can pinpoint exactly what banks 

the 1,000 or 1,200 out of the 8,000 banks are making loans through 

the SBA programs. We know exactly what banks those are. 

Ms. GUSTAFSON. That is right. 

Chair LANDRIEU. We also know the volume of loans that each of 

those banks puts out every year. So I think this would be relatively 

easy to try to track this information and eliminate the bad actors 

from this program. 

Ms. GUSTAFSON. I think so. In general, there has always been a 

piece of paper somewhere with who the loan agent was. This centralization is new, and it is crucial because I will tell you, we have 

cases where the loan may be in Mississippi, and the loan agent for 

some unknown reason is in Florida. So, you know, there has to be 

a central database; otherwise, they are going to go undetected. Certainly the schemes will. 

Chair LANDRIEU. Okay. Well, I will look forward to seeing how 

we are advancing on that. 
35 

On the general programs, in the March 15th letter that we sent 

to the SBA regarding improper payment rate, which I think is 

across the whole agency, the Inspector General said the rate could 

be as high as 27 percent. When you all reviewed the same data, 

you said the estimate is 1 to 2 percent. So there is a great disparity 

there, and if we could try to get some clarification on that with you 

two sitting at the same table this morning, that would be helpful. 

I do not know which one of you wants to go first. 

Ms. MILLS. This is a conversation actually that we have on a 

fairly routine basis. There is a disagreement about the definition 

about improper payments. So we are referring to not actually the 

payment, but a loan that was a loan properly done. And if the T 

is not crossed and the I is not dotted, in one definition that is improper. In another definition we might draw the line in a different 

place and say that is a foot fault, and that it can be corrected, and 

the intent was honest and proper and that the loan guarantee 

should be honored or the loan was proper. 

In the past situation there was no good dialogue on this issue, 

and when we came on board, we started a very constructive dialogue. We have made tremendous progress. There is still progress 

and conversation to be had, and we are working, I think—but Peg 

can tell you—constructively and aggressively on this issue. 

Chair LANDRIEU. Okay. 

Ms. Gustafson. 

Ms. GUSTAFSON. Yes, let me quibble a little bit and then talk 

about progress that has been made. There is no question that both 

the agency and the IG did a review of the 7(a) improper payment 

rate for fiscal year 2008, and what you cited, Senator Landrieu, 

were the two rates that we came up with—vastly different. And, 

yes, we did begin a discussion about where we were disagreeing 

and why, and some of it is fundamental questions of what is and 

what is not under the law an improper payment. And that is a very 

constructive conversation to have that I think will inform the next 

improper payment review, which is going to begin shortly, both by 

the agency and by ourselves. 

The one thing I would note is we have been having this discussion for about 2 years, and so we are slowly getting there. I am 

concerned about the speed, or lack thereof, that it is taking to 

reach these decisions, but I do think as we get there, we will come 

closer. And I would note that, in general, where we go so far, for 

what it is worth, they are coming closer to us. And so my quibble 

is we never say it is an improper payment if a T is not crossed or 

an I is not dotted. It is always a material issue. But we are working through those, and we will get there, but it needs to be done 

much quicker than it is being done. 

Chair LANDRIEU. Okay. And, finally, I know my time has expired, but I will acknowledge Senator Snowe in just a moment. One 

of my strong beefs with the agency actually is in overcollecting 

funds, approximately $925 million in CDBG block grant funding 

that the agency, in my view, collected aggressively without warrant 

and unnecessarily by requiring victims—in this case of Hurricanes 

Katrina, Rita, or other natural disasters—to immediately repay 

back their 30-year SBA loan the minute they received the CDBG 

grant to rebuild their home. I am going to try to fix this legisla-
36 

tively because while it might be too late for the people of Louisiana, 

it is very timely for the people of Joplin, Missouri, who are going 

to be experiencing this exact same horrific nightmare, where they 

finally after 6 months get an SBA loan to help rebuild their home, 

which they might have had insurance or might not. The minute 

they receive a $30,000 grant from some other agency of the Federal 

Government, the SBA grabs the grant money to repay itself, leaving the homeowner with absolutely nothing to rebuild. 

So I am not sure how Joplin, Missouri, which lost 30 percent of 

their city, 8,000 structures were destroyed, including hospitals, 

homes, and businesses, but I hope it works better for them than 

it worked for us. 

Chair LANDRIEU. I am going to be pursuing this, and I just want 

to put everybody on notice that I am going to try to find—because 

HUD actually agrees with me, and so does either the GAO or the 

Inspector General, where HUD cites receipt of partial benefit from 

a major disaster or emergency shall not preclude provision of additional Federal assistance for any part of a loss or need for which 

benefits have not been provided. This is in the Stafford Act already. 

So we have had conversations about it, but I just want to go on the 

record that I think it is something, with the Chairman of the Subcommittee here on Disaster Response and Preparedness, I thought 

I would bring it up before Senator Pryor, and the two of us are 

going to work on some sort of appropriate legislative fix. 

Senator Snowe. 

Senator SNOWE. Thank you. Thank you, Madam Chair. 

Just on that last issue on the improper payments, is it difficult 

to define what an improper payment is? 

Ms. GUSTAFSON. Well, it requires some analysis. Especially in 

the loan area, it is not as easy as just saying did we double pay 

for a widget or was there some wrongdoing there. So it definitely 

takes some analysis. 

We were able to do it, and as you know, it can be difficult, but 

we were able to do it. 

Senator SNOWE. I guess on a lot of these issues, Administrator 

Mills and Ms. Gustafson, what is in place, what is actually operational and implemented, because I think that that is still not clear 

on some of the enforcement mechanisms. 

Now, Administrator Mills, you mentioned certification, enforcement, and monitoring procedures that you have put in place to respond to all these issues. Have they been actually implemented? 

Are they in play now? 

Ms. MILLS. Yes, they have. 

Senator SNOWE. They have been. Are you satisfied with those 

procedures? 

Ms. GUSTAFSON. We are pleased and on paper are satisfied with 

the enforcement procedures against loan agents, against third parties who people obtain Government contracts. That is in place. To 

the best of my knowledge, it has not been implemented yet, but to 

give credit, that was years in coming. For years the agency just did 

not even bother to have enforcement procedures in place, and then 

we would say, ‘‘You need to do something against the loan agent.’’ 

And they would say, ‘‘We do not have any enforcement procedures 

in place so we cannot.’’ 
37 

So they are there, and we were very, very pleased by that. They 

are brand spanking new, but they are there. 

Now, what is, I believe, not quite fully in place is the overhaul 

of the suspension and debarment process, which is to say they have 

a very strong plan, I think, to get serious about suspension and debarment and to as an agency become more of an enforcement agency than they were before. It is in its nascent stages, which is to say 

they are doing training, but I do think the agency is going to need 

to send a strong message that they are serious, hold people accountable for not just knowing this stuff but making sure that referrals are made and things like that. That has not happened yet, 

and it needs to happen soon. 

Senator SNOWE. So, Administrator Mills, on the question of the 

task force, is that the purpose? 

Ms. MILLS. Yes, the task force on—— 

Senator SNOWE. Right. Is that in play now? Is that implemented? 

Ms. MILLS. The task force has been in play for a while. It completed its work and recommendations. We implemented these recommendations. We are, as Peg said, working very closely in the beginning stages. We have begun to demonstrate on the last round 

of cases that were brought up, every single one has been pursued 

through these procedures, and we plan to continue to be aggressive. 

Senator SNOWE. I think we have to be. I think we have to send 

a very strong message, and there has to be a clear and delineated 

process by which this all occurs, both in the implementation of 

these procedures to detect and to avert any potential fraud, but 

also on the other end is making sure that the SBA personnel are 

trained, informed, you know, aggressive in the implementation, 

and that there is a consistent standard. 

Now, in changing this culture—because, you are right, Ms. Gustafson, it has built up over the years. In the article that the Chair 

was referring to that appeared in the Post back in March, it said, 

‘‘D.C. insiders can reap fortunes from Federal programs for small 

businesses’’ and that Government officials were not monitoring contracts for compliance with rules. There is no question that the report exposed some glaring deficiencies in contract oversight with officials, but what was disturbing in this article—and that is why I 

want you to answer it, Administrator Mills—was when the Pentagon said that the responsibility for oversight fell to SBA, yet an 

SBA spokesperson was quoted as saying that the SBA, and I quote, 

‘‘long ago transferred that authority to the Pentagon and other 

agencies.’’ 

