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75–017 PDF 2012

S. HRG. 112–500 

THE FY 2013 BUDGET REQUEST FOR THE SMALL 

BUSINESS ADMINISTRATION 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS AND 

ENTREPRENEURSHIP 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

MARCH 29, 2012 

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 

JERRY MORAN, Kansas 

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

WALLACE K. HSUEH, Republican Staff Director 

CLAIRE O’ROURKE, Democratic Professional Staff Member 

MEREDITH WEST, Republican Senior Professional Staff 
(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 J., Ranking Member, and a U.S. Senator from Maine .... 3 

WITNESSES

Mills, Hon. Karen, Administrator, United States Small Business Administration ........................................................................................................................ 7 

Gustafson, Hon. Peggy, Inspector General, United States Small Business 

Administration ..................................................................................................... 22 

Sargeant, Hon. Winslow, Chief Counsel for Advocacy, United States Small 

Business Administration ..................................................................................... 35 

Wilkinson, Tony, President, National Association of Government Guaranteed 

Lenders ................................................................................................................. 53 

Shear, Bill, Director, Financial Markets and Community Investment, United 

States Government Accountability Office .......................................................... 71 

Hurn, Christopher G., Chief Executive Officer and Cofounder, Mercantile 

Capital Corporation ............................................................................................. 87 

Evers, Ridgely C., Managing Partner, Tapit Partners, L.L.C. ............................. 101 

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Evers, Ridgely C. 

Testimony .......................................................................................................... 101 

Prepared statement .......................................................................................... 103 

Gustafson, Hon. Peggy 

Tesimony ........................................................................................................... 22 

Prepared statement .......................................................................................... 24 

Hurn, Christopher G. 

Testimony .......................................................................................................... 87 

Prepared statement .......................................................................................... 89 

Landrieu, Hon. Mary L. 

Testimony .......................................................................................................... 1 

Letter dated March 28, 2012, from the Chamber of Commerce ................... 52 

Chart titled ‘‘Grow Businesses and Create Jobs—Access To Capital’’ ......... 108 

Mills, Hon. Karen 

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

Prepared statement .......................................................................................... 9 

Responses to post-hearing questions from Chair Landrieu .......................... 117 

Responses to post-hearing questions from Senator Tom Harkin ................. 128 

Responses to post-hearing questions from Senator Mark Pryor .................. 130 

Pryor, Mark L. 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 6 

Rowe, C. E. ‘‘Tee’’ 

SCORE presentation ........................................................................................ 147 

Prepared statement .......................................................................................... 154 

Sargeant, Hon. Winslow 

Testimony .......................................................................................................... 35 

Prepared statement .......................................................................................... 37 

Responses to post-hearing questions from Senator Mark Pryor .................. 138 

Response to post-hearing question from Senator Jerry Moran .................... 140 

Shear, Bill 
Page

IV 

—Continued 

Testimony .......................................................................................................... 71 

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

Responses to post-hearing questions from Chair Landrieu .......................... 141 

Snowe, Hon. Olympia J. 

Testimony .......................................................................................................... 3 

Chart titled ‘‘SBA Loan Subsidies Skyrocketing’’ .......................................... 13 

Items for the Record from Administrator Mills ............................................. 114 

U.S. Small Business Administration 

Press release titled ‘‘SBA Program Helps to Bridge the Small Business 

Gap’’ ............................................................................................................... 152 

Wilkinson, Tony 

Testimony .......................................................................................................... 53 

Statement from the National Association of Development Companies ....... 54 

Prepared statement .......................................................................................... 66 
(1) 

THE FY 2013 BUDGET REQUEST FOR THE 

SMALL BUSINESS ADMINISTRATION 

THURSDAY, MARCH 29, 2012 

UNITED STATES SENATE, COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP, Washington, DC. 

The Committee met in a roundtable discussion, pursuant to notice, at 10:23 a.m., in Room 428A, Russell Senate Office Building, 

Hon. Mary L. Landrieu, Chair of the Committee, presiding. 

Present: Senators Landrieu, Pryor, Cardin, Shaheen, Hagan, and 

Snowe. 

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

AND A U.S. SENATOR FROM LOUISIANA 

Chair LANDRIEU. Good morning. Let me call our Small Business 

budget hearing to order and apologize for the delay. I had an early 

morning speech way over in Old Town, Virginia, and traffic is not 

easy in the morning. So I thank everyone for being here, and I am 

going to go right into my opening statement. 

Thank you all for joining us today. I would like to thank particularly Administrator Mills and our witnesses for coming today. 

There is nothing small about small business in America. According 

to the SBA, small businesses are responsible for employing roughly 

half of all working Americans. Entrepreneurs pump almost $1 trillion into the economy and have generated 60 to 80 percent of net 

new jobs annually over the last decade. 

Many of these small business owners rely on SBA counseling, 

contracting, and loan programs to help get their businesses started, 

expand their business, and develop their business plans. 

In his fiscal year 2013 request for the SBA, President Obama 

once again signaled his commitment to our nation’s nearly 28 million small businesses by submitting a strong and fiscally responsible budget of $949 million in funding for the agency, plus $167 

million for disaster loans. This is a good budget in tough budgetary 

times. It makes investments in key programs that will enable the 

agency to fulfill its core mission. 

One of the things I wanted to mention before we get into the 

budget specifically is our Small Business Jobs Act, which this Committee, Senator Pryor particularly, and others, worked so hard with 

me to spearhead. The President signed it into law 18 months ago. 

It has had a very, very positive effect on bank lending and retail 

sales. The GDP, an important indicator of our nation’s economic 

health, has grown for the tenth consecutive quarter. This landmark 
2 

Small Business bill added billions of dollars of lending and investment to America’s entrepreneurs and provided $12 billion in tax 

cuts to small businesses from coast to coast. 

In addition, recognizing that less than 1 percent of small businesses export, we stepped up in that bill some important export opportunities. I just was recently hearing from my state that they are 

absolutely thrilled to have received one of the 40 STEP grants that 

were given competitively. 

They have never received a grant like this from the Federal Government and they are very excited about stepping up their export 

opportunities. So the partnerships that are being created, I think, 

Administrator Mills, at the state level are quite exciting when it 

comes to export. I know you will have a lot more to say about that. 

The SBA approved nearly 22,000 loans during the first quarter 

of 2011. This was a record quarter. We now have 157 active lenders, as we financed almost 1,000 small business commercial mortgages totaling $1 billion in volume through the 504 Commercial 

Mortgage Refinancing Program, which has been extremely popular 

and, I think, very helpful to keeping people’s balance sheets in 

order and helping some our businesses roll through this very tough 

time. 

I mentioned the STEP grants, so I will not go through those, but 

I will highlight a few other interesting facts. More than 2,400 small 

businesses have received loans above $2 million. More than 338 

microloans have been made above $35,000. The SBA has 20 new 

microloan lenders on board to participate in the ILP Program 

championed by Senator Levin. 

The other good feedback we are getting, Senator Snowe, is from 

our state partners, particularly Michigan and North Carolina, and 

there are some other states that have been really excited about the 

new partnerships that we have with them. 

Let me just say something about the budget and then I will turn 

it over to Senator Snowe. The $348 million to support $16 billion 

in 7(a) and $6 billion in 504 lending, both of these programs have 

proved enormously successful over the course of their lifetimes. I 

would like to see these programs expand. I know there is some subsidy required to do that. I would like to talk about how to potentially do that as we move forward on the budget. 

The $167 million to administer the SBA Disaster Loan Program 

is critical to getting loans out to places along the East Coast and, 

of course, through our mid section of the country with the recovery 

still in progress from tornados, et cetera. 

This is a strong budget for the agency, but I am concerned about 

reducing the budget for counseling and technical assistance. The 

negative impact such cuts could have on critical core services for 

American entrepreneurs—and over and over again I will say in the 

hearings that I have, Administrator Mills, people that are on the 

street, entrepreneurs say that partnerships, mentorships, besides 

capital, besides access to capital, is crucial. 

We have had business people sit here and say, right where Senator Pryor is sitting, ‘‘If it was not for my mentor from the SCORE 

organization, I never would have been able to restructure my business in a difficult time.’’ 
3 

In times where the economy is constricting, our efforts on 

mentorship and apprenticeship need to be moving upwards, because we have to counter the downpull on these businesses and 

help businesses to think differently, how to market their product 

differently, maybe even change their business plan, and that takes 

know-how and you are not going to learn that in college. You are 

going to learn it from an experienced business person. 

The final thing I want to say is that I am going to take a very 

strong interest in focusing on the quality of our programs and 

measures of success. I believe, Senator Snowe, and I know you do, 

when we try to manage something, you have got to be able to 

measure it before you can manage it well. I know that you understand this. 

I am having a little difficulty getting some quality control information from some of the things that we fund in this budget. I just 

want the Committee to know that is going to be one of my priorities. I am anxious to hear your priorities and to work with all of 

my members on fashioning the very best budget we can to do the 

very best work out of Washington, partnering with local banks, 

community banks, other non-bank lenders, and our states to help 

get money to Main Street. 

Senator SNOWE. 

OPENING STATEMENT OF HON. OLYMPIA J. SNOWE, RANKING 

MEMBER, AND A U.S. SENATOR FROM MAINE 

Senator SNOWE. Thank you, Chair Landrieu, for calling this 

hearing today to discuss the Small Business Administration’s fiscal 

year 2013 budget request. I am very pleased that we have Administrator Mills testifying here today. Our nation could not ask for a 

better small business champion. 

As an early and ardent proponent of restoring the SBA Administrator position to Cabinet-level status, it was a tremendous victory 

for small businesses that this long overdue promotion has finally 

come to fruition. Creating a seat for SBA at the President’s highest 

table is a signal to our fragile economy that America’s small business will, in fact, drive our nation to full recovery. 

I am as confident now as I was when I first called for this position’s elevation that Administrator Mills is precisely the right person at the reins of the agency responsible for America’s preeminent 

job generators. 

And especially at this critical time where we need economic 

growth and we need to bolster small businesses, SBA is certainly 

filling the vacuum with a record level amount of lending of more 

than $30 billion to 60,000 businesses, which I gather is record level 

lending for small business in SBA history, and is an indication of 

the fundamental pivotal role that the SBA is playing at this moment in time with the exceptional leadership of Administrator 

Mills. I think it is without question, as we talk to small businesses, 

that they desperately need access to capital, especially at a time 

when more than $2 trillion is sitting on the sidelines among other 

businesses who are not in a position or are not willing to make the 

investments within their businesses or for additional hires. 

I would also like to thank Dr. Sargeant from the Office of Advocacy and SBA Inspector General Peggy Gustafson for coming today, 
4 

and for their tireless work on two of my biggest priorities, which 

is to reduce the Federal regulatory burden on small businesses and 

rooting out fraud, waste, and abuse in the Federal Government. 

Finally, I would also like to thank our knowledgeable witnesses, 

most especially Bill Shear from the Government Accountability Office, Chris Hurn with Mercantile Capital, Tony Wilkinson with the 

National Association for Government Guaranteed Lenders, and 

Ridgely Evers with the Board of Directors for SCORE. I certainly 

appreciate everybody being here today to provide suggestions for 

streamlining the SBA’s budget. 