Now, I know that is not your attitude, Administrator Mills, but 

I think that it is very clear, the Federal Acquisition Regulations require that the SBA be the oversight agency. But can you tell me 

what is happening to bolster that oversight and that everybody in 

SBA understands that it is uniquely and singularly their responsibility? 

Ms. MILLS. Yes, the oversight for the Government contract program, which, as you know, is $100 billion and multiple—every 

agency—is SBA’s responsibility. I believe the comment was referring to the agencies that actually do the contracts, and we jointly— 

we are responsible, but we jointly need to monitor. There are 
38 

30,000 contracting agents out there making these decisions, and 

there are 8 million individual contracts that get done every year. 

So we have in the Small Business Jobs Act and on a continual 

basis increased and beefed up the way we train our partners at the 

Federal agencies to detect issues, whether it is in certification 

issues, whether it is issues in a small business that does not meet 

the qualifications or anything improper. And then as we have 

talked about, we go after the bad actors. 

So this is an ongoing partnership. We appreciate the fact that 

the Small Business Jobs Act gave us some additional powers to do 

this more effectively. We are continuing to implement the improvements in this, and there is no question about the commitment at 

the SBA to this project. 

Senator SNOWE. My time is up. Thank you. 

Chair LANDRIEU. Thank you. 

Senator Paul. 

Senator PAUL. Thank you. 

The NFIB did a survey recently of small businesses and found 

that the number one concern was not really access to capital. It 

was taxes and regulations. I am a big fan of small business. I think 

we should do everything possible to help small business. I was in 

a small business before I came to the Senate. 

The President wants to increase taxes on those who make more 

than $250,000. A lot of those are small businesses. Do you think 

that is a good idea for small business, Ms. Mills? 

Ms. MILLS. Actually only 2 percent of those who make over $250,000 are small businesses or report over $250,000 of business 

income, and some of that is from unrelated business activities. 

But to your point about this survey and removing barriers to 

small business, I think that is very much a shared goal, particularly on the removal of excess regulation. We are working quite aggressively on that as well. 

Senator PAUL. With regard to why we have small business loans, 

you indicated to me yesterday evening that it is a market failure. 

I guess the problem I have is that when you say the market fails, 

it to me seems somewhat arbitrary because if the market is failing 

to give loans, maybe the market just decided these people were not 

good credit risks or maybe they went to the bank and the bank 

said, ‘‘You know what? I like so-and-so-’s project better.’’ And that 

is sort of how we would do it if we had a voluntary society. 

This sort of arrangement, those people who are told no by the 

bank and then they are told yes by Government because Government decides, ‘‘We like your project,’’ I guess that to me just seems 

somewhat dictatorial and contradictory to the freedom of the marketplace. How do you define ‘‘market failure’’? How do you say that 

the market is failing to give these people loans and they should get 

loans instead of the rest of us deciding in the marketplace? 

Ms. MILLS. Well, I enjoyed our conversation, and, as you know, 

many of these are economic terms. But specifically to the SBA program, let me give you an example. When the market is functioning 

and you can get a loan from a bank, there is no reason for you to 

get an SBA guarantee or taxpayer involvement because you can get 

a loan. But if you are a good small business and you cannot get 

access and opportunity, we are able to provide these guarantees. In 
39 

the market, you go to a bank, the bank makes that decision, and 

so it is not sort of a top-down from the Government; it is a bottomup from the small business. 

The example is when the credit crunch hit in October 2008, these 

banks shut their doors to small business. You could not get a loan, 

even if you had previously been creditworthy. And we were able to 

put $42 billion into the hands of the small businesses at a very low 

cost and saved—I travel all around the country, and I was in rural 

Arkadelphia at a saw mill, and a husband-and-wife team looked at 

me and they said, ‘‘You saved my business.’’ This was a part where 

their local community bank, whom they had had a long relationship with, just could not make that loan. It is a good loan. We have 

very low default rates on our loans, as you know. And we are able 

to step in on these, let us call them ‘‘market gaps,’’ to provide access and opportunity to viable, important small businesses who create jobs. 

Senator PAUL. I guess my point in response would just be that 

you can see that and you can see how you helped that person, and 

it seems really good and we feel good about ourselves because we 

helped this person whose business would have gone out—you know, 

they would have gone bankrupt. What we do not see is the 

$100,000 you gave to them did not go to someone else. The unseen 

is what we do not see. We see the seen, but we do not see the unseen. And then when the market directs those, they direct them on 

everybody getting together and interacting in a voluntary way; 

whereas, the decision by Government is done involuntarily and 

done by a few select set of people. And I think there is danger for 

those select set of people making the decisions based on either political reasons or other reasons rather than the validity of whether 

or not it is a good enterprise. 

One of the things that when I hear from people about access to 

capital they are concerned about is we have just passed thousands 

of new regulations through Dodd-Frank. Most people think this is 

making it harder to get capital. Do you think Dodd-Frank is making it easier or harder for small businesses to get capital? 

Ms. MILLS. At the moment it is not clear that there is an appreciable effect on small business access to capital from those regulations. We know that small businesses have been concerned by the 

regulators’ making more oversight on banking institutions that had 

had issues. We are working very hard with third-party regulators 

to make sure that they give clear direction to their banks so that 

small businesses who have previously been creditworthy are considered appropriately. 

Senator PAUL. And I guess my final—do I have another minute? 

Chair LANDRIEU. Go ahead. 

Senator PAUL. My final point would just be that when you went 

in and you intervened in the crisis after the housing market collapsed, that is sort of like putting Band-Aids on things, and you 

found problems. But it is really not addressing how we got to those 

problems. Why did we have all these calamities? Why did we have 

housing prices that were going up 20 percent a year? Why did we 

have an exponential rise in housing prices? And, really, that had 

to do with bigger problems. It had to do with the Federal Reserve 

setting the interest rate below the market rate of interest. It had 
40 

to do with Congress telling people they should have home loans 

when they had no downpayment. People would purchase a 

$160,000 home with no downpayment, and the next year it was 

worth $180,000, and they said, ‘‘Put a swimming pool in. You have 

got $20,000 in equity.’’ 

So we have to diagnose the problem correctly before we just keep 

giving people loans, and I think there was a rash of failures, and 

stepping in seemed to be noble. But I think we have to remember 

the seen and the unseen, and the unseen is the money that has to 

come from somewhere. We have an enormous debt. Our debt equals 

100 percent of our economy. People have estimated we are losing 

1 million jobs a year because of the burden of our debt. 

So these things cost money. I just hope we will all pay attention 

to that. Thank you. 

Chair LANDRIEU. Thank you, Senator. 

The Senator from Arkansas. 

Senator PRYOR. Thank you, Madam Chairman. 

Let me start with you, if I might, Ms. Mills. On May 10 you 

wrote me a letter, and you said that you are committed to continuing the review of SBA programs to eliminate overlap and duplication. You also stated that OMB is working with all Federal agencies to better organize Federal programs and functions. 

So can you give us an update today on how this review process 

is being performed and how the members of your staff are involved 

in the review and whether OMB and SBA are finding program efficiencies? 

Ms. MILLS. Well, as you know, we do have a continuous process, 

and it was driven around the 2012 budget for eliminating duplicative programs and reducing costs and focusing current programs. 

So we did offer up a series of programs for elimination, and they 

included the Drug-Free Workplace, they included selected special 

purpose counseling grants, and they included the PRIME program. 

It was not because these programs were bad, but it was because 

we found other ways to deliver some of those services more effectively, notably in PRIME through our micro-loan intermediaries. 

We continue to look at how to do the things that we do more effectively and deliver that money. The first criteria is: Does the 

money go directly into something that gets in the hands of small 

businesses and improves their situation, allows them to grow and 

create jobs? And the second criteria that we use is: Or is it creating 

oversight and elimination of fraud, waste, and abuse? And those 

are the two criteria. If it does not match that, then that is something that we cannot afford to do. 

Senator PRYOR. And do you feel like that your work is done 

there? Or do you feel like you are still looking for ways to find more 

efficiencies? 

Ms. MILLS. Well, it is a continuous improvement process. 

Senator PRYOR. Let me ask about sort of a different area of that 

continuous improvement that I hope you are working on, and that 

would be—when I look at your SBA loan data, a few minutes ago 

you said that you have a very low default rate on SBA loans, which 

is great. But when I look at your data for fiscal year 2010, you 

wrote off more than $2.6 billion in bad loans. Am I reading that 

right? 
41 

Ms. MILLS. No, that actually is not that year’s loans. 

Senator PRYOR. Okay. So tell me how that works. 

Ms. MILLS. When I referred to our low default rates, we have a 

subsidy rate that we calculate that is based on our previous loan 

rates. Generally that runs around 5 percent. In recent times, because of the economic recession, those loan rates for us and for all 

financial institutions have climbed. They have more than doubled 

in many situations. The reason for that is that we take all the collateral, and the collateral that were pledged in the 2005, 2006, 

2007 cohorts was on inflated real estate prices. So now, as we go 

to collect on that collateral, the value is not there. So there are 

many more losses on those loans than one would have projected 

when the collateral was high. 

I want to make sure that you know that this is not the current 

loans or the loans that were given in 2009 and 2010. This is really 

a cohort from a day where things were quite—bank lending was 

quite aggressive and real estate was quite high. That is a large 

part of the dollars that you have described. I believe the other piece 

of the dollars you have described is the tail end of the Participating 

Securities program which was canceled and eliminated in 2004. 

Senator PRYOR. Okay. And even with all that said—and I appreciate that clarification—it looks to me, if I understand your numbers correctly, that you have not been able to recoup on those bad 

loans. In other words, it just seems like you are writing those off. 

I think I see a figure here of $107 million that you have been able 

to recoup. Am I understanding that right? 

Ms. MILLS. I am not familiar with the $107 million, but we are 

happy to look at it. We very aggressively go after recouping, but 

as I have just said, right now on the real estate portions the value 

is not there. 

Senator PRYOR. Right. But will you ever recoup any of that loss, 

or do you just write off the entire loan amount? 

Ms. MILLS. We collect. The first thing we do is we try to see if 

the borrower can get back into payment, and if not and we go after 

the loan, we recoup everything we can. 

Senator PRYOR. Okay. Well, we ought to follow up on that more, 

but, Madam Chairman, I am out of time so thank you. 

Chair LANDRIEU. Thank you, and I just want to follow up on 

that. I was looking at those documents myself in preparation for 

this meeting. My question is: Do you have all the authority you 

need under the current law to try to recoup as much debt that is 

owed to us as possible? And if not, are you prepared to ask for additional authority? 

Ms. MILLS. That is a very good question, and I would like to 

come back to you on that after a consultation. 

Chair LANDRIEU. Okay. I would really like to pursue that, because I understand the market collapsed and these loans were 

made prior to this Administration coming on. But, again, the taxpayers are still on the hook for approximately $2 billion in loans 

that were made prior to this administration that have gone sour. 

And we need to try to figure out a way to recoup that money if we 

can, even if it takes a little extraordinary financial management or 

oversight or some sort of workout schedule that may not be available to you. So take a look at that and get back to me. 
42 

That is my final question, Senator Snowe, and then I would like 

to go to the second panel, if possible. 

Senator SNOWE. Yes, thank you. 

Administrator Mills, I just think it is important to understand 

what exactly the agency is doing with respect to the process on improper payments. Now, I understand Ms. Gustafson is saying that 

you may have the process in place, but it is not moving quickly. 

And I think we need to have a response to this Committee, in writing or whatever, to understand fully how this is going to be administered and to respond quickly in dealing with those improper payments, because I do think that that has to be acted upon. And 

there should not be any ambiguity with respect to that. 

Ms. MILLS. Thank you. We are happy to respond. One thing I 

will note is that we are starting—what we decided to do together 

to move on exactly the issue you describe is that the agency suggested that we conduct voluntarily another audit, and then after 

we do our audit, that the IG will audit our audit and see if we can 

use that process to come to agreement on what is proper, what is 

improper, where we draw the lines. And so we have actively begun 

that process to get to the bottom of the questions that you raise. 

Senator SNOWE. Well, I know that in a 1-year period the SBA made approximately $234 million in improper payments in the 7(a) 

loan and the audit recommended a corrective action plan. So do you 

agree that this is the plan, Ms. Gustafson? 

Ms. GUSTAFSON. They are still responding and working, as you 

noted, and I would also note I agree with Administrator Mills. The 

concurrent or almost concurrent review of improper payments will 

be helpful. But, again, we are still waiting for answers on fiscal 

year 2008, and I am concerned that if we have not reached agreement on fiscal year 2008, that may very well impair our ability to 

reach agreement on 2010. 

Our fiscal year 2008 audit came out in July of 2009, and so they 

say it has been over a year. I would say it is almost 2 years that 

we are waiting literally on their decisions on the same loans we 

looked at. 

Senator SNOWE. So what is the problem, Administrator Mills? 

What is the problem here? 

Ms. MILLS. I am happy to look into it, but my impression is that 

we are working constructively. We just do not agree. 

Senator SNOWE. Well, I just hope that we can find some agreement and move forward because, obviously, this is languishing in 

terms of improper payments, collection, corrective action, enforcement action, and so on. We have got to get a standardized process 

in place, that this happens, you know, without delay. 

Furthermore, on the Inspector General’s surveillance review 

process, again, this is another issue. You made recommendations, 

Ms. Gustafson, to SBA on deficiencies that were identified by the 

surveillance review teams. 

Ms. GUSTAFSON. Right. 

Senator SNOWE. And according to the SBA, there was a lack of 

staff resources and competing priorities preventing the SBA from 

doing so. So what is the issue here, Administrator Mills? Do you 

have enough people to do what you need to do to provide the oversight of these contracting activities? 
43 

Ms. MILLS. Well, I—— 

Senator SNOWE. I mean, I gather that the SBA’s contracting office conducted reviews of nearly 30 contracting activities which represented less than 1 percent of all small business contracting activities last year. So that is minuscule in terms of the overall, let 

alone, you know, the dimension of the dollar amount. So what is 

the issue here? 

Ms. MILLS. Well, I think this is a very interesting new—this is 

a new finding that the IG has come to us. The IG is referring to 

surveillance reviews that we do on the rest of our sister agencies. 

There is no statutory obligation to do any of these reviews. In fact, 

they were proactively begun by us as a way to make sure that our 

sister agencies who were doing these procurement activities were 

on the ball, they were more educated, that they were—it was part 

of an oversight. 

Now, we did this within the resources that we had at the moment so we began, and we think it is a positive step. We have 

asked for 24 additional personnel across fraud, waste, and abuse to 

augment these kinds of activities. 

Remember, there are 30,000 contracting offices, and there are 8 

million of these individual activities. So we have, I think, put a 

good foot forward to begin this, and we have to understand, you 

know—we certainly would like to increase it. We think it is a positive thing to do. We are not staffed and it is not part of the overall 

statutory obligation that we had been staffed to go after. But we 

do think it is important, and we have begun. 

Senator SNOWE. Well, I think the question is on the statutory obligation. As I understand it, the SBA would be the prime agency 

for SBA contracting. Is that correct? 

Ms. MILLS. Yes. 

Senator SNOWE. I mean, even if you collaborate with other agencies, but ultimately it is in your purview. Would you agree? 

Ms. MILLS. Yes, we agree. 

Ms. GUSTAFSON. Let me just briefly, Senator Snowe, kind of talk 

to your point. What we are talking about here goes directly to what 

you had mentioned on the Washington Post article, which I think 

is a huge problem in Government contracting, which is procuring 

agencies think SBA is doing one thing, and SBA thinks that it is 

up to the procuring agencies to do it. And SBA has become exponentially smaller since the time when they used to do it. But I do 

not think it is getting done. I do not think it is getting done well. 

And so there needs to be a very robust conversation not just with 

SBA at the table, but I think we need as a Government to figure 

out how we are going to make sure that these contracts are being 

monitored and go into the—— 

Senator SNOWE. That is a good point, and that is the issue here, 

and that is what is obvious. We have to do something to either 

clarify that to make sure that this is a primary obligation obviously 

with the agency, the contracting agency, but the procurement agencies have to commit to it as well. 

Ms. GUSTAFSON. Absolutely. 

Senator SNOWE. So we will have to figure that out. I would welcome some ideas on that question if we have to change it through 

legislation. 
44 

Ms. GUSTAFSON. We would love to work with you. Procuring 

agencies want to get their contracts done, and they need their stuff, 

so—— 

Senator SNOWE. Right. But they have no responsibility for the ultimate contract. Thank you. 

Ms. GUSTAFSON. Thank you. 

Ms. MILLS. Thank you. 

Chair LANDRIEU. Thank you so much. I appreciate it. Let us 

move to the second panel. Thank you for your testimony. 

Our second panel today will be William Shear, Director of Financial Markets and Community Investment at the U.S. Government 

Accountability Office. Bill has directed substantial bodies of work 

addressing the Small Business Administration. 

Kevin Baron has been the Director of Government Affairs for the 

American Small Business League since 2007. In his capacity he coordinated the organization’s government affairs activities in Washington, D.C. 