In my capacity as Ranking Member, this marks my tenth SBA 

budget hearing. It is hard to believe it has been a decade, Chair 

Landrieu, either as Chair or Ranking Member. It is through this 

lens that I am considering the 2013 budget. With our country’s economic recovery from the recent recession still lackluster at best, because the economic growth numbers are not where they should be 

that would generate the kind of job growth that we should have at 

this moment in time, we have to ensure the SBA can be the catalyst small businesses require to get Americans back to work. 

It has not been an easy task, considering the fact that we are 

facing alarming budget challenges and deficits. But as I indicated, 

with Administrator Mills at the helm, there is no doubt that that 

is happening. 

The 2012 SBA budget, excluding disaster funding, was approximately $800 million. The 2013 request is a 15 percent increase over 

last year. A full 96 percent of this increase is to subsidize the 

SBA’s lending programs, due in large part to rising defaults. Administrator Mills and I discussed this yesterday, about my concerns 

regarding the skyrocketing increases in loan subsidies. 

I have a chart that I will illustrate in my question period, but 

it indicates that the 7(a) and the 504 programs, when they operated at zero subsidy, mean the programs paid for themselves with 

no fees, with no requirement for taxpayer support. In each of fiscal 

years 2010 and 2011, the SBA required $80 million to subsidize 

these programs due to increased defaults, and this year, subsidies 

have grown $350 million, marking an astounding increase from the 

2009 level of zero. We had five years of zero subsidies and then we 

went from $80 million to $350 million. 

Last year, I expressed concerns about the subsidies being too 

high, at $210 million, but was told the request represented an 

anomaly because the SBA was working through the bad loans. This 

year, however, marks the second consecutive year with yet higher 

subsidies with an explanation that obviously the worse loans are 

still filtering through the system and things should bounce back by 

next year. But I am not so sure that the problem is simply going 

to get better with time, and although I agree that SBA loans are 

still a good return on investment, that does not mean that we 

shouldn’t focus like a laser in addressing the very real concerns of 

increased subsidies. 

The SBA should establish a clear plan to reduce its subsidy costs 

in the future. Looking at historical data, subsidies compared to the 

overall SBA budget just get higher every year. They accounted for 

12 percent of the total SBA budget in 2011, 26 percent in 2012, and 
5 

now a 37 percent increase in 2013. This is the paramount issue, 

in my view, in the agency’s 2013 budget. 

On the one hand, the Administration is asking for more money 

to cover increased subsidies; on the other hand, the Administration 

is failing to recover losses on defaulted loans, and thus, lower the 

subsidy rate. According to the SBA’s own estimates, the Administration has written off nearly $2 billion in the 504 program alone. 

A recent independent audit of the Administration’s 2011 financial 

statements revealed that the SBA failed to refer over 5,000 eligible 

co-borrowers and guarantors to the Treasury for cost servicing and 

offset for at least $226 million. 

Even the SBA’s Inspector General has highlighted in her testimony today the need for the SBA to address the heightened risk 

of losses. The Administration must formulate a meaningful plan to 

address defaults, recover on losses, and cease the out-of-control 

costs of these programs to taxpayers. There are other issues that 

I have of concern that I will raise during the course of question and 

answers so that we can move to the testimony. 

I do want to commend Administrator Mills for reining in the administrative expenses of the agency. The increase in the executive 

direction budget from 2012 to 2013 is negligible at just $115,000, 

down 21 percent from the 2011 level of $26 million. 

Further, agency-wide, overhead costs are largely held steady or 

reduced in this year’s budget request. So again, I want to commend 

you, Administrator Mills, for your leadership in this regard. Thank 

you, Madam Chair, and we will proceed to questions. 

Chair LANDRIEU. Senator Pryor. 

Senator PRYOR. I will just submit mine for the record, but thank 

you very much. 

[The prepared statement of Senator Pryor follows:] 
6 
7 

Chair LANDRIEU. Thank you so much. Proceed, please. 

STATEMENT OF HON. KAREN MILLS, ADMINISTRATOR, 

UNITED STATES SMALL BUSINESS ADMINISTRATION 

Ms. MILLS. Chair Landrieu and Ranking Member Snowe and 

members of the Committee, I am very pleased to testify before you. 

First I want to thank this Committee for its strong support of our 

agency and for its unwavering commitment to America’s small 

businesses. 

I also want to thank the Committee for the passage of the longterm SBIR preauthorization. This extension supports critical funds 

for research and innovation for entrepreneurs and has helped 

found some important companies like Qualcomm and Symantec. 

You all know the facts and Chair Landrieu just reiterated some 

of them. Over the last 15 years, small businesses have created two 

out of every three net new private sector jobs and over half of all 

working Americans own or work for a small business. Our goal at 

the SBA is to make sure small businesses remain well-positioned 

to do what they do best, grow and create jobs. The President’s proposed fiscal 2013 budget for the SBA of $1.1 

billion, which includes the funds for our disaster-related programs, 

is focused on helping more entrepreneurs and small business owners compete and win in today’s economy. Government does not create private sector jobs. We provide small businesses with the tools 

that they need to start, to grow, and to create these jobs. 

I think the owner of a company we work with called Quality 

Electrodynamics in Ohio summed it up best. He said, Government 

cannot start your business, but they can help accelerate what you 

do. To make that possible, we are focused on three key objectives 

that are reflected in the President’s proposed budget. 

First is continued access to capital. As the Chair mentioned and 

the Ranking Member mentioned, in 2011, we had a record year. We 

supported more than $30 billion in lending to over 60,000 small 

businesses. This is the most capital going into small businesses in 

a single year in our agency’s history. 

Today, credit markets are improving, but there are still gaps, 

particularly for smaller loans and in under-served communities and 

we are working to make sure those gaps are filled. 

Second, the fiscal 2013 budget reflects the needs of high growth 

entrepreneurs. These companies are proven job creators, but they 

require specialized tools, long-term capital to accelerate their business growth. In 2011, our small business investment companies 

also had a record year, putting $2.6 billion directly into the hands 

of more than 1,300 of these high-growth businesses. I would like 

to thank the Chair and the Ranking Member for their efforts to 

build on the SBIC’s program success through increased authorization levels and other legislative improvements. 

Third is our counseling and mentoring activities. These programs 

assisted more than one million people in 2011. In fiscal year 2013, 

we are strengthening our veterans’ program and the skills-based 

training and counseling programs that are needed to ensure a path 

to successful entrepreneurship. 

Estimates show there will be approximately 300,000 returning 

veterans looking to transition to the civilian workforce in fiscal 
8 

2013. These returning veterans are natural business leaders and 

we are committed to providing them with the training and the resources they need to be successful business leaders. 

This includes an SBA-led National Government-wide veterans’ 

Entrepreneurship Training Initiative. The fiscal 2013 budget also 

reflects our continued commitment to streamlining our processes 

while creating efficiencies and eliminating duplication, as well as 

our ongoing efforts to combat fraud, waste, and abuse. 

Two examples of these initiatives are our efforts to consolidate 

our data infrastructure and continued development of 

BusinessUSA.gov, a user-friendly virtual one stop for accessing 

small business-related programs across the Federal Government. 

Overall, our goals remain twofold, getting the right resources 

into the hands of more small business owners and entrepreneurs, 

and making sure these programs are effective, easy to use, and 

most importantly, that they give the American taxpayer a good 

bang for the buck. I look forward to working with all of you to ensure that small businesses are front and center in our efforts to 

create jobs and foster a 21st century American economy that is 

built to last. Thank you very much. 

[The prepared statement of Ms. Mills follows:] 
9 
10 
11 

Chair LANDRIEU. Thank you. We have been joined by Senator 

Shaheen. I so appreciate her continued and extraordinary support 

for the work of this Committee. Thank you, Senator. 

Let me get right into the questions, and I am going to follow up 

on some of the comments that my Ranking Member made, because 

I respect her views so very much and I want to jump right into it, 

this runaway subsidy issue. Could you please address that? Because one of the things that I have tried to do is to improve the 

quality of programming for the taxpayers. So that we are investing this $1 billion to stretch it, which is a 

small amount of money relative to other budgets. I also chair the 

Appropriations Subcommittee on Homeland Security and that 

budget is $42 billion, just to give you relative numbers here. So a 

billion dollars is a lot of money, but relative to other budgets of the 

Federal Government, I think it is one of our—it is our smallest. 

I think this agency does a great deal of good with that investment. But we do want to run it as efficiently, as effectively, and 

as business-like as possible, recognizing there are differences between government and business that sometimes get lost up here. 

But let us talk about the subsidy rate. What would be your response to Senator Snowe’s comments about runaway subsidies and 

the default rate? 

Ms. MILLS. Thank you. As we just discussed, we had a record year. We supported $30 billion last year. The fiscal budget that we 

are requesting is for $351 million in subsidy to support $22 billion 

in loans in the hands of small businesses. So $351 million in subsidy supports $22 billion. That is about a 1.8 percent subsidy rate. 

So we have actually very low default rates, a very low subsidy 

rate. I want to make sure that the Committee understands that the 

increase in subsidy rates is not due to increases in default rates in 

recent loans. Recent loans are performing well and default rates 

are declining. 

The subsidy rates are done by formula and they have a number 

of inputs. First are economic variables and they are set a period 

of time ahead. So once again, they will, going forward, begin to reflect the improving unemployment numbers, but do not necessarily 

do so yet. 

Second, the loans’ default rates that are in the subsidy rate that 

are causing it to rise are from the 2005, 2006, 2007, and 2008 cohorts. At those periods of time, a number of loans were made which 

ended up having poor performance, high default rates, and poor recoveries particularly due to the fact that commercial real estate 

values which were high at the time of the loan then dropped and 

did not support the loans and the loan recovery. 

Chair LANDRIEU. So what you are saying is the default rates primarily are loans that were made or defaulted in 2005, 2006, 2007, 

and 2008? Is that what you said? 

Ms. MILLS. That is correct. 

Chair LANDRIEU. And it was because of the recession and former 

practices, or maybe not, but former practices, perhaps, but the constriction in the economy. But that is not reflective under your 

watch, is what you are saying? 

Ms. MILLS. Yes. I want to make it very clear that the facts support recent loans are performing well. Our default rates are declin-
12 

ing. So we should expect, over the longer term, those will become 

part of the subsidy rate calculation. 

Chair LANDRIEU. The other question I want to ask, because this 

is really crucial to these core programs, 7(a) and 504. This Committee purposely—and I think we did it all together, as I recall— 

reduced, argued for an elimination of the fees and an increase from 

75 percent to 90 percent of the guarantee. So how did that affect 

the subsidy rate and what was the effect to the businesses? 

Did they receive those reductions in fees which you could say 

was a tax on small business that we took away so that people could 

borrow money in a more economical way to themselves, even 

though it was a cost to our Government? 

Ms. MILLS. In the Recovery Act, I want to thank Congress because at that absolutely critical time when credit markets were frozen, the Recovery Act allowed us, as you just mentioned, to reduce 

or eliminate most of the fees and to raise our guarantee to 90 percent. And that was so successful that Congress reauthorized more 

money for it four different times and then culminated a fifth time 

in the Small Business Jobs Act. 

That is one of the reasons—the strength of that is one of the reasons why we had such a record year. We were able to step into a 

gap where the market had failed, no one could get a loan, good 

small businesses were turning to the SBA, and people saved their 

fees, put them back in their businesses, bought more equipment, 

and were able to come through the recession in strong order. So 

those were definitely very, very successful and important programs. 

Chair LANDRIEU. And just to finalize, one of the things I am 

going to focus on with the members this year of this Committee is 

how we could go into a long-term authorization of reduction of fees 

because I think it has worked so well. 

I would like to see if there is some other way to recoup those dollars to the Federal Treasury, because I have been told over and 

over and over again by every business that has used the program 

that that is one of the reasons they used the program, because instead of paying $13,000 or $25,000 or $33,000 in fees up front, they 

could put that money in their pocket, reinvest in their business, 

and it really spurred additional interest in those programs. 

So let me turn it over to the Ranking Member now and then we 

will go through a series of questions. We have been joined by Senator Cardin. Thank you very much. 

Senator Snowe. 

Senator SNOWE. Could you put the chart up? Thank you. 

[The chart follows:] 
13 
14 

Thank you, Madam Chair. I would like to get to the loan subsidy 

issue. I would appreciate if we could have those numbers in those 

zero years? Obviously I gathered that everything contributed to the 

real estate devaluation in those zero years in which there was no 

subsidy rate by the taxpayers. 

Ms. MILLS. We would be happy to get you those numbers. 

Senator SNOWE. As you can see in the chart, there is a tremendous growth in subsidies and that is the concern. I am wondering, 

is it all attributed to the fact that those loans were issued in the 

five years in which there was zero subsidy? 

Ms. MILLS. Senator, we would be happy to get you the background numbers behind those cohort years and those default rates. 

But yes, in fact, the chart there actually shows that the subsidy, 

in 2012 and 2013, is high because it is reflecting losses from the 

2005, 2006, 2007, and 2008 cohorts. 

Senator SNOWE. So it was not a matter of the origination, but it 

was a matter of what happened during the real estate time. So is 

that the reason for the tremendous growth this year that you are 

proposing? 

Ms. MILLS. Yes. The subsidies, the formula, it includes losses 

from the portfolio which is driven by those cohort years at the moment, and also economic variables. 

Senator SNOWE. I am interested in the econometric model that 

the Administration used to calculate the future loan performances. 

What were the unemployment numbers? I understand it was about 

9.3; is that correct? 

Ms. MILLS. We would be happy to get them for you. The formula 

is set in advance so it lags the current numbers. 

Senator SNOWE. As I understand, based on the request for the 

subsidy increases, the econometric models with respect to unemployment as well as economic growth is much higher and based on 

the wrong indicators. I would appreciate that information, as well, 

to understand the assumptions that were used to calculate this 

subsidy request based on future loan performances. 

Ms. MILLS. Yes, we would be happy to. 

Senator SNOWE. Were there any questions raised about the accuracy of those estimates? 

Ms. MILLS. Well, there is a series of economic variables that are 

part of the model. It is an econometric model. It is set in advance 

so that, once again, we would anticipate the current economic performance, which has improved, to be reflected in future subsidy 

rates and bring them down. 

Senator SNOWE. The issue of subsidies is quite substantial. I 

think that that is what is troubling, and obviously we have to get 

to the heart of that matter in terms of what is driving it and 

whether or not that is as accurate as it could be based on the accurate unemployment numbers and economic growth. 

In addition to that, why has the Administration written off nearly $2 billion in the 504 program and not attempted to recover those 

losses? 

Ms. MILLS. I want to assure this Committee, we attempt to recover every penny for taxpayers, and we have gone through each 

piece of the process. We are partnered with our CDCs, which are 

our community development companies who help us make those 
15 

loans, and we work across the board. Where we are not referring 

to Treasury, we are now referring to Treasury, and we are going 

to continue to turn over every rock to find every possible recovery. 

Senator SNOWE. I was raising that question because of the Inspector General’s report that did a review, an audit of SBA, and 

indicated that the SBA did not refer more than 5,000 eligible coborrowers and guarantors to the Treasury for cross-servicing and 

offsets. 

Ms. MILLS. I am happy to get you the information on that. My 

understanding is that is at the very end of the process and that we 

are now referring them all to Treasury. 

Senator SNOWE. Okay. So on the $2 billion, has it been written 

off? 

Ms. MILLS. The amounts that have come to Treasury, that $2 billion, there are a number of pieces of it and we can put it together. 

Part relates to an old program called Participating Securities, 

which is an SBIC program that was terminated in 2004 that is still 

creating write-offs, and we have terminated and no longer do that 

program. The other piece is largely driven by 504 and commercial 

real estate is one of the main drivers. 

Senator SNOWE. Just so I understand, will you be referring these 

5,000 eligible co-borrowers and guarantors and banks that the IG’s 

report has highlighted? 

Ms. MILLS. I believe we have. 

Senator SNOWE. To Treasury for debt collection? 

Ms. MILLS. But if we have not, we absolutely will. 

Senator SNOWE. Yes, because this was based on a report that 

was issued in December 2011, in accordance with the Debt Collection Improvement Act of 1996. Could we have a report on that as 

well? 

Ms. MILLS. Absolutely. 

Senator SNOWE. Because I think it is really important for us to 

do everything we can to collect every dollar to the extent possible. 

We realize sometimes it costs more to collect the debt than what 

is owed. We have learned that through even the IRS, but we certainly should be making attempts to do that. 

According to this report, it has not been done, and I think it is 

very critical because we have to do everything we can, as you well 

know, to safeguard taxpayers’ funds, especially because of these 

large increases in subsidies. I think it gets back to the heart of that 

question because we certainly have not had a strong economic recovery, and the growth is lackluster. 

We could continue to have serious problems with the loans that 

are even being issued in this period of time. So thank you. 

Chair LANDRIEU. Thank you. 

Mr. Pryor. 

Senator PRYOR. Thank you, Madam Chairman. Thank you both 

for hosting this and I want to thank you for being here on behalf 

of the SBA because SBA does a lot of great things around the country. Let me say that my understanding is you have traveled extensively around the country. You are hearing from businesses all over 

the country. And I know you mentioned some of that in your testimony. 
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But have you taken some of the ideas that you have picked up 

on the road and are they in your budget? Are you trying to translate those into priorities for SBA? 

Ms. MILLS. Absolutely. I have traveled to about 40 states, trying 

to make it to every place, many states, of course, multiple times. 

I pretty much travel every week and when I go to a state, when 

I came to your great state, I did go to Arkadelphia and we had— 

I visited a sawmill, met with the lumberjacks, actually, and we had 

a roundtable of lenders. We have a processing center there. I visited our SBA offices. 

But each place we have a roundtable of small businesses and 

usually a roundtable of lenders. The inputs from that allow us— 

and my deputy is on the road as well. We understand. We make 

it a point to know what is happening in our network on the ground. 

We make it a point to listen to small business and incorporate 

those things into both our policy pieces and just our programmatic 

changes. 

So if we hear this program needs streamlining, there are too 

many forms, we respond to that as well. 

Senator PRYOR. Okay, great. And let me ask about something 

that I am a big supporter of and that is regional innovation clusters. I know that is one of your priorities as well. Let us see. You 

are asking for $3.35 million in FY2013 to continue your program. 

My questions are really two or three in number. 

First, what regional innovation clusters have you supported in 

the past? And second, what would your criteria be for that support? 

And then third is, the Economic Development Administration also 

has a regional innovation cluster program. I am curious if this is 

an overlap or if you guys work in concert? 

Ms. MILLS. Well, number one, thank you for your support of clusters. As everybody knows, they are near and dear to my heart because I got involved first in public service through a cluster of the 

Maine boat builders and I always say that there is nobody less 

likely to cluster than the Maine boat builders. But they did because 

as small businesses, there was something in it for them to be collected together with the University of Maine and composite technology. 

We have done clusters all across the country, both through our 

own SBA program that you see represented here, and in collaboration with a multi-agency activity led by EDA over in Commerce. 

And what we have found is that clusters have become one of the 

foundation stones of regional economic development. 

They have proven to be very successful, highly cost-effective, and 

they involve—where they involve small businesses at the core, they 

are even more successful. Now there is very good academic data 

supporting this and we are seeing extremely good results on the 

ground. 

I want to make the point that these clusters are very connected 

to our Small Business Development Centers, our SCORE partners, 

our district offices, our community colleges, and the entire network 

on the ground. 

Senator PRYOR. Well, I appreciate that and I appreciate your 

commitment to the clusters because like I said, I agree with the 
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stats you are giving the Committee today. I think it is a great asset 

for this country, and we need to do more of it. 

But also, there is a GAO report which Mr. Shear will discuss on 

the second panel today, and he says that there are 53 programs 

that support entrepreneurs at SBA, HUD, USDA, and Commerce. 

Many of these programs assist disadvantaged areas and small businesses. Now, I realize that SBA and USDA have signed a memorandum of understanding to improve service to small businesses in 

under-served areas and I think that is great. 

But what other recommendations do you have in coordinating or 

consolidating some of these programs to make sure they are the 

most cost-effective ways to help small businesses? 

Ms. MILLS. Well, I have actually read the GAO report as well 

and I know that you will hear from Bill later. We very much appreciated being commended for our collaborative efforts. The one that 

was mentioned was the MOU that we do with the Department of 

Agriculture to make sure that all of our people are cross-trained in 

the Department of Agriculture loan programs, for instance, and 

that all of their offices, which is quite extensive, are then crosstrained and are outposts for the SBA. 

So this is working extremely well. Our resource partner programs and all of our entrepreneurial programs across the Administration are actually complementary and additive, and we have had 

quite a bit of conversation with GAO about this, showing how 

needs of entrepreneurs at the beginning of their life cycle, at startup, are very, very different from the need of an entrepreneur who 

has an established business with 100 people and is looking to expand with exports. 

There are small businesses who need a one-to-one mentor and 

coach at that moment and then a different small business that 

needs help with a technology problem or a loan guarantee. So we 

need to be prepared across the Administration to bring that small 

business into—from whatever door they come in and help them 

navigate to the program that meets their needs, no matter which 

agency it is, and that is what our virtual one-stop portal is designed to do, as well as our collaborations like our MOUs. 

Senator PRYOR. Thank you. 

Chair LANDRIEU. Senator Shaheen. 

Senator SHAHEEN. Thank you, Madam Chair, and thank you and 

Ranking Member Snowe very much for holding the hearing today. 

And Administrator Mills, thank you so much for your testimony 

and congratulations. I was very pleased to see the President elevate the SBA Administrator to Cabinet level, and I think it is 

about time. So I was delighted to see that. 

I cannot over-emphasize the importance of SBA programs in supporting small businesses in New Hampshire and helping particularly during the recent recession and during earlier recessions in 

the early 1990s, helping business get through those difficult times 

when access to credit was virtually impossible to obtain. 

Now having said that, I appreciate that these are difficult fiscal 

times and that everybody is under constraints to cut budgets, including Congress. But I have to raise the concern, as I did when 

we talked earlier this week, about the proposed cuts to the Small 

Business Development Centers, because in a state like New Hamp-
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shire, which is small and does not have a lot of urban areas, those 

SBDCs provide counseling that young businesses really need if 

they are going to grow. 