Tad DeHaven is a Budget Analyst on the federal and state budget issues for the Cato Institute. Previously he was Deputy Director 

of the Indiana Office of Management and Budget. 

Fran Pastore is the Founder and President and CEO of Women’s 

Business Development Council, for more than 14 years, a leader of 

entrepreneurial training for women in Connecticut. 

And finally we have Mr. Greg Clarkson, who currently serves as 

Executive Vice President and Manager for BBVA Compass SBA Division, formerly Compass Bank. Clarkson is active in industry 

trade associations, and the National Association of Government 

Guaranteed Lenders. 

I have asked you all to limit your opening statements to 3 minutes, and then we will do a round of questioning. We will start 

with you, Mr. Shear. If you could pull the microphone closer to you, 

please. Thank you. 

Mr. SHEAR. Can you hear me now? 

Chair LANDRIEU. Yes. 

Mr. SHEAR. Okay. Great. 

STATEMENT OF WILLIAM B. SHEAR, DIRECTOR OF FINANCIAL 

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

Mr. SHEAR. Chair Landrieu, Ranking Member Snowe, and members of the Committee, it is a pleasure to be here today. My written 

statement discusses our work on potential duplication and fragmentation in economic development programs as well as our work 

on internal controls in contracting and business development programs. This oral statement is devoted to our work on potential duplication. In Q&A I would be glad to answer questions on either 

body of work as well as other topics in this hearing where we have 

conducted evaluations, such as SBA loan guarantee programs. 

Our recent work on economic development programs includes the 

information on 80 programs at four agencies; SBA, Agriculture, 

Commerce, and HUD. SBA administers 19 of the 80 programs. Absent a common definition for economic development, we had previously developed a list of nine activities most often associated with 

economic development. For example, the agencies administer 54 
45 

programs that fund entrepreneurial efforts, which includes business development. All 19 SBA programs can fund such efforts. 

We found that the design of each of these 80 programs appears 

to overlap with that of at least one other in terms of the economic 

activities they can fund. Here I want to stress that our focus to 

date has been on the design of the programs. In other words, we 

have evaluated the permitted uses of funds and have not as of yet 

drilled down to see how each program’s funds are actually distributed among various uses. 

In addition to addressing overlap, we focused on: one, collaborative efforts agencies should consider using to maximize performance; and, two, actions the agencies take to measure outcomes. 

Here we have found that Commerce, HUD, SBA, and USDA appear 

to have taken actions to implement some collaborative practices 

but have offered little evidence so far that they have taken steps 

to develop compatible policies or procedures with other Federal 

agencies or to search for opportunities to leverage physical and administrative resources with their Federal partners. And we have 

found that the agencies appear to collect only limited information 

on program outcomes—information that is necessary to determine 

whether the potential for overlap and fragmentation is resulting in 

ineffective or inefficient programs. 

Building on our past work, we are in the planning phase of a 

new, more in-depth review that will focus on a subset of these 80 

programs. Our current thinking is that we may have a focus on the 

54 programs that fund entrepreneurial efforts, and this would include all 19 SBA economic development programs. 

We plan to evaluate how funds are used, identify additional opportunities for collaboration, determine and apply criteria for program consolidation, and assess how program performance is measured. 

Chair Landrieu, Ranking Member Snowe, members of the Committee, this concludes my prepared statement. I would be happy to 

answer any questions. 

[The prepared statement of Mr. Shear follows:] 
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Chair LANDRIEU. Thank you very much. 

Mr. Baron. 

STATEMENT OF KEVIN BARON, DIRECTOR OF GOVERNMENT 

AFFAIRS, AMERICAN SMALL BUSINESS LEAGUE 

Mr. BARON. Thank you, Madam Chair, Ranking Member Snowe, 

Senator Paul. My name is Kevin Baron. I am the Director of Government Affairs for the American Small Business League. We are 

an independent small business advocacy organization that focuses 

on creating the greatest opportunities for small businesses to work 

with the Federal Government and on ending the diversion of billions of dollars a month in Federal small business contracts to 

large corporations. The American Small Business League reaches 

a constituency of approximately 100,000 small businesses nationwide, the majority of whom are small Federal contractors or small 

businesses that are wanting to work with the Federal government. 

Considering the current economic climate, small businesses are 

a vital asset to the U.S. economy, so we must not only ensure that 

they are being provided all possible help, but the greatest opportunity to effectively work within the Federal marketplace. According to the latest data from the U.S. Census Bureau, small businesses are currently creating over 90 percent of all net new jobs. 

Furthermore, small businesses are responsible for over half of the 

GDP and more than 50 percent of the non-farm private sector 

workforce. And, historically, small businesses are our Nation’s driver for job creation and the creators of the economic growth necessary to pull our country out of times of recession. This is key to 

understanding the important role that small business contracting 

programs play to the overall health of our Nation’s economy. 

In 2005, the Small Business Administration Office of Inspector 

General released Report 5–15 that stated, ‘‘One of the most important challenges facing the Small Business Administration and the 

entire Federal Government today is that large businesses are receiving small business procurement awards and agencies are receiving credit for these awards.’’ For the past 6 consecutive years, 

the SBA IG continues to list the same issue as one of the agency’s 

top management challenges. 

In addition to Report 5–15, since 2003 there has been a whole 

series of Federal investigations from the GAO and various other Inspectors General showing areas of fraud and abuse within these 

small business contracting programs. This fraud and abuse has 

materialized in the diversion of billions of dollars in small business 

contracts to large companies, multinational corporations, Fortune 

500 firms, and businesses otherwise not qualified as small. We 

have conducted extensive analysis on our own of this data, a lot of 

which was submitted with my written testimony, and I would be 

more than happy to discuss that in greater detail if necessary. 

Small business contracting programs are credited with helping 

millions of small businesses nationwide, and in these times when 

we are focusing on the area of fiscal responsibility, small business 

contracting programs are a major answer to this. 

Federal small business contracting programs are a deficit-neutral 

way of creating jobs and stimulating economic growth. The programs are already in place; the infrastructure already exists; the 
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money that the agencies spend is already being budgeted. The Government does not produce computers. It does not construct buildings. So there will always be contracting out for goods and services. 

Thus, these programs are a vital way to drive demand back into 

the hands of our small firms. 

Senator Landrieu, in February of last year you specifically stated, ‘‘Government contracts are perhaps one of the easiest and most 

inexpensive ways the Government can help immediately increase 

sales for America’s entrepreneurs, giving them the tools they need 

to keep our economy strong and create jobs. By increasing contracts 

to small businesses by just 1 percent, we can create more than 

100,000 new jobs—and today, we need those jobs more than ever.’’ 

I could not agree with you more on that statement. Based on that 

estimate, fixing some of these programs could result in the creation 

of over 1 million jobs. 

I know I am short on time. Let me wrap up really quick, please. 

Our understanding is that some agency employees and SBA officials believe that the Government’s 23-percent procurement goal is 

not achievable. I am here to state that that belief could not be further from the truth. And, in fact, the Government’s small business 

goal can be achieved or surpassed by simply implementing a series 

of targeted reforms to small business programs. I will just outline 

three real quick steps. 

One is to pass a Senate companion version of the Fairness and 

Transparency in Contracting Act. This was a bill introduced in the 

previous Congress by Congressman Hank Johnson of Georgia. He 

plans on reintroducing this bill in the House again this year. It will 

shut down a major loophole that has allowed large firms to get 

small business contracts. 

Secondly, to establish a small business set-aside program for 

task orders placed against GSA schedules or other Government 

Wide Acquisition Contracts, or GWACs, or large Government contract vehicles. Years ago, Congress passed legislation mandating 

that any contract with a value less than $100,000 be specifically 

set-aside for small businesses. Shortly after passage, the FAR 

Council passed a rule exempting GSA schedule contracts from that, 

and let me say that contracting data shows that over one-fifth of 

all Federal contract actions are under $100,000; however, a majority of those contracts go to large firms. So simply removing that exemption and putting a set-aside rule in place for other GWACs 

could significantly increase the pool of opportunities for small businesses to work with the Government and would help in achieving 

or superseding that 23-percent goal. 

Lastly, we ask for and applaud the introduction of S. 633 and 

push for the passage of that legislation. It creates some teeth within the law and provides tools for various agency officials such as 

the SBA IG as well as outside advocates to strictly enforce fraud 

in contracting programs. Contractors need to know that there is 

punishment for committing fraud and that that will be followed up 

on. 

Let me finish please by stating again—— 

Chair LANDRIEU. Mr. Baron, you are already 2 minutes over. I 

am sorry. 