Last year, New Hampshire’s SBDC directly helped 750 businesses. Again, in a large state that does not sound like a lot, but 

being from Maine, you appreciate that is a lot of businesses and 

there are a lot of employees who are affected by that number of 

businesses. In this difficult budget climate, I would hope that we 

would look at programs like the SBDCs that we know are working 

in states. 

I am particularly concerned about the effects of the cuts, again 

in a state like New Hampshire, where we do not have the ability 

to absorb those kinds of cuts in the way that a large state does. 

And as you know, it has a double impact because the state funding 

then, also, is affected. 

In New Hampshire, just for an example, I live in the seacoast. 

The impact of the cuts that are being proposed would force the closure of the seacoast center and that is probably a third of the population of New Hampshire. So it is going to have a real impact in 

our state. 

I wonder if you have done any analysis on what that potential 

impact would be on the delivery of services and the number of businesses that would be affected nationally. 

Ms. MILLS. Well, we have an enormous strength in what we call 

our bone structure, our strong network of over 800 Small Business 

Development Centers, 110 Women’s Business Centers, and more 

than 12,000 SCORE representatives. In our budget, you see that 

we have proposed an across-the-board 10 percent cut and we have 

asked our resource partners to tighten the belt in their operations, 

as you have just described. 

Now, I am very sympathetic coming from a big state with a lot 

of rural activities—I mean, big state which is actually very 

small—— 

Senator SHAHEEN. Geographically, yes, I got that. 

Ms. MILLS. In terms of number of people where we have a great 

reliance on the counseling efforts of folks like our Small Business 

Development Centers. We have done a number of things and will 

pledge to you to do a number of more things to work together to 

make sure that all of our resource partners on the ground and all 

of our co-resource partners like those Department of Agriculture offices are collaborating more than they ever have before. 

This is the watch word. Along with the budget cut, we have 

brought our resources partners together so that they have more 

seamless collaboration and may find other ways to provide efficiencies and cost savings while servicing the population that really 

so much needs them. So we are going to increase efficiency. We are 

bringing our portals there so that small businesses can navigate 

more easily. And then come to our counselors with more specific activity. 

And we are going to try to make sure that our bone structure 

does—remains robust, and we believe that we can with this level 

of activity. 

Senator SHAHEEN. Well, I appreciate that and my time is up, but 

I have to say, I think collaboration is very important, but collabora-
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tion that does not include the programs that are making a difference for businesses does not have the same impact. Thank you. 

Chair LANDRIEU. Thank you. 

Senator Cardin. 

Senator CARDIN. Let me thank the Chairman and Ranking Member for this hearing. Administrator Mills, I want to thank you for 

your service. In the three years that you have been there under the 

Obama Administration, we have seen dramatic improvement on 

the SBA as an advocate for small business. I see that in Maryland 

and I thank you very much for what you have done to help the climate between the SBA and small business as an advocate for programs that can help small business growth. 

One of the first meetings that we were at when you were here, 

I talked about the record as it relates to minority businesses, as 

it relates to women-owned businesses, and veteran-owned businesses, and that the numbers were not impressive as to the programs being utilized by minorities and women and veteran-owned. 

There has been a remarkable improvement. We have been following those numbers over the last three years and improvements 

have been made. I am going to ask that you supply my office with 

the information so that we can continue to monitor the progress 

being made in this area. It requires continued priorities within 

your office to work with the local offices to make sure that you are 

advocating on behalf of the priority areas that we expect to be 

done. 

So I compliment you on the progress we made. I just want you 

to know that we want to continue that moving forward and would 

ask that you would make that information available to my office. 

The incentives for small business clearly have helped. We have 

passed a lot of bills here. I really do compliment our leadership, 

Senator Landrieu and Snowe, who have really marshaled a lot of 

very important legislation through. 

I want to share the concern that Senator Snowe has raised on 

the efficiencies of our credit programs to help small business. I 

think that is a very important point. Many of us raised concerns 

initially on the program as to whether it would get enough money 

out at a reasonable cost. Some of us had suggested more direct 

lending or some other options, at least evaluate how we could get 

credit out, because it was such an urgent situation. 

So I just want you to know that there is, I think, a large number 

of members of the Senate who are concerned as to whether the 

credit programs are reaching their intended businesses at the most 

cost-effective way and there is still a need for that program. So I 

welcome a way to make that more efficient. 

I want to talk about contracting and Government procurement. 

We have taken an interest in this Committee in this matter. We 

have included in our legislation the trained procurement officers so 

they are more sensitive to the requirements of small business to 

make sure that we prevent the bundling which denies small companies the opportunities to participate; that we look at more direct 

contracts rather than using subcontracts; that we can improve the 

opportunities for small businesses. 

Can you just go over with me how your budget would allow you 

to continue to be the advocate for small businesses through the bu-
20 

reaucracy of the Federal Government, which is not always easy, to 

get more sensitivity to opening up opportunities by procurement officers to reach out for new companies rather than just using their 

same old connections with larger companies to offer more opportunity for small businesses in our community? 

Ms. MILLS. Well, thank you, Senator, for all your support for the 

Small Business Jobs Act provisions, particularly around contracting which have been so meaningful and helpful. 

As you know, small business contracting is the largest Government program for small business. We are responsible to make sure 

that 23 percent of all Government contracts go to small business. 

That is about $100 billion a year. And we say that that is no cost 

to Government because it is actually a win-win. The small businesses get the revenue and Government agencies get access to the 

most innovative companies and usually the service of the CEO. 

We have a number of ways in which we have been able to make 

substantial progress, and as I said, in part because of some of the 

legislative pieces of the Small Business Jobs Act on our Government contracting goals. Most importantly, the President has made 

this a priority and he has asked every agency head to be engaged 

in this and to make their goals. 

And we have quarterly meetings at the White House with all of 

the sub-agency heads or deputies and they are held accountable for 

their goals. So as you know, tone from the top helps a great deal 

in getting the agencies to act. 

Then we have done a number of things. I just want to highlight 

one. Last week I was in New York with IBM and we launched 

something called Supplier Connection. The private sector, IBM, has 

garnered together 15 major companies that have over $300 billion 

of purchasing, procurement, and they have created a portal for 

small businesses to become part of those supply chains. 

We were able to send, that same day, an email, an appropriate 

eGov email to 50,000 of our registered small business contractors. 

By the end of two days, 1,000 of them had actually completed all 

the paperwork to sign up for Supplier Connection and be part of 

those commercial supply chains. 

So this is, we call it, kind of like the common app in colleges. You 

make one application and then you are qualified for 15 different 

companies. Small businesses, we do a lot of matchmaking. We do 

a lot of bringing together agencies and small businesses. But this 

allows us, for instance, to give even more contracting opportunities 

to these small business owners. 

Senator CARDIN. Thank you. Appreciate that. Thank you, Madam 

Chair. 

Senator SNOWE [presiding]. The Senator from North Carolina, 

Senator Hagan. 

Senator HAGAN. Thank you, Ranking Member Snowe, and thank 

you for helping to host this hearing today. I just wanted to reiterate what Senator Shaheen said, and I am pleased that the SBA 

has been elevated to a Cabinet position, so congratulations on that. 

I know you will add a lot to those discussions. 

And I am very pleased at hearing about this common portal for 

small business. I think that is going to be very important as another avenue for our small businesses to have access to growing 
21 

their companies and, obviously, hiring more people through that 

endeavor. 

And I also wanted to mention, recently you were quoted in a 

New York Times article talking about, especially during the height 

of the recession, about the good work that the North Carolina 

Small Business Technical Development Centers, the SBTDCs, who 

were able to really go to the forefront and help people who had 

been rejected by their bank, that the quote was, Everybody who is 

rejected come to us and we will work with you on a bank package. 

Through the efforts of the counseling at the SBTDCs, they were 

able to get 70 percent of those businesses credit-worthy, and when 

they got before the banker, they then had success. So I think that 

is another win for the good work that our SBA does, and I am certainly pleased with that happening in North Carolina. 

I did want to ask a question about our veterans and the Vet- eran’s Initiative. The SBA’s budget request contains $7 million in 

the National Veteran’s Entrepreneurial Training Program aimed at 

the increased number of members of the armed services who we 

know now are transitioning into civilian life. The Vet Program will 

be administered through the Department of Defense’s Transitional 

Assistance Program. 

And it is certainly no secret to anybody in North Carolina that 

I consider it the most military-friendly state in the nation and we 

certainly have a huge number of veterans, and we also have a large 

number of veterans that are unemployed right now. 

Can you tell me more about the Vet Program, what services it 

provides, the program launch, and where will the program first be 

implemented and how are those locations being chosen? 

Ms. MILLS. The specific Veteran’s Entrepreneurship Training Initiative that you are referring to in our budget is designed for working with the military on the returning veterans from Iraq and Afghanistan. And as you know, approximately 250,000 of them are 

anticipated to return this year. The unemployment rate for returning veterans is 11.1 percent for men and 14.7 percent for women. 

We know that veterans over-index in entrepreneurship, so this 

program is designed to be a module for every exiting vet, military 

person, through the TAPS Program. They will have first the option—they will each first get a 90-minute module on entrepreneurship. So all returning veterans will do that as part of the TAPS 

Program. 

They can then opt into a two-day program, and if they are interested in pursuing entrepreneurship further, there is an eight-week 

online program. 

Senator SNOWE. Excuse me. The mic is off. Is it working now? 

Ms. MILLS. Now it is on, I think. Better? Sorry. So then if they 

opt into the eight-week program, and after that as they go off and 

they start their businesses, they will be followed up with our Small 

Business Development Centers in our on-the-ground ongoing veteran and counseling operations. 

The Brigadier was in our offices a few weeks ago and he said 

something that really struck everyone. He said, These are men and 

women who are used to making their own decisions. They are out 

on the battlefields. We are piloting this with Marines. And he said, 

The Marines are ingrained to make these kinds of decisions, and 
22 

then they come home and they are in a job where they are told 

what to do every minute of the day. This does not work for them. 

And so, we want to provide a pathway to entrepreneurship for 

those who are inclined, and we have the capacity and the expertise 

through our program we have been running with Syracuse University to do that successfully. 

Senator HAGAN. So once again, do you know where those locations will be and the actual implementation of it? 

Ms. MILLS. Yes. We have four pilot locations that will be the first 

with Marines. They will then go to every Marine base, and then we 

have interest, also, from the Army. So we anticipate it expanding. 

Senator HAGAN. Thank you, Madam Chairman. 

Senator SNOWE. Thank you, Administrator Mills. We appreciate 

you being here today and we will follow up on a number of the 

issues that have been raised. But we appreciate your testimony 

and we certainly appreciate your leadership. Thank you. 

Ms. MILLS. Thank you. And I want to say, Senator Snowe, how 

much the whole small business community has appreciated your 

leadership on this Committee. 

Senator SNOWE. I appreciate that. Thank you. 

I will convene the second panel, including the Honorable Peggy 

Gustafson, the Inspector General of the Small Business Administration, and the Honorable Winslow Sargeant, Chief Counsel for 

Advocacy at the Small Business Administration. 

STATEMENT OF HON. PEGGY GUSTAFSON, INSPECTOR GENERAL, UNITED STATES SMALL BUSINESS ADMINISTRATION 

Ms. GUSTAFSON. Senator Snowe, thank you very much for inviting me to testify in front of Senate Small Business today. My name 

is Peggy Gustafson. I am the Inspector General for the Small Business Administration. My office, as you know, is an independent office within SBA and we conduct and supervise audits, inspections, 

and investigations relating to SBA programs, and we seek to detect 

and prevent waste, fraud, and abuse. 

I want to talk just briefly about the President’s budget request 

for my office, some things that I would like to talk about what we 

have done, and some things we would like to do in the future, and 

then, of course, take any questions. 

During fiscal year 2011, my office issued 24 reports containing 

136 recommendations for improving SBA operations, reducing 

fraud and unnecessary losses, and recovering funds. In addition, 

the work of my Investigations Division led to 69 indictments and 

47 convictions of subjects who had defrauded the Federal Government. In all, OIG efforts resulted in more than $120 million in office-wide dollar accomplishments during FY2011. 

The operating budget for my office in fiscal year 2011 was $17.3 

million, which included a $1 million transfer from the agency’s Disaster Loan Program account. So this number represents about a 

sevenfold return on investment for the Federal Government 

through the work of my office. 

However, even though these figures are reassuring, I am concerned that SBA’s financial and operational risk are actually increasing. For example, in the 7(a) and 504 lending programs, as 

you know, the maximum allowable guarantee per loan has grown 
23 

from $2 million to $5 million. For manufacturers in the 504 loan 

program, it has gone up to $5.5 million. And this, of course, dramatically expands the potential exposure to the taxpayer through 

the guarantees that need to be paid on defaulted loans. 

This exposure, combined with a growing portfolio and concerns 

about limited agency oversight, has increased the possibility of future losses. SBA’s payments of guarantees on defaulted loans have 

increased significantly, from $1 billion in FY07 to $5 billion in 

FY10, and $3.4 billion in FY11. In addition, SBA’s preferential contracting programs continue to be subject to fraud and weak Federal 

oversight. 

Finally, we have concerns that shortcomings in the Agency’s IT 

systems may hinder SBA’s ability to effectively manage these programs. As you are aware, the OIG—the President has requested of 

Congress that my office receive a $3.1 million increase in our budget. These additional resources are necessary to effectively target at 

early defaulted loans for fraud and lender negligence and to increase the capacity of our investigative personnel. 

In particular, we have—the President has requested that these 

additional resources be used to allow us to establish a dedicated 

Early Defaulted Loan Review Group to identify loans that default 

within 18 months, which is an early default loan; enhance our investigative capacity; and enhance the operations of our hotline. 

The Early Defaulted Loan Review Group would recommend nonpayment of the guarantee in the appropriate circumstances, would 

identify trends for operational improvements in the area of loan 

guarantee payments and lender oversight, and refer suspected 

fraud to my Investigations Unit. 

On average, my Investigations Unit handles 250 criminal and 

civil fraud investigations per year and obtains multiple indictments 

and convictions of recoveries of tens of millions of dollars. However, 

our resources are very limited. For example, over the last four 

years, the OIG has administratively closed 272 allegations with potential losses estimated at $172 million that may have met prosecutorial thresholds, but could not be further investigated due to 

a lack of resources. 

Also, over the last three years, our Early Fraud Detection Working Group has proactively identified 688 suspect loans with values 

estimated at over $636 million that contained characteristics typical of problem loans, but due to limited resources, these loans 

could not be further reviewed for indications of fraud. 

In short, much work has been done. I am incredibly proud of the 

amount of work we do for what is, in general, an extremely small 

staff given the risk inherent in SBA’s programs. And I thank you 

very much for your support and welcome any questions. 

[The prepared statement of Ms. Gustafson follows:] 
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Senator SNOWE. Thank you. 

Dr. Sargeant. 

STATEMENT OF HON. WINSLOW SARGEANT, CHIEF COUNSEL 

FOR ADVOCACY, UNITED STATES SMALL BUSINESS ADMINISTRATION 

Dr. SARGEANT. Ranking Member Snowe, good morning. Thank 

you for the opportunity to appear today to discuss the Office of 

Advocacy’s budget request for fiscal year 2013. In the interest of 

time, I will summarize my prepared remarks and ask that my full 

statement be included in the record. 

The Office of Advocacy’s budget submission is part of the President’s request for SBA and the Government as a whole, and it, accordingly, has the full support of the Administration. I should note, 

however, that since my testimony is not circulated for comment 

through OMB or other Federal offices, my views on matters other 

than the official budget request do not necessarily reflect the position of the Administration or SBA. 

Before outlining Advocacy’s budget request, I would like to provide an update on the office. First, let me thank the Committee for 

its support of my nomination by the President to become the sixth 

confirmed Chief Counsel for Advocacy. As Chief Counsel, my top 

priority is ensuring that small businesses are considered in the regulatory process. We continue to work with agencies across Government to help them mitigate the potential cost of regulation on 

small entities. 

I am pleased to report that during FY2011, we achieved $11.7 billion in first-year cost savings, $10.7 billion of which will be annually recurring savings. Since I have been Chief Counsel, I have 

signed 66 public comment letters to 27 agencies on a wide variety 

of issues. Every comment letter I sent represents an opportunity 

for the Federal Government to do a better job for small business. 

Small business advocacy review panels remain a critical activity 

in ensuring early participation by small entities in the rural development process. We participated in eight separate panels on EPA 

rules in FY2011 and began work on another seven planned rules. 

I recently met with CFPB Director Richard Cordray to discuss 

small business concerns about the Bureau’s adherence to CFPB– 

RFA. He assured me that the CFPB is committed to the CFPB– 

RFA process. Advocacy has been working closely with the Agency 

as it began to issue new rules. We also have provided RFA training 

to CFPB staff. 

Advocacy continues to provide RFA compliance training to other 

regulatory agencies as well. Last year, 109 regulatory and policy officials received RFA training, and so far this year, 107 officials 

have been trained. 

To help us understand small business concerns, we hosted 32 

small business roundtables in FY2011, and we have another 14— 

have held another 14 so far this year. Advocacy also maintains a 

strong focus on economic research. We published 25 research or 

data products in FY2011, and another 12 so far this year. 

On the subject of today’s hearing, I would like to take this opportunity to thank Congress for providing the full $9.12 million that 

President Obama requested for Advocacy in FY2012. For FY2013, 
36 

the Office of Advocacy requests $8.9 million for its direct expenses. 

In recognition of the need for Federal agencies to reduce their 

budget requests during these current economic conditions, this request represents a reduction from FY2012 enacted level. 

This amount includes $7.65 million for personnel costs and 

$800,000 for economic research. 

The remaining balance of $450,000 covers all other direct expenses. 

Advocacy’s new separate account is fully operational, and we 

have statutory line-item funding that is not commingled with other 

SBA funding. 

I have signed a Memorandum of Understanding with SBA in 

which the agency has agreed to provide Advocacy with operational 

support, without charge to our appropriation account. 

I would like to conclude by citing a benchmark that demonstrates 

what a good investment Advocacy is for America’s taxpayers. At a 

cost of $8.3 million in FY2011, Advocacy achieved $11.7 billion in 

first-year cost savings. This means that taxpayers paid only $710 

for Advocacy’s expenses to realize $1 million in new regulatory cost 

savings. 

Thank you again for your support for the Office of Advocacy. I 

look forward to continuing to work with you on issues of importance to small business and would be happy to answer any questions. 

[The prepared statement of Dr. Sargeant follows:] 
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Chair LANDRIEU [presiding]. Thank you very much and I apologize for the vote, but that is why members are coming and going. 

Senator Snowe will rejoin us in a minute. 

Let me ask you, Dr. Sargeant, the President’s budget has asked for an increase of $220,000 in the Advocacy’s budget. At the same 

time, you have got heavy responsibilities. 

Do you feel—and I know that your budget does not go through 

OMB so that you are clear to talk about what deficiencies might 

be, and I have got a specific question about the Leahy-Smith America Invents Act, which was the patent change, but overall, can you 

just hit one or two highlights about some of the shortcomings in 

your budget that you think might keep you from doing the jobs 

that we have asked you and required you to do by law and Congressional directive? 

Dr. SARGEANT. Chair Landrieu, the FY2013 budget adequately 

funds the Office of Advocacy, of course, but we could always do 

more with more. 

Chair LANDRIEU. Do you have the money to fund the study that 

we required that you do to the follow-up of the Leahy-Smith America Invents Act? And if you do, where are you getting that money 

from? It is, I think, the cost of about $250,000 to conduct such a 

study. 

Dr. SARGEANT. Chair Landrieu, the America Invents Act mandated that the Office of Advocacy would do a patent study and that 

was for the FY2012 budget. The funds were not set aside to do that 

study, and so we have been talking with the appropriate—talking 

with you and your staff on ways that we could do that study. 

Chair LANDRIEU. Okay. But I am confused because Congress has 

specifically directed you—as you know, we put an amendment to 

that bill because America was the last country in the world to be 

operating off of a First to Invent system and we changed to a First 

Inventor to File system. 

There was a very serious concern by small businesses that under 

a First to File, they would be pushed out of the opportunity for patents, having less back office, less ability to use that system. And 

so, we specifically required a study to be done, and my question is, 

do you have the money or not to conduct this study? 

Dr. SARGEANT. Currently, Chair Landrieu, we do not have funds 

set aside. 

Chair LANDRIEU. Then I would say that your budget is not adequate to carry out the responsibilities that you have been asked to 

do. 

Dr. SARGEANT. Well, we will continue to discuss with you and 

your staff on ways that we can do the study. I strongly—for small 

businesses and entrepreneurs to succeed, they need to have access 

to a patent system that works, and so that is why—— 

Chair LANDRIEU. Right. And no one is going to know if it works 

or not if your office does not, because there really is not any other 

office that I can think of, and maybe the Ranking Member can, 

that is responsible to report to Congress how new rules and regulations are affecting small business in America. We are not going to 

get that from the Agriculture Department. We are not going to get 

that necessarily from the Commerce Department. It is your job. 

And this is a big change in the law. 
48 

I want you to know that I am going to stay very focused on this. 

We are hoping that the study will show that all of our concerns 

were for naught, that this new system is absolutely helping small 

businesses, and that their response is overwhelmingly positive. But 

we will not know that unless this study is conducted. 

For the 28 million small businesses out there, many of them, I 

will admit, are not filing new patents every day, but maybe millions of them are. Maybe not 28. Hundreds of thousands of them 

are. That is something we need to know. So I want to follow up 

with you on that. 

Let me get to the Inspector General. I am concerned, as Senator 

Snowe is, about the subsidy rates. I think our Director explained 

that they were from loans previously made that are defaulting and 

that is what is driving this default rate up. But is there something 

that you want to point out to me that are your top one or two concerns with the operations of the SBA? I believe we have good leadership. Just like Senator Snowe, I do believe the agency is making 

a lot of progress in cleaning up some things, streamlining programs. 