Mr. BARON. Okay. 
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Chair LANDRIEU. It was wonderful testimony, but I have to be 

fair to everyone, and thank you so much. 

Mr. BARON. I understand. Thank you. 

[The prepared statement of Mr. Baron follows:] 
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Chair LANDRIEU. I really appreciate it. 

Mr. DeHaven. 

STATEMENT OF TAD DEHAVEN, BUDGET ANALYST, CATO 

INSTITUTE 

Mr. DEHAVEN. Chair Landrieu, members of the committee, thank 

you for inviting me here to testify today regarding the Small Business Administration. 

Chair LANDRIEU. Is your microphone on? Is your button pressed? 

Mr. DEHAVEN. There we go. Thank you. 

Chair LANDRIEU. There we go. 

Mr. DEHAVEN. Most Americans correctly recognize that Washington does a poor job of managing their money. The Cato Institute 

has documented countless examples of waste, fraud, and abuse at 

its website, www.DownsizingGovernment.org. 

Policymakers on both sides of the aisle recognize that examples 

of waste, fraud, and abuse do not sit well with the American people 

and are, therefore, constantly promising that they will work to 

eliminate Government waste. 

What few in Washington want to acknowledge is that waste, 

fraud, and abuse always comes with Government programs—the 

same way a Happy Meal always comes with a toy and a drink. 

For decades, there have been efforts to end such abuses, but Federal programs are extremely complex and they deliver benefits to 

thousands or millions of recipients. As a result, Government programs are always chasing their tail. In the private sector, businesses have a financial incentive to stop abuses before they happen. No such incentive exists with Government programs. 

The Small Business Administration is no stranger to waste, 

fraud, and abuse. By the mid-1970s, the agency had earned the 

nickname ‘‘Small Scandal Administration.’’ 

Now, we have already discussed today many examples of waste, 

fraud, and abuse, duplication, and inefficiency, so we will move 

along, therefore. And as I discussed, however, Government programs and waste go hand in hand. Generally speaking, the more 

the Government spends, the more taxpayer dollars will be wasted. 

Therefore, the best way to rein in waste and inefficiencies is to rein 

in the size and scope of Government. 

Economic development subsidies are not a proper role of the Federal Government. Indeed, what policymakers innocuously refer to 

as ‘‘economic development’’ is just a form of central planning. Central planning can end badly for the general public, as demonstrated 

by the recent housing collapse and economic downturn, which is a 

direct result of distortions in the housing market fostered by Government policies. 

In addition to the taxpayer costs, there are other problems with 

SBA-style economic development or what is called ‘‘corporate welfare. 

First, corporate welfare creates an uneven playing field. By aiding some businesses, corporate welfare puts other businesses at a 

disadvantage, which distorts markets. For example, small businesses that do not receive a loan backed by the SBA are disadvantaged because they must compete against a business that did receive Government backing. 
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Second, corporate welfare programs duplicate activities that are 

routinely, provided in private markets, such as lending. If such 

commercial-oriented activities are useful, then private markets 

should be able to perform them without Government help. 

Third, corporate welfare generates an unhealthy relationship between businesses and Government. Corporate welfare creates special interests that work to protect their Government-granted privileges. Privileged interests have a strong incentive to build organized groups to lobby Congress to expand their benefits. These 

groups set up camp near Capitol Hill to advocate their issues, and 

many policymakers become convinced of the merits of special interest causes after hearing about them year after year. 

At the same time, average citizens do not have a strong incentive 

to battle against particular subsidies because each program costs 

just a small part of their total tax bill. 

In conclusion, many of the problems with the SBA that have 

been discussed today have been discussed for decades. There is 

only one way to eliminate those problems, and that is to abolish 

the Small Business Administration. The United States grew to become the economic envy of the world with a small central Government that largely left business development to the private sector. 

The dramatic ascent of the American economy did not come about 

as a result of small business subsidies and central planning from 

Washington. We should dispense with Government favoritism to 

small businesses and large businesses, and allow America’s entrepreneurs to compete on a level playing field serving their customers. 

Thank you very much. 

[The prepared statement of Mr. DeHaven follows:] 
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Chair LANDRIEU. Thank you very much. 

Ms. Pastore. 

STATEMENT OF FRAN PASTORE, CHIEF EXECUTIVE OFFICER, 

WOMEN’S BUSINESS DEVELOPMENT COUNCIL, STAMFORD, CT 

Ms. PASTORE. Thank you, Madam Chair Landrieu, Ranking 

Member Snowe, and Committee members, for taking the time to 

bring much-needed attention to this very crucial issue facing entrepreneurs. I am honored to speak before you today regarding the 

Small Business Administration. 

My name is Fran Pastore. I am the Founder, President, and CEO 

of the Women’s Business Development Council. I have been actively engaged in the Women’s Business Center program for more 

than 17 years, and I have a long history of working with SBA and 

its partners. 

I come before you today to provide my testimony on a subject 

that is obviously not only near and dear to me personally, but also 

to the more than 160,000 clients that are served by the Women’s 

Business Centers funded by SBA. 

My goal is to illustrate that the Women’s Business Center program, which provides a wide variety of services, including training, 

counseling, and mentoring, is vital to women entrepreneurs of all 

socioeconomic backgrounds—especially minority and low-income 

women to whom entrepreneurship provides a logical and reachable 

goal to economic self-reliance. And it is not duplicative of other 

SBA programs; rather, the Women’s Business Center (WBC) program strives to work in concert with its partners. 

According to the SBA’s Office of Entrepreneurial Development 

2010 Impact Report, WBC clients who received 3 or more hours of 

counseling reported a 47-percent increase in sales. Businesses that 

receive assistance from Women’s Business Center programs have 

significantly higher survival rates. 

Women’s Business Center programs offer access to all of SBA’s 

financial programs, which have had a major impact on womenowned microbusinesses. During fiscal year 2009, the SBA backed 

nearly 10,000 loans worth about $2 billion to women business owners, and women entrepreneurs received $26.8 million in investment 

capital through the SBA’s small business investment companies. 

For a Federal investment of $36.5 million between 2001 and 

2003, a total of $500 million in gross business receipts were generated—a 14:1 ratio of business revenues to Federal dollars invested. 

The WBCs establish long-term relationships with clients and 

serve them from inception through the life cycle of their businesses; 

whereas, SBDCs and SCORE chapters are more likely to provide 

one-time, transactional support. 

Women’s Business Centers provide a variety of services, including counseling, training, peer groups, and mentoring support; 

whereas, Small Business Development Centers and SCORE chapters are more likely to provide one solution to their clients. 

Given that the Women’s Business Center programs are locally 

designed and embedded within local economic development groups, 

Women’s Business Center support is more customized and tailored 
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to the needs of particular communities; whereas, SBDCs and 

SCOREs are more likely to look similar regardless of location. 

A study conducted by the National Women’s Business Council 

found that there was no difference in program outcomes of Women’s Business Centers based on their proximity to Small Business 

Development Centers or SCORE chapters. The clients they serve 

and support they provided are different, and the number of firms 

launched or businesses created are the same. 

I draw your attention to the 2007 GAO report, which specifically 

outlines issues within SBA that impede the effectiveness of its relationship with Women’s Business Centers. 

I recommend that SBA continue to implement strategies that 

eliminate the silos that currently exist between those three organizations: the Women’s Business Center program, the SCORE chapters, and the Small Business Development Centers. It is worth a 

closer look at the SBA organizational infrastructure and how institutional processes can be streamlined for each program rather than 

simply eliminating an already underfunded program for women 

that has a proven track record. 

Let us not destroy the hopes and dreams of women entrepreneurs, many from low-income and minority backgrounds, many 

of whom are single mothers, working multiple minimum wage jobs, 

who see the dream of entrepreneurship as a game changer for their 

future and the future of their families. Owning and operating a 

microenterprise and developing good financial habits empowers 

these women to achieve their humble goals: a roof over their heads, 

a secure future for their children, and a way up. Thus, it has a 

positive impact on their children and on their communities because 

they become active contributors to the American economy as taxpayers and by creating jobs for themselves and others. 

If we eliminate the SBA’s valuable programs specifically targeted 

for women, what are we saying about the value that we place on 

women in our country and our belief in their ability to play a vital 

role in turning this economy around? 

Cutting the Women’s Business Center program will compromise 

SBA’s legacy and its ability to help lead the Nation out of this recession and will call into question the fundamental reason for their 

existence. 

Chair Landrieu, this concludes my prepared statement. Thank 

you for your commitment to women-owned businesses and for giving me the opportunity to speak before you today. 