But what would be the one or two things that you would like to 

highlight to me in our short time in terms of quality and effectiveness of the programming that we should really look at that we 

might be able, with the right kind of twist or new tools, to make 

significant improvement? 

Ms. GUSTAFSON. Thank you, Senator Landrieu. I think the—and 

I will narrow it even to one, in the interest of time. I think the one 

area I would like to highlight right now would be the area of improper payments, for several reasons. 

One, the area of improper payments in these programs has been 

a concern in our office for some time, and our office just issued, 

pursuant to the Improper Payments Act, the latest review of how 

the agency is doing on improper payments. 

As you know, Senators, an improper payment is not necessarily 

always a payment that should not have been made. Sometimes it 

is an internal control issue or a documentation issue. But there is 

an aspect to improper payments that does deal with, for example 

in SBA programs, loan guarantees that perhaps should not have 

been made or there should be a repair made. 

And so, you will recall that three years ago or so I was here talking about an improper payment rate that we had classified in the 

double digits on guarantees, on loan guarantees that are paid. Our 

latest audit followed the Improper Payments Improvement Act, so 

it actually covered more areas as well. 

We continue to have some kind of fundamental disagreements 

with the agency on whether they are doing enough in improper 

payments, capturing those improper payments, doing them—having—reporting the correct improper payment rate, and whether 

they have a plan in place, both to reduce improper payments and 

to perhaps seek through recovery. 

And so, that is something. This report is very recent. It is, I 

think, two weeks old. This is something that I think the agency— 

that I would say I think the agency does need to focus on. 

Chair LANDRIEU. Okay. Well, I want to hone down here just a 

little bit because one of the serious issues right now getting capital 
49 

into the hands of small business is the tension between the regulators of banks coming down so hard on banks, making them stay 

in their box, stay in their lanes. You know, if the law says two 

cents and they say 2.1, it is a violation. 

And the banks, I am reported, across the board, are having a 

very difficult time doing the lending that they would like to do because their regulators are breathing down their necks. Now, you 

are not technically a regulator, but you are an overseer. So I need 

to really understand what you are attempting to oversee. 

And anything that we want to identify as fraud or recklessness 

is one thing we have to get rid of. But if it is because the agency 

did not dot an I or cross a T on a loan form, I am not interested 

in that and I do not want that recorded as improper payments. 

So I need you to be a little bit clearer with me, if you can on the 

record, about what your problems really are. Because the last thing 

that I am going to do is sit here as the Chair of this Committee 

and allow the sort of overseer and regulator of the SBA do the 

same thing that some of the regulators are doing to small business 

banks, and you will absolutely shut down all lending in the country, which just about happened. 

Ms. GUSTAFSON. Right. 

Chair LANDRIEU. And we have got to find a way through this, because the fact is there is great need and thirst for capital and for 

loans out there. Contrary to what the Chamber of Commerce continues to say, there are wonderful businesses out there that need 

these loans and need these guarantees. 

Their mayors are running economic development that are desperate to build their cities back up in Michigan, Ohio, Louisiana, 

and I am sure in Maine. There are governors, Democrats and Republicans, looking for creative ways to get capital out to businesses 

that are trying to expand. So let us be a little bit clearer. Give me 

an example of an improper payment. 

Ms. GUSTAFSON. Thank you for your question, Senator Landrieu, 

because I do think that sometimes there is a strong misapprehension and an undue fear over what the improper payment rate 

means, what we are talking about, and what the practical effect is. 

And again, this is something that I experienced even the first year 

that I was here when we had done an improper payment review. 

Basically, nobody—neither the agency nor the IG ever goes back 

and faults a lender, and we certainly never seek recovery for a dotting of the I or a crossing of the T. I think that is just really a fundamental misapprehension. Basically, as you know, all that we are 

talking about is making sure that the programs are working as 

they are intended to do, which is to say that there is a guarantee 

that will be paid, except in extraordinary circumstances where 

something that was supposed to have been done just truly was not 

done and it was so material that the guarantee should not have 

been—— 

Chair LANDRIEU. So you are talking about material things that 

you are concerned about—— 

Ms. GUSTAFSON. Absolutely. 

Chair LANDRIEU [continuing]. In terms of improperly—and is 

that rate, in your mind—now, you have only been there, what, a 

year? 
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Ms. GUSTAFSON. Two and a half years. 

Chair LANDRIEU. Two and a half years. So is that rate going up, 

is it staying flat, is it going down? 

Ms. GUSTAFSON. I actually think that there has been—and we 

are—we remain working with the agency to reach the final rate. 

As you may recall, we agreed to go back and do another deep dive 

this year as we did improper payments on 7(a) and on disaster. 

We are closer this year than we were before. I would say, even 

though it is not completely final, it has gone down. In 2008 when 

I came in, I want to say the improper payment rate was double 

digit and now it is, at least the preliminary rate that we have reported, is less. So it is going down. 

Chair LANDRIEU. So it is moving in the right direction? 

Ms. GUSTAFSON. Yes. 

Chair LANDRIEU. So when you basically showed up, which was 

two and a half years ago, and you were looking back at things that 

had been done, it was alarming. And it is moving in the right direction, but it is still concerning. Is that a fair—— 

Ms. GUSTAFSON. That—that is fair. But yeah, and there is no 

question that the agency and the IG are closer than—closer, not in 

a friend way, but closer in where we are seeing it than we were 

before which is definitely progress. 

Chair LANDRIEU. Okay. I know that Senator Snowe has other 

questions to you all, but in light of time, I am wondering if we 

could allow the next panel to come forward so they can give their 

testimony? Can you all stay because when Senator Snowe comes 

back, we are going to extend this hearing to 12:10, and I know she 

is going to have some questions for you all. Okay? 

Ms. GUSTAFSON. Thank you. 

Dr. SARGEANT. Thank you, yes. 

Chair LANDRIEU. Okay, thank you. Our first witness on the third 

panel—and thank you all for being flexible—we have Tony 

Wilkinson, President and CEO of the National Association of Government Guaranteed Lenders. It is the only national trade association that represents the 7(a) lending industry. We are looking forward to hearing your testimony this morning. 

Next, Bill Shear, Director of Financial Markets and Community 

Investments at the GAO. As we all know, GAO is an independent, 

non-partisan agency that ensures Government programs are running efficiently and meeting their objectives. 

Christopher Hurn is joining us today from Mercantile Capital 

Corporation where he serves as CEO and Cofounder. They specialize in SBA 504 loans. 

And then Ridgely Evers, Managing Partner of Tapit Partners 

and a Member of the Board of SCORE, one of my favorite organizations. It is a non-profit association authorized by Congress that 

provides one-on-one small business counseling, and in my view, has 

done a remarkable job over a long period in many parts of our 

country. 

Before I start, I want to put in a letter to the record from the 

Chamber of Commerce. I just had that. I would like my staff to 

find it. I had it before I left. It was a letter from the Chamber— 

here it is. Bruce Josten supporting the subsidy rate for these programs. And the Chamber is a strong advocate for the kind of new 
51 

partnerships that we are strengthening between the SBA. Without 

objection, I will have that put into the record. 

[The letter follows:] 
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Chair LANDRIEU. Mr. Wilkinson, why do you not begin—and 

please limit your opening statement to less than three minutes so 

we will have time for questions. 

STATEMENT OF TONY WILKINSON, PRESIDENT, NATIONAL 

ASSOCIATION OF GOVERNMENT GUARANTEED LENDERS 

Mr. WILKINSON. All right. Thank you, Chair Landrieu. Appreciate the opportunity to be here today. I would ask that my written 

record be submitted—written testimony be submitted for the 

record. 

The National Association of Development Companies has also 

submitted testimony for the record. They represent more than 95 

percent of all the SBA 504 financings that are done, and as the 

trade association representing the 504 industry, we would respectfully request that their statement also be included in the hearing 

record. 

[The prepared statement of the National Association of Development Companies follows:] 
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NAGGL is supportive, also, of the Administration’s overall budget request as it relates to the Agency’s loan programs. We particularly appreciate the fact that it does not propose increased costs for 

loan program participants for either borrowers or lenders, and instead provides appropriations to offset any cost not covered by current program fee structures. 

This provision is critically important because for the last several 

years, SBA loans have been almost the only source of term financing for small businesses. For that reason, continued Congressional 

support of the SBA loan programs is essential. 

Many small business trade groups continue to tell us that access 

to credit remains a top issue for their membership. These small 

business trades have found that while many of their members are 

ready and willing to take on additional risk to grow their businesses and create jobs, accessing the capital necessary to support 

those efforts has proven to be a daunting task during these tough 

economic times. 

Fortunately, the SBA and its loan programs have been there to 

fill the capital void for small businesses. The importance of SBA 

lending to small businesses is clearly evidenced by the demand for 

the agency’s loan programs. According to SBA statistics, between 

its 7(a) and 504 loan programs in just the last two years, SBA has 

helped to deliver approximately $42 billion into the hands of small 

business owners, and when you add the dollar value of the private 

sector first mortgage portion of 504 loans, that total exceeds $50 

billion. 

There is also data to support the fact that SBA, in conjunction 

with its private sector lenders, is the primary source of all longterm small business lending. For FDIC statistics accumulated from 

bank call reports, as of December 31st, 2011, banks reported approximately $600 billion in outstanding small business loans. 

Of this, the vast majority of these loans, or approximately 76 percent, have maturities of three years or less with a significant majority of this tranche having maturities of less than one year. The 

remaining 24 percent, or about $150 billion, have maturities of 

three years or longer. 

As of December 31st, the same date, the outstanding balance of 

SBA 7(a) loans, 504 loans, and the private sector first mortgage 

portion of 504 loans totaled approximately $110 billion, with the 

average maturity of an SBA loan in excess of ten years. 

So comparing SBA term loans with bank call report term loans, 

you can see why it has been said that SBA loans account for as 

much as 70 percent of all long-term loans made to small businesses. And as a point of reference, prior to the recent recession, 

this ratio averaged approximately 40 percent. Given the dramatic 

rise in the importance of SBA lending, it is easy to see why many 

small business trade groups refer to SBA lending as the only game 

in town. And with that, I will conclude my verbal testimony. 

[The prepared statement of Mr. Wilkinson follows:] 
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Chair LANDRIEU. Thank you. I am going to take that information 

that you gave and make the appropriate charts and give a speech 

on the Floor of the Senate about this. I think it is a really important fact to get out there, that while banks are making small business loans and the volume is greater than the SBA, their loans are 

short-term in nature and they are not helping small businesses. 

Their rates may be higher, their terms are draconian, in some 

cases, requiring not only the shortness of the term and the rate 

that businesses are paying, but the guarantees that the owners 

have to give, literally their first child has to be guaranteed, their 

house, their automobile, and their wife’s dowery. It has gotten to 

be just awful, and I do not think people understand this. 

Why we are not expanding our programs exponentially I do not 

know. I mean, we are pushing them out as far as we can. But 

thank you for giving us those numbers. 

Mr. WILKINSON. Yes, ma’am. 

Chair LANDRIEU. Bill. 