[The prepared statement of Ms. Pastore follows:] 
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Chair LANDRIEU. Thank you very much, Ms. Pastore. 

Mr. Clarkson. 

STATEMENT OF GREG CLARKSON, EXECUTIVE VICE PRESIDENT–SBA LENDING DIVISION OF BBVA COMPASS BANK 

AND CHAIRMAN OF NAGGL BOARD OF DIRECTORS 

Mr. CLARKSON. Chair Landrieu, Ranking Member Snowe, and 

members of the Committee, thank you for holding this hearing and 

inviting me to testify today on the inefficiencies in the SBA process. 

Thank you also for your ongoing support of the SBA and the recognition that this lending program is vital to economic growth and 

job creation during good times and bad. 

The SBA loan programs keep credit flowing and fill a critical gap 

for small businesses, particularly startup and early stage companies—those that need access to longer-term loans. Since the banking industry is highly regulated as opposed to a free-market environment, arbitrary parameters have limited qualified small business owners’ access to credit on reasonable terms. The lender is the 

one that says yes to the loan. The SBA then in turn says yes to 

the partial guarantee. 

The SBA, through its private sector lending partners, now accounts for approximately 70 percent of the outstanding balance of 

all long-term small business loans made in America, making the 

agency the single largest provider of long-term capital to U.S. small 

businesses. That is not a duplication of lending efforts, but it is a 

vital component to overall capital access. 

The importance of SBA lending to small businesses is clearly evidenced by the demand for the programs. In the last 2 years the 

SBA loan programs have delivered $42 billion to small business 

owners. The 7(a) guarantee program has worked so well and the 

need is so great that the SBA risks exceeding the authorization 

level of $17.5 billion this fiscal year. Without legislative relief, this 

could result in a curtailment of vital credit to small businesses or 

possibly a shutdown of the 7(a) program availability until that authority is restored. 

The SBA must have an environment that continues to foster responsible participation by its lending partners. A key component in 

that effort is an effective lender oversight program. Lender oversight should be a means for the agency to identify variances from 

established lender benchmarks and to provide a reasonable process 

for lenders to remedy deficiencies. 

NAGGL has long advocated an oversight program that is timely, 

consistent, and constructive while it provides value to the agency, 

lenders, and taxpayers. Loan risk and losses cannot be eliminated 

from any lending program; however, they can be managed to reasonable tolerances. 

The SBA has established a lender oversight structure that combines off-site monitoring and on-site reviews. However, NAGGL believes that there are correctable weaknesses in the current program that need to be addressed. We have some recommendations. 

First, the SBA should establish and publish commercially reasonable lender performance benchmarks and periodically update them 

as economic conditions warrant. 
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Second, the SBA should use existing data that is provided by 

lenders on a monthly basis and that is derived from loan origination to develop an early-warning system that detects on a real-time 

basis risk in any lender’s portfolio. Currently they are using a 

third-party contractor that uses a predictive scoring model that has 

questionable results and is expensive to the lenders. 

Third, the lender oversight program should reach all of the lending partners—large banks, community banks, high-volume and 

low-volume. 

NAGGL has raised concerns about the timeliness and transparency of the existing lender oversight program. That includes the 

timeliness of written on-site reports, PLP renewal timeliness, and 

also accuracy of lender portal information and ratings. 

I commend Administrator Mills and Associate Administrator 

Smits for their efforts to improve the oversight program. What they 

have done, they have taken some managerial and administrative 

changes to help improve those issues. 

The public-private partnership that exists in SBA’s lending programs has been and continues to be an example of what can be 

achieved when the Federal Government and the private sector 

work together. It is vital to economic growth and job creation to 

keep SBA’s loan programs available to meet the capital needs of 

tens of thousands of creditworthy small businesses that have limited options. These loan programs merit continued bipartisan support in Congress. 

Chair Landrieu and Ranking Member Snowe, this concludes my 

oral statement. I have also submitted written testimony for the 

record. Thank you for all that has been done for America’s small 

businesses through this Committee and through your efforts. 

[The prepared statement of Mr. Clarkson follows:] 
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Chair LANDRIEU. Thank you very much, and thank you for being 

specific in your recommendations on how to improve this program, 

which I believe is very important. 

Let me start with you, Mr. Shear. You have outlined the duplication across agencies of many different economic development programs. It is my understanding that based on your report, SBA and 

USDA have entered into some sort of memorandum of understanding to better coordinate their programs. Is that your understanding? And if so, could you give us an update, if you are knowledgeable about that arrangement between Agriculture and SBA? 

Mr. SHEAR. Yes, I can. We are aware of the MOU, and we think 

that it is very broad, it is general, where many times what we are 

looking for for comprehensive collaboration are more specific 

MOUs. 

When we reach out to each agency to ask them what type of collaborative practices are actually evolving, the one agency that has 

responded to us is USDA. SBA has not provided us information 

that would suggest the type of collaboration that was conveyed in 

the first panel of this hearing, and it is disturbing to us because 

we have heard about plans to collaborate, yet we observe that 

USDA seems to be the one agency that is interested, and collaboration cannot be a unilateral action. 

What USDA is doing at this stage is it is reaching out to its own 

field offices to try to assess how much collaboration is occurring out 

in the field rather than trying to develop more collaborative practices at the agency-wide level. 

Chair LANDRIEU. Okay. We will follow up on that. 

Mr. Baron, you gave a fairly strong statement supporting the notion—and we agree—that the Federal government does have a particular role and obligation to make sure that the 26 million small 

businesses have access to Government contracting; otherwise, they 

could be muscled out or squeezed out by big businesses that have 

potentially greater access in terms of lobbyists, et cetera, et cetera. 

But there are some members, and even on this Committee, that 

would disagree with that. 

What are your best one, two, or three arguments as to why this 

contracting program—a special set-aside, if you will—for small 

business is necessary? Some people think business is business. 

Small businesses should compete against large businesses for government contracts. What would you give as your best arguments as 

to why this program should be continued and supported and improved? 

Mr. BARON. Sure. Essentially in looking at these contracting programs, we kind of view it as looking at the health of the economy 

as a whole. We see the Small Business Act that was established 

in 1953 as being one of the greatest stimulus plans for the economy 

put into place. 

There has been a lot of research done not only by our organization but by others showing that small firms more often than not 

can compete in providing products, goods, and services of a higher 

quality at a cheaper price. We look at the fact that small firms are 

not going to build tanks, boats, and a lot of the big-ticket items. 

For example, Boeing was awarded the tanker contract. However, 

small firms contribute as subcontractors to all of those items quite 
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a bit. And in looking at the fact that one out of every $5 being 

spent by the Federal government in contract actions is on contracts 

under $100,000. Those are well within a range for small firms to 

easily compete with and should be used. If we see right now that 

small firms are creating the majority of net new jobs and are the 

most vibrant part of our economy, we should be doing everything 

possible to help provide demand, drive demand for them. 

We have been hearing more and more from small businesses that 

what they are looking for right now is they need business walking 

in the door. They need demand to increase. So we see these contracting programs as a way of literally bringing that demand to 

them and having them—we see that multiplier effect. When small 

firms get Federal contracts, they hire out of the local community. 

That money gets spent back within the local community that grows 

and builds from the ground up, which is exactly what we need 

going forward to help rebuild our economy, get us stabilized, and 

move forward again. 

So I think, you know, when we are looking at this, historically 

speaking these programs have provided for thousands of small 

businesses, taken a business from just a few employees and helped 

it grow into a very successful company that employs lots of Americans today. 

Chair LANDRIEU. Thank you. 

Mr. Clarkson, some members have indicated that they do not believe Government should be choosing who to lend money to. It is 

my understanding—and I want to ask you if it is yours—that 

under the current lending programs, isn’t it the community bankers in the community that are making those decisions as to who 

to lend to and the Government is just providing a guarantee? How 

would you describe that? Is it Government choosing or is it the 

local community bankers that are in the communities that must 

know the people very well or know them more than the Federal 

Government would know them? 

Mr. CLARKSON. It is the lenders that are actually making the 

credit decision as to whether the loan is made or not made, and 

so that includes not only the community lenders, but all of the 

other lenders that are out there, the 3,000 lenders that are participating in this program. 

We do our credit analysis. We evaluate the structure of the loan, 

and we are the ones that are making the decision. In turn, the SBA 

provides the guarantee, so it is not even a straight dollar out of 

that the SBA is having to commit. It is a guarantee of potential 

losses on that transaction. And to note, it is a sharing of the risk. 