STATEMENT OF BILL SHEAR, DIRECTOR, FINANCIAL MARKETS AND COMMUNITY INVESTMENT, UNITED STATES GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. SHEAR. Thank you. Chair Landrieu, Ranking Member 

Snowe, and members of the Committee, I am pleased to be here 

this morning to discuss our work on overlap, fragmentation, and 

potential duplication in economic development programs. 

Most recently, in February 2012, we reported on the existence of 

overlap and fragmentation among those Federal economic development programs that support entrepreneurs. Specifically, we have 

focused our analysis on 53 of the 80 economic development programs at Agriculture, Commerce, HUD, and SBA that fund entrepreneurial assistance because these are the 53 programs that appear to overlap the most. 

Specifically, this testimony discusses our work to date on, first, 

the extent of overlap and fragmentation among these programs, 

and second, the availability of meaningful performance information 

on these 53 programs. I will also include information on actions 

taken to improve collaboration in response to previous GAO reports. This summer, we plan to issue our final report on economic 

development programs. 

In summary, based on our work to date, we have found that programs that support entrepreneurs overlap based not only on their 

shared purpose of serving entrepreneurs, but also on the type of assistance they offer. The programs generally can be grouped according to at least one of three types of assistance, technical assistance, 

financial assistance, and Government contracts. 

Some of the overlap and fragmentation among these 53 programs 

is found among programs that assist, for example, disadvantaged 

businesses. In addition, many of these economic development programs also operate in both urban and rural areas. 

While most of the 53 programs have reasonable performance 

measures and tend to meet their annual performance goals, few 

evaluation studies have been completed and little evaluation information exists that assesses the program’s effectiveness. Studies of 
72 

SBA’s three major counseling and training programs are among 

such studies that do look at effectiveness. 

With respect to collaborative practices, in April 2010, USDA and 

SBA signed a memorandum of understanding. The MOU defined 

and articulated a common outcome focused on improving service 

delivery to small businesses in under-served rural areas. 

While we have received information from USDA about collaborative actions its field offices have taken, we have not received 

comparable information from SBA indicating progress in this area. 

However, SBA has provided sound evidence indicating that it has 

taken actions to coordinate services provided by its Small Business 

Development Center, Women’s Business Center, and SCORE resource partners. 

Chair Landrieu and Ranking Member Snowe, 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. And, Mr. Shear, to be honest, the 

overlap does not bother me, and even duplication does not bother 

me. What does bother me is ineffectiveness. I know there has been 

a lot made about your report by many people up here about overlap, overlap. All overlap means to me is that nobody is going to fall 

through the cracks, which makes me happy, because there are a lot 

of threats out there to small business, and I am happy there is 

overlap. 

What I am not happy about is the lack of data about the effectiveness of these programs and that is why I started out my testimony saying that one of my goals this year is going to be to press 

the SBA for this effectiveness data because if programs are not effective these days. We just have to save the money and use that 

money elsewhere we can stretch that taxpayer dollar. So thank you 

for your testimony. 

Mr. Hurn. 

STATEMENT OF CHRISTOPHER G. HURN, CHIEF EXECUTIVE 

OFFICER AND COFOUNDER, MERCANTILE CAPITAL CORPORATION 

Mr. HURN. Good morning, Chairwoman. I would like to share a 

few ideas on how the subsidy for the SBA 504 loan program can 

be reduced and ultimately eliminated. In these challenging economic times, when budgets are shrinking and the American people 

are demanding that Washington spend less, I believe that efforts 

to reduce or even eliminate the subsidy for the 504 is the best way 

to ensure its long-term strength and effectiveness. And let me be 

clear, we want 504 to become zero subsidy again. 

One of the most effective ways to reduce the subsidy is to 

incentivize CDCs to actively pursue recoveries on their 504s. Billions in unnecessary losses on the 504 program are helping drive 

up the subsidy rate. Recent charge-offs, as we have already spoken 

about this morning reported by SBA, reveal that during the last 

three fiscal years, SBA has walked away from nearly $2 billion in 

the 504 program alone, and even more in other SBA loan programs. 

We have the ability to make a substantial impact on these losses 

without requiring any additional taxpayer funds. Let CDCs aid 

small businesses while dramatically improving 504 recoveries. This 

will reduce the need for a subsidy and strengthen the program. 

Given the opportunity to cover costs and share in the recovery 

dollars, this will create a win-win-win scenario. SBA will benefit 

from increased recovery dollars at zero cost to taxpayers. CDCs will 

benefit from minimizing the losses which in turn reduces the subsidy requirement. And in the end, borrowers continue to benefit 

from one of the finest small business capital access programs available. 

I would also recommend extending the 504 Loan Refinance Program and the First Mortgage Lien Pool Program by at least one 

year. Thanks to the efforts of this Committee, as part of the Jobs 

Bill of 2010, they were both unfortunately subjected to bureaucratic 

delays, nearly 14 months in the case of 504 and nearly 19 months 

in the case of FMLP. 
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The reason for extending these two programs is that they will 

bring down the subsidy rate, because both charge higher fees to 

borrowers to offset future losses, 16.55 additional basis points for 

refi and 74.4 basis points for FMLP. I believe these fees are grossly 

overstated and will produce excess fees to help bring down the subsidies in the future. To let these programs expire prematurely as 

they are gaining momentum would be unwise and irresponsible. 

In summary, we need to empower CDCs to maximize recoveries 

and extend two successful 504 loan programs that this Committee 

created less than two years ago, but have yet to get out of the 

starting gate. Thank you and I welcome your questions. 

[The prepared statement of Mr. Hurn follows:] 
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Chair LANDRIEU. Thank you. This will be a very interesting debate between the Chamber of Commerce on one side, Mr. 

Wilkinson on another, and you arguing for the opposite position. I 

am going to ask you how Mercantile Capital makes its profits and 

how your company operates. 

Go ahead, Mr. Evers. 

STATEMENT OF RIDGELY C. EVERS, MANAGING PARTNER, 

TAPIT PARTNERS, L.L.C. 

Mr. EVERS. Chair Landrieu, Senator Snowe, members of the 

Committee, my name is Ridgely Evers. I am a member of the 

Board of SCORE, as well as a serial entrepreneur with a lifelong 

passion for small business. I came here today from Silicone Valley 

because I believe in the power of SCORE. I know you do, too, which 

is great because we need your help. 

I would like to make three points today. First, SCORE is so efficient that it makes you money. We are lean. In 2011, we served 

over 400,000 small businesses with just 18 paid employees supporting over 10,000 volunteers in over 1,000 locations, a volunteerto-staff ratio that would be the envy of any non-profit. 

In 2011, we helped over 40,000 new businesses get started at a cost of $172 each. And at the cost of just $73 each, we created— 

our clients created 95,000 jobs. What that means is that for every 

one dollar this Committee invests in SCORE, our clients returned 

$57 to the Federal Treasury. We believe that is unparalleled by 

any other program. 

Second, no organization is more effective at mentoring than 

SCORE. Essentially, all SCORE clients are first-time entrepreneurs. First-time entrepreneurs are prone to making preventable mistakes, mistakes that result in under-performance or even 

outright failure. 

Because our volunteers are experienced business people, not paid 

employees, they have seen this movie before in their professional 

lives and they are uniquely equipped to help our clients avoid these 

mistakes, not just once, but over the life of their business. 

We do not teach our counselors about business. They are business people. But what we can and do teach them is to be effective 

mentors and give them the tools and infrastructure that they need 

to provide better service, and our results speak for themselves. 

Importantly, SCORE itself runs like a business. You talk about 

metrics. We are constantly working to improve. To that end, over 

the last three years, we have been investing in powerful new infrastructure that when complete will allow us to bring our best resources to every client regardless of where they are and regardless 

of where the resources are. Those same systems will enable us to 

create virtual centers of excellence in areas from farming to finance 

to fabrication. 

Third, SCORE can scale. You have got us in at $11.5 million for 

2013. Senator Snowe has supported us; we are grateful for that 

support. And we understand that in this climate, you have to face 

tough decisions. We also recognize that the amount that any organization can grow year over year is limited, and in that spirit, we 

respectfully increase—we respectfully request an increase to $9 

million in fiscal year 2013. 
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That increase will not go to grow more SCORE. As you can see 

from the chart, the green part is SCORE. Everything above it is 

facing the client. It will flow disproportionately to client services. 

Thus, the increase would significantly and immediately grow tax 

revenues. That is good math. Conversely, our data suggests that 

the proposed $700,000 cut would result in a $15 to $20 million decrease in Federal tax revenue. That is bad math. 

I have worked with and invested in a lot of businesses over my 

career and SCORE has all the attributes you look for when making 

an investment, efficiency, effectiveness, and the ability to scale. 

With your support, we can do that. Thank you. 

[The prepared statement of Mr. Evers follows:] 
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Chair LANDRIEU. Thank you very much. My first question is to 

you, Mr. Shear. Have you reviewed the SCORE program in your 

analysis of overlap and fragmentation specifically, and if you have, 

do you have any comments about it? I realize it is not a Government run program; it is a non-profit, but the Government is one 

of its largest contributors. It has private sector contributors as well. 

Mr. SHEAR. What our focus has been is on SBA’s oversight of its 

entrepreneurial development programs, and as part of that, as I 

noted in my statement, is that SBA has conducted evaluations of 

these programs. So our primary evidence on the SCORE program 

comes from those evaluations. 

The reports from those who participate in the program tend to 

be positive. As you know, the three different programs serve slightly different populations, but I think those evaluations speak for 

themselves. 

The other area where we are still conducting work is in many 

rural areas and especially depressed economies, including the Delta 

Region where we look at the resource partners and how they interact with other players in the economic development process. So 

from that, we have a certain lens on all the resource partners, but 

again, we are relying heavily on SBA information. 

Chair LANDRIEU. Well, I think this is—I do not know how to— 

I mean, your report has gained a lot of notoriety, good and bad. We 

are going to have to, at some point as a member of Congress, stop 

talking about overlap, fracturing, duplication and start getting into 

the meat of the question for policymakers like myself, which the 

bottom line is, just tell me what is working and what does not and 

how you measured it. 

Or just tell me what is working the best for the least amount of 

investment. So I want to ask you again. Do you have an independent evaluation of SCORE, yes or no? You are just taking the 

information that the SBA has given you? And I could also ask, do 

you think the evaluation that SBA has done is sufficient to get at 

what I am asking? 

In other words, for every dollar that we are investing, which is 

a very small amount of money, are we getting the results that Mr. 

Evers has claimed we are? Do you think that is true or not? 

Mr. SHEAR. We do not have a basis to answer your direct question. Where I would completely agree with you, and especially in 

that our major story here is it is overlap, but it is really about fragmentation. It is, how well do these various programs all work together. 

Chair LANDRIEU. I do not even think it is about fragmentation 

or overlap, to be honest. It is just about effectiveness. And I need 

you to do a different kind of job to tell me what programs are really 

working and what programs are not first. And then the second 

thing is, we have the good news. 

Like, for instance, Senator, would be this program is really working well. You only gave it $5 million and it produces a gazillion dollars. This program you give $10 million to, it produces only half. 

So you could decide. You want to stay with this one or go with that 

one? Now, they do overlap so you do not really need both of them. 

That is the way I need this information presented to me, and you 

have not so far. So what you have done, and I know you are well- 
107 

intentioned, but what you have done is provided enough fodder for 

people to run around, which they have been running around, claiming that our programs are dysfunctional because they overlap. Our 

programs are dysfunctional because one works in a rural area or 

two work in a rural area and maybe we should just have one. 

It is not helping. I want to be honest with you. I know your intention is to help, but it is not helping because a helpful report 

gives you an actionable path forward. Just continuing to talk about 

overlap is not. So I am not going to let you keep talking about it 

when you are in front of my Committee. 

I am going to ask you, when you report here, to talk about a program’s effectiveness, and if you have information, any information 

that says that this program is not what Mr. Evers says, you need 

to tell me, or whatever other program. Okay? 

Mr. Wilkinson, I am going to ask you to respond to Mr. Hurn, 

and why do you think he is wrong because you testified completely 

opposite. You support the subsidies. He wants to get rid of them. 

And he thinks the program can work without the subsidies. So 

what do you want to say about that? 

Mr. HURN. First I would say he was commenting on the 504 program from his perspective, and I think he was looking for a path 

to get to a zero. In the past, we have had a zero subsidy in the 7(a) 

program as well. 

Chair LANDRIEU. So you agree with him, that we could get to a 

zero subsidy in 504? 

Mr. HURN. At an appropriate time. And as we had in our written 

testimony, when we had the funding from the Jobs Act and the Recovery Act and we reduced the cost to borrowers in the program 

and increased the guarantees, we saw our loan volume go up dramatically. When we ran out of those fundings, we saw our loan volume drop dramatically. And in fact, our current fiscal year volume 

is already below—about 10 percent below fiscal year 2010. 

Chair LANDRIEU. So how precipitously did it drop without the reduction in fees? I think this chart—I do not know if you have—— 

[The chart follows:] 
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Mr. WILKINSON. I am sorry. I cannot—— 

Chair LANDRIEU. Yeah, I am sorry. You do not have access to 

these charts. But go ahead. I am sorry. Go ahead and just repeat 

what you said, that the loan volume—— 

Mr. WILKINSON. The loan volume in fiscal year 2012 that has the 

same fee structure today that we had in 2010, we are running 

about 10 percent behind fiscal year 2010. So any further increase 

in fees today would likely cause that loan volume to drop even further, which is not something we want to do given this really is 

small businesses’ only access to long-term capital. 

Chair LANDRIEU. And so, Mr. Hurn, tell me again why you want 

to increase the fees. 

Mr. HURN. I think it is not sustainable long-term for these programs to operate with a subsidy. And the fact is, in the recent history, we have operated at zero subsidy and you have two programs, 

specifically the 504 refi and the FMLP program that are set to expire this September, both of which are meeting tremendous demand in the marketplace. 

Chair LANDRIEU. Well, if Senator Snowe were here, she could put 

back up her chart that when the rate of no subsidy, when it was 

zero, the default rate was the highest. And I am not sure we want 

to have a high default rate. I do not know if it was related, because 

it was a default rate that is what is part of the subsidy is taking— 

is including the default rate made in the years where the program 

was operating with fees that paid for it. I do not know if there is 

a cause and effect. 

Mr. HURN. Can we put—— 

Chair LANDRIEU. But getting back to it, you think that we should 

just charge the small businesses the fees? You think that the loan 

volume will stay up? And does your company make more or less 

money or the same when the fees are low or high? 

Mr. HURN. It makes the same. 

Chair LANDRIEU. Same amount. 

Mr. HURN. It does not matter. 

Chair LANDRIEU. So it does not matter? 

Mr. HURN. And the fact of the matter is, we have data that 

shows that refis and FMLP are both meeting demands in the marketplace, even though they have additional fees above the statutory 

limit of the 93/75 basis points. 

And then to the default point, 504s have had, of average historically, just under 2 percent default rate before the great recession 

hit about three years ago. So I am not really sure what the data 

was that we were referring to a few moments ago. But I do not see 

it as a—I think it is easy at one point see it as a tax on—— 

Chair LANDRIEU. So the default rate of the program—— 

Mr. HURN [continuing]. Small business. 

Chair LANDRIEU [continuing]. Is very low. 

Mr. HURN. Yes. 

Chair LANDRIEU. The default rate is very low. 

Mr. HURN. Yes. 

Chair LANDRIEU. But you just object to the low fees. You want 

the fees to be higher and the guarantee rate to be lower? 

Mr. HURN. I would love to have no fees, but the reality is, in the 

world we live in, we have to be responsible, and I think this is such 
110 

a tremendous loan program that is meeting the needs and is so far 

superior to ordinary commercial financing out there right now, that 

I have seen it with my own eyes. I have the data that backs it up. 

It is in my written testimony. 

These are two programs that need to be extended, and the 504 

is really carrying a lot of the commercial banking loans out there 

right now. So yeah, I do not see it as something that is going to 

turn people away. 

Chair LANDRIEU. Okay. 

Mr. Wilkinson. 

Mr. WILKINSON. Can we spend just a minute on the subsidy calculation, the chart that Senator Snowe had up there? 

Chair LANDRIEU. Yes. 

Mr. WILKINSON. If you look, let us just take the 2008 subsidy 

rate, which was zero. That subsidy rate was submitted in the 

President’s budget request in February of 2007 and most of the 

work on that number was completed by the end of calendar year 

2006. So at the end of 2006, you are estimating what you think the 

subsidy rate is going to be for the cohort of loans made during that 

fiscal year time period. 

So first of all, the subsidy rate will never, ever be exactly correct. 

It is a guess. And so as we see in fiscal years 2005, 2006, 2007, 

and 2008, I believe, the original estimate was a zero subsidy rate. 

Now, what the Credit Reform Act requires is that SBA go back 

in and look every year and say, Okay, this is what we estimated 

was going to happen. What actually happened? And we know that 

in fiscal year 2008, as we got into the recession, we were not at 

a zero subsidy rate. That number was incorrect. Our losses, because of the recession, because of its depth and its breadth were 

higher. 

Chair LANDRIEU. So you are saying that this chart is incorrect? 

Mr. WILKINSON. Those are original estimated subsidy rates. That 

is right out of the President’s budget request every year. 

Chair LANDRIEU. Original, but the actual would be different? 

Mr. WILKINSON. Yes, ma’am. 

Chair LANDRIEU. And do we know what the actual is? 

Mr. WILKINSON. So what they do with the subsidy model, and I 

am no subsidy model expert, but what they do is they learn from 

all the cohorts in the past. And so we know that we under-estimated the cost of the program in 2008 and we factor that into the 

calculation going forward. 

So that now we have, as part of the subsidy estimate for 2013, 

I am sure there is some number for the recession losses that occurred. So is it quite possible that the $351.4 million is too high? 

Yes, it is quite possible. We will not know that until we get a few 

years down the road. 

But as you heard the Administrator testify, the quality of the 

credits going into SBA today is much higher than it was. They use 

what they call a Small Business Predictability Score. So the credit 

scores of the borrower going in today are much higher than they 

were in years past. I would not be surprised that five or six years 

from now we sit back and look and say, Gee, we over-estimated the 

cost of the program today. 
111 

Chair LANDRIEU. And we do have the actuals here, and just for 

the record, in 2005, they were 1.5; in 2006, 1.3 instead of zero; in 

2007, 1.3; 2008, 2.0; and 2009, 2.5 and 83/82. Okay. Is Senator 

Snowe coming? 

Mr. WALKER. She is not. She is at the vote. 

Chair LANDRIEU. She is not? Okay. All right. I am going to give 

you all one minute each to wrap up, starting with you, Ridgely, or 

30 seconds to wrap up. I am sorry for the delay and the tight time 

frame, but I have got something and Senator Snowe is not coming 

back. Go ahead. 

Mr. EVERS. I think that the net of it is that SCORE actually 

makes sense as an investment in a tough time, and the numbers 

that we are presenting to you are not numbers that we have come 

up with ourselves. They are the result of research that we have 

been the beneficiary of through Gallop. We can get you the hard 

data on that. These are real numbers. 

As I look at this as a taxpayer, I love this. If I can put a dollar into something, get $57 back, and at the same time help strengthen 

the fabric of the local communities through a program like SCORE, 

great. And the only reason that is possible, and the thing that 

makes SCORE entirely different from everybody else, is the fact 

that all of our staff, other than 18 people in Herndon, are volunteers. 

Our field staff, our field management staff are all volunteers. We 

have a regional vice president in the Southwest now who is a volunteer. That is a huge gift to the Government and to small business on the part of business people. And I think, to be perfectly 

candid, I think that we owe it to them to honor them with a budget 

that supports them, that allows us to underpin them so they can 

be as effective as possible. The bang for the buck is clear. 

Chair LANDRIEU. Thank you. 

Mr. Hurn. 

Mr. HURN. Well, I would just say again, if subsidies are a concern, there are at least three things that we can do to bring the 

subsidy rates down. I think it is just responsible for the SBA to empower CDCs who our local experts for the SBA and who are involved and can be involved early in the process, as opposed to waiting until the end when Treasury gets involved far too late in the 

process. 

That is a very simple thing, and I would urge the Committee to 

consider a pilot program to let CDCs participate in that. 

The second thing I would say is, I really feel we need to extend 

the 504 refinance program. These are better performing loans than 

even regular 504s, in many cases, and if you review my written testimony, you will see why I make that argument. The FMLP is basically the—SBA has assumed a preferential risk in this situation 

while creating a secondary market in this program. 

It is the only market that is actually meeting the needs of special 

purpose commercial properties out there, and has really shown 

great strides since both of these programs have gotten away from 

some of the delays that they had when they first were launched. 

So I would urge the Committee to consider both of these programs. 

Thank you. 

Chair LANDRIEU. Thank you. 
112 

Mr. Shear. 

Mr. SHEAR. I would like to thank you for inviting me. I fully 

agree with you that evaluation of these programs is just integral 

to looking at the cross-cutting issue of serving small businesses. We 

are collecting every piece of information we can that is available to 

try to inform those decisions in our July report. 

We are also looking upon the agencies, including SBA, to collect 

information as part of managing their programs so they can better 

determine which programs are working the best and how strategically SBA, and SBA in partnership with other agencies, can better 

serve the small business community. So again, thank you. 

Chair LANDRIEU. Mr. Wilkinson. 

Mr. WILKINSON. I would just like to add, thanks for having me 

again today. Would close with, I am glad to hear that the U.S. 

Chamber has submitted a letter in support of the continued appropriation for this program. I know that the International Franchise 

Association has also sent in their letter of support. 

And then from the NADCO testimony, their statement is, Due to 

the low cost of job creation under 504 and the high impact on the 

economy, NADCO supports the Administration’s budget request for 

continued borrower fee relief through an appropriation. And, of 

course, from our testimony, NAGGL, also supports the continued 

appropriation. Thank you. 

Chair LANDRIEU. Great. And I just want to recognize the head 

of the 504 trade association, Chris Crawford. Chris is in the audience, and we could have had you up on this panel. I am sorry, but 

thank you for your support of the program. 

I think we will adjourn. The record will stay open for two weeks. 

We thank you all very much. It has been a very, very informative 

hearing. Meeting adjourned. 

[Whereupon, at 12:15 p.m., the Committee was adjourned.] 
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