It is not a complete transfer of the risk over to the SBA or the Government. And as lenders, we not only collect fees from the borrower 

that are remitted to the SBA, but we in turn also remit fees to the 

SBA for our participation in that program. So it is a well-run program—— 

Chair LANDRIEU. A public-private partnership really from the 

community lending perspective. 

Mr. CLARKSON. That is exactly what that is. 

Chair LANDRIEU. And my final—and I will get to the Senators. 

I beg your forbearance here. 
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Ms. Pastore, I am considering very strongly trying to review and 

look out into the country the best entrepreneurial training programs that exist because I do believe that America’s strength is in 

entrepreneurial activity and trying to figure out who is doing that 

well, who is doing it better than others for some potential legislation. 

You mentioned in your testimony that, unlike SCORE, Women’s 

Business Centers are there helping a business to grow, et cetera, 

et cetera. How many volunteers, either in numbers or in volunteer 

hours, are associated with the Women’s Business Centers? And if 

you do not know that, if you could get that information. Because 

my understanding is that a SCORE model is really more volunteer 

driven; yours is more 100 percent Government funded. And I am 

trying to find what model is the best, et cetera. So what would you 

say to that? And then I will get to the other Senators in a moment. 

Ms. PASTORE. I would say to that, in terms of the number of volunteer hours and the numbers of volunteers across the country, 

across all 110 Women’s Business Centers, that is a very big part 

of the operation. I can get you those specific numbers. But I can 

tell you that in Connecticut we have over 150 volunteers, because 

when you are thinking about a small—— 

Chair LANDRIEU. Statewide or—— 

Ms. PASTORE. Statewide. We have two Women’s Business Centers in our state, and I represent both of those, and we have about 

150 volunteers that teach, train, counsel, and mentor, because with 

a very limited budget—usually a shoestring—we have a small staff, 

and we have to leverage community resources. 

What the Women’s Business Centers provide is an opportunity 

for professionals in the community to volunteer their area of expertise, and I bring a volunteer with me here today, actually, from 

Connecticut, who volunteers her time and her expertise to clients. 

We make it very easy and very comfortable for them to do that. 

So it is a very similar—it is similar in some degrees, but the 

oversight and the training that we provide to our counselors and 

our mentors and our volunteers is pretty rigorous. And not just 

anybody can volunteer. There are serious qualifications that have 

to be reviewed. 

Chair LANDRIEU. Thank you. 

Senator Risch, who has taken over for Senator Snowe or Senator 

Paul. 

Senator RISCH. There goes your battlefield promotion. 

[Laughter.] 

Mr. Baron, have you heard about—well, I am sure you have 

heard about the proposal from the President by Executive order to 

require anyone who is doing Government contracting to disclose 

their political contributions, not only the company but also the directors and that sort of thing. Have you heard about that proposal 

that is on the table? 

Mr. BARON. Yes, I have. 

Senator RISCH. Okay. What is the position of your organization 

on that? 

Mr. BARON. Well, our organization has not come out with an official position, but essentially the way that we have fallen in discussion with several congressional offices on this is that we are always 
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pushing in favor of greater transparency. And we believe that the 

Presidential Executive order, while not perfect, does offer greater 

transparency into how some of the money is being spent when it 

comes to contractors’ connection with Members of Congress or 

members within the Administration. 

What we see frequently, I think, based on several websites that 

you can go to that track a lot of money, is just seeing how money 

is being spent and influenced and trying to determine whether or 

not campaign contributions or things of that nature have a direct 

impact on companies’ abilities to land Federal contracts and is that 

really having an impact in helping skew, so that contracts are not 

being awarded based on who can provide a better, a superior product at the best price but who has connections. 

Senator RISCH. Are you worried about the reverse of that, that 

is that those who are awarding the contracts want to see that their 

money is going to the right place as far as they are concerned? 

Mr. BARON. Are we worried about that? 

Senator RISCH. Yes. 

Mr. BARON. I would say at this point not as much. From what 

we are hearing from our members, small businesses do participate 

in contributing to various candidates, campaigns as well. They do 

not seem to have a concern as far as that information being public. 

Senator RISCH. My constituents would disagree with the membership of your organization. 

Mr. DeHaven, I think I probably know what Cato’s position is on 

this, but have at it. 

Mr. DEHAVEN. Well, yes, I mean, we believe that the SBA should 

be abolished. We believe that there is absolutely no role for the 

Federal Government in the credit markets. 

Actually, if you look at history, the SBA is an interesting character because it is actually one of those few Government programs—— 

Senator RISCH. Mr. DeHaven, I got that. Could you go back to 

the issue of the President’s Executive order to disclose campaign 

contributions, without the force of law? He is doing an Executive 

order as opposed to having a congressional statute. 

Mr. DEHAVEN. Cato has written books on the abuse of Executive 

power. It has been building for years. The Bush Administration 

took it to new levels, and the Obama Administration is basically 

building on what came before him. 

As to the specifics of that issue, I am not completely familiar. 

Senator RISCH. Ms. Pastore, does your organization have a position on that particular Executive order? 

Ms. PASTORE. We do not. 

Senator RISCH. Okay. Thank you very much. 

Mr. Clarkson, you are in the lending—you represent the lenders 

so I assume you do not have a position on that. 

Mr. CLARKSON. We do not. 

Senator RISCH. Thank you very much. 

Thank you, Madam Chairman. 

Chair LANDRIEU. Thank you. 

Senator Brown, thank you for joining us, but Senator Paul has 

been here. Do you mind if he does his questioning? Then we will 

go to you. 
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Senator BROWN. No, no. I just came from SASC. We are in our 

SASC hearing. 

Chair LANDRIEU. Thank you so much. 

Senator PAUL. I still get to assume some sort of authority and 

seniority here. 

Senator BROWN. We will see. 

Senator PAUL. We will see. 

[Laughter.] 

Chair LANDRIEU. First to come, first to question. 

Senator PAUL. All right. Thank you very much. 

Mr. DeHaven, if the SBA exists to give loans to firms that are— 

there is this market failure, firms are not getting loans, this is sort 

of—in other words, these are firms that I guess the marketplace 

has already voted against, the marketplace voted not to give them 

funds, so the Government is going to give them funds. 

If so, I guess we are kind of lucky the SBA is only giving out 

about 1 to 5 percent of business loans because if they were giving 

out loans at the rate, for example, of the home mortgages—80 percent of them were owned by the Government, by Fannie Mae and 

Freddie Mac—we set sort of sub-standard ideas for who we gave 

the money to, and because of that it led to an enormous problem 

in our economy. 

So I guess the only thing I can think of is that we are lucky 

maybe the SBA gives a few loans and that they are giving them 

to people who are less creditworthy by definition because this is 

supposedly the market failure. 

Now, my other question and what I would like you to comment 

on is that we are told, well, SBA is not making the decisions, this 

is just the banks who are making the decision on the creditworthiness. But, also, if we look closely at the requirements here, 23 percent of Federal contracts have to go to small businesses. We are 

dictating how the Federal contracting policy works. We are also 

dictating that the small business loans are either women or minority owned, and they get preferential treatment, not based on creditworthiness but just based on their chromosomes or the color of 

their skin. 

I would like you to make a comment on the market failures and 

also how SBA loans are being dictated not based on creditworthiness. 

Mr. DEHAVEN. There was an interesting comment made by Mr. 

Clarkson about the community lender, the community banks. They 

have relationships with the folks closest to the community and the 

Federal Government does not, so, therefore, the Government is not 

dictating. 

But that argument in itself mitigates against there being a market failure because you are saying that we are closest to the lender, 

we have a relationship, therefore, we can make the decision. 

This idea of market failure—you know, I was out in the State of 

Indiana, and one day I tried out a new pizza place, and up on the 

wall is a newspaper article that says ‘‘we got started with a small 

business loan.’’ And that really set off bells in my head. I thought, 

well, there are thousands of pizza places in Indianapolis. Why are 

they getting an SBA loan that helps them compete against somebody else? 
115 

Now, that is inherently discriminatory, and I am not sure what 

the constitutional basis for the SBA is. Some might say the general 

welfare, but that is not the general welfare. You are discriminating 

against other businesses. 

Senator PAUL. I guess the question would be how good is the 

pizza. You know, the other people got their loan and are successful 

based on the taste of their pizza and pleasing their customers. This 

person got a loan because they were connected somehow to Government. 

The other question I have for you, Mr. DeHaven, would be: Right 

now do you think it is a good idea to increase taxes on individuals 

and businesses that earn over $200,000 a year? 

Mr. DEHAVEN. No, of course not, and I accidentally started answering Senator Risch’s original—is that when the SBA was created, the small business community was either ambivalent or did 

not even want it. What they were concerned about at the time in 

the 1950s was the increase in government in terms of regulation 

and taxes as a result of the New Deal in World War II. So what 

was the response from the Government? Instead of addressing 

those problems and fixing those problems, we will create a Government bureaucracy. And the rest is history. Once that bureaucracy 

became entrenched—and, again, we are having a hearing today 

about waste, fraud, and abuse in Government programs. I staffed 

a hearing for Senator Coburn 5 years ago on the SBA. William 

Shear was there to testify. This is like Groundhog Day for me. The 

only difference between 5 years ago and today is that I am sitting 

and talking to you instead of sitting behind you. 

Senator PAUL. May I have a few seconds? 

Chair LANDRIEU. Go right ahead. 

Senator PAUL. One last question would be: Mr. DeHaven, do you 

think that Dodd-Frank is going to help with small businesses getting loans, or do you think it is going to hurt with small businesses 

getting private loans? 

Mr. DEHAVEN. Our regulatory experts are dead set against it. As 

you mentioned, just yesterday the NFIB, the National Federation 

of Independent Businesses, came out with their latest survey: 3 

percent of their small business respondents said that credit was 

their number one concern—3 percent. And that has been consistent 

throughout even the recession. 

When you look at the combination of taxes and regulations, that 

is their biggest issue, and yet we persist, as we have for 50 years, 

trying to address the interests of small business through bureaucracies and Government programs. And then we wonder why we 

have waste, fraud, abuse, and inefficiency. 

Senator PAUL. Thank you, Madam Chairman. 

Chair LANDRIEU. Thank you so much. 

Senator Brown. 

Senator BROWN. Thank you, Madam Chair. 

Mr. Shear, I know your GAO report suggested that agencies 

should leverage physical and administrative resources, establish 

compatible policies and procedures, monitor collaboration, basically 

streamline, consolidate, et cetera, et cetera. I know the SBA has 

taken some initial steps. Are you satisfied that they have taken rig-
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orous steps to incorporate your suggestions on how to address the 

issues from overlapping programs and the like? 

Mr. SHEAR. At this stage we have identified potential duplication, potential overlap, so it is not like we have gotten down to specifically what programs might be those most prone for consolidation. But where we have taken very strong positions based on rigorous audit work in the past has been that when multiple agencies 

and multiple programs are providing at least compatible programs 

and services, there should be—collaboration can improve the 

leveraging of resources and can lead to more efficient distribution 

of those resources. And when it comes to SBA and USDA particularly in rural areas, we have been, in all honesty, disappointed by 

the lack of action of the two agencies to work together to come up 

with collaborative practices that could provide some structure for 

them delivering their services. 

Senator BROWN. So, in other words, not much has been done to 

basically address those issues. 

Mr. SHEAR. I would agree with that, that they have established 

an MOU without taking it further. 

Senator BROWN. I get it. Thanks. All right. 

Just to go back to you, Mr. DeHaven. You indicated that you 

went to the pizza place, and you wondered how they got the loan. 

And then you also said you felt it was discriminatory that they 

would actually get the loan. How can you make that statement 

based on the fact that you know nothing about the loan? You do 

not know what circumstances at all that they got the loan. They 

may have been the only one who applied for the loan. They may 

have rehabilitated the building. They may have taken a chance in 

an area that nobody else did. How do you make that statement and 

stand behind it? 

Mr. DEHAVEN. The discrimination occurs against those pizza 

shop entrepreneurs who did not get Government backing. 

Senator BROWN. But they could have applied, potentially, just 

like everybody else. 

Mr. DEHAVEN. I do not. They could have, but they did not. 

Senator BROWN. You do not know, but you are claiming that that 

is discriminatory based on basically having no basis in fact. 

Mr. DEHAVEN. Unless every single pizza shop in that area in the 

State of Indiana, and I would say across the country, is getting 

their start with a Government-backed loan, then there is necessarily discrimination. 

Senator BROWN. But they potentially could have done that had 

they sought the application and applied for it. 

Mr. DEHAVEN. Not necessarily because the SBA is capped in how 

much loans—and I think that actually brings up an interesting 

issue. If it is such a great program and such a good idea, why is 

there a cap on 7(a) lending volume? 

Senator BROWN. To take it a step further, I find it kind of inappropriate that you would make a statement that it is discriminatory for that pizza place to get a loan without having the facts, and 

I think it is the kind of rhetoric like that, as you throw it around— 

and we hear those things in a whole host of areas in Washington. 

It does not help solve the problem and basically step up and, you 
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know, make it better and encourage people to take a shot in business. That is just my thoughts on that. 

Mr. Clarkson, back to you, if I could shift gears a little bit. I also 

find it disconcerting that the SBA’s lending program has not specifically been directed to find ways to minimize expenditures and 

losses in a way that a bank tries to do. Do you think it would work 

or could work if the SBA were to engage the CDC in a collection 

process in order to stop surrendering that money that we otherwise 

could recover? 

Mr. CLARKSON. Are you talking about under the 504 program? 

You had said the CDC—— 

Senator BROWN. Any program where it is applicable. 

Mr. CLARKSON. Under the guaranteed program, what we do as 

lenders, we are the ones that liquidate the collateral, and then we 

request from the SBA their sharing, their pro rata sharing of the 

loss in the residual. And we as lenders do not give up all of the 

risk, so we do have our capital at risk. We do have our personnel 

and our process involved in the collection of those loans. So, yes, 

I mean, the system in and of itself in my mind is working appropriately. 

Senator BROWN. Okay. And, Mr. Shear, back to you a little bit. 

I know you have the reports, and you have noted the duplication, 

and you commented that they really have not done anything. At 

what point do you—or what role do you play to say, you know 

what, you really have to start to do this? Because every other—I 

mean, I am in SASC right now. We have been in there for 2 days. 

We are cutting billions and billions of dollars from the military 

budget at a time when we are in two and a half wars. And yet we 

have other agencies that, you know, they note these duplications 

and overlaps and ways that they could consolidate and streamline 

to save the taxpayers money, and they are not doing anything. At 

what point do you or other agencies, you know, say, hey, guys, it 

is time, you have got to really kind of get with the program here? 

Mr. SHEAR. One of the reasons why we are undertaking this 

work and devoting resources to it to look at economic development 

programs and why as an agency we are looking across the Federal 

Government and the Comptroller General has made a commitment 

that we will reach across the Federal Government by 2013 to look 

for duplication, overlap, and fragmentation in Federal programs is 

to try to inform Congress as far as how programs are operating and 

where there might be chances for efficiencies, for better program 

delivery, an also for efficiencies that could reduce Federal costs. 

Senator BROWN. Madam Chair, thank you. I would hope that we 

could, in fact, find a mechanism to put some teeth into some of 

these recommendations to have these agencies actually get cracking and save us some taxpayer money. 

Chair LANDRIEU. Thank you, Senator Brown. I really appreciate 

your sincerity, and I would like to close with just two comments. 

One, the defense budget is about $649 billion; homeland security 

is $42 billion. The entire SBA program is less than $900 million. 

Now, that is not an excuse to not make it as efficient and as effective as it can be. But, you know, if we did take Mr. DeHaven’s recommendation to completely eliminate it, it would save $900 mil-
118 

lion. A small percentage cut in defense would double or triple that 

in one fell swoop. 

Having said that, that is what this hearing is about. Senator 

Snowe and I are committed to eliminating waste, fraud, abuse, and 

exploitation of government programs. 

Finally, in conclusion, I am going to present this to all of our 

members because I carry this around with me. These are the private sector partners of the SBA. Some of them are private sector 

partners. SCORE is for the most part private sector. The government funds it at a small amount, but it leverages an extensive volunteer network which is private. The SBDCs are supported by the 

government and the Women’s Business Centers. So you can see 

they are represented all over the country. 

There are other partners—that would be state economic development offices—that are not on here. There are city economic development offices. In the city of New Orleans, there is the Idea Village, which is run privately by entrepreneurs, with some government funding. 

Mr. Shear, what I am getting at is I really want to try to get to 

a position where we can identify which of these are working well, 

leveraging taxpayer money well, and which are absorbing a lot of 

taxpayer money without working well, so that I can do my job in 

this Committee to eliminate those that are not living up to the 

mark. 

So I want to share this with you for the record, and I look forward to working with you so we can identify, again, out there in 

the country what entities are really doing a very good job and 

which ones are not and trying to do our job by eliminating those 

that are weaker. 

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Thank you so much, and we will end the hearing. Thank you all 

very much for coming. I appreciate it. 

[Whereupon, at 11:53 a.m., the Committee was adjourned.] 
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