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27-286 pdf 2006

S. HRG. 109–430

THE PRESIDENT’S FISCAL YEAR 2007 BUDGET

REQUEST AND LEGISLATIVE PROPOSALS FOR

THE SBA

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MARCH 9, 2006

Printed for the Committee on Small Business and Entrepreneurship

(

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

(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED NINTH CONGRESS

OLYMPIA J. SNOWE, Maine, Chair

CHRISTOPHER S. BOND, Missouri

CONRAD BURNS, Montana

GEORGE ALLEN, Virginia

NORM COLEMAN, Minnesota

JOHN THUNE, South Dakota

JOHNNY ISAKSON, Georgia

DAVID VITTER, Louisiana

MICHAEL B. ENZI, Wyoming

JOHN CORNYN, Texas

JOHN F. KERRY, Massachusetts

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

MARY L. LANDRIEU, Louisiana

MARIA CANTWELL, Washington

EVAN BAYH, Indiana

MARK L. PRYOR, Arkansas

WESTON J. COULAM, Staff Director

NAOMI BAUM, Democratic Staff Director

(III)

CONTENTS

OPENING STATEMENTS

Page

Snowe, The Honorable Olympia J., Chair, Committee on Small Business

and Entrepreneurship, and a United States Senator from Maine ................... 1

Kerry, The Honorable John F., a United States Senator from Massachusetts .. 11

Vitter, The Honorable David, a United States Senator from Louisiana ............. 14

Landrieu, The Honorable Mary, a United States Senator from Louisiana ........ 15

Coleman, The Honorable Norm, a United States Senator from Minnesota ....... 22

Pryor, The Honorable Mark, a United States Senator from Arkansas ............... 23

Thune, The Honorable John, a United States Senator from South Dakota ....... 39

Enzi, The Honorable Michael B., a United States Senator from Wyoming,

prepared statement .............................................................................................. 72

WITNESS TESTIMONY

Barreto, Hon. Hector V., Administrator, U.S. Small Business Administration . 23

Prepared statement .......................................................................................... 51

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Almeida, Ann Marie

Prepared statement .......................................................................................... 95

Coleman, The Honorable Norm

Opening statement ........................................................................................... 22

Enzi, The Honorable Michael B.

Prepared statement .......................................................................................... 72

Kasoff, Barbara

Prepared statement .......................................................................................... 109

Kerry, The Honorable John F.

Opening statement ........................................................................................... 11

Letter from James Morrison ............................................................................ 114

Landrieu, The Honorable Mary

Opening statement ........................................................................................... 15

Prepared statement .......................................................................................... 17

McNeil, Chris Jr.

Prepared statement .......................................................................................... 115

National Association of Development Companies

Prepared statement submitted by Kurt Chilcott ........................................... 79

Pryor, The Honorable Mark

Opening statement ........................................................................................... 23

Schubert, Lynn M.

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

Snowe, The Honorable Olympia J.

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

Prepared statement .......................................................................................... 5

Letter from Pamela J. Mazza and Antonio R. Franco ................................... 102

Thune, The Honorable John ...................................................................................

Opening statement ........................................................................................... 39

Vitter, The Honorable David

Opening statement ........................................................................................... 14

Wilson, Donald

Prepared statement .......................................................................................... 88

(1)

THE PRESIDENT’S FISCAL YEAR 2007 BUDGET

REQUEST AND LEGISLATIVE PROPOSALS

FOR THE SBA

THURSDAY, MARCH 9, 2006

UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP,

Washington, D.C.

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

SR–428A, Russell Senate Office Building, Hon. Olympia Snowe,

(Chair of the Committee) presiding.

Present: Senators Snowe, Coleman, Thune, Isakson, Vitter,

Kerry, Landrieu, and Pryor.

OPENING STATEMENT OF THE HONORABLE OLYMPIA SNOWE,

CHAIR, SENATE COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP, AND A UNITED STATES SENATOR

FROM MAINE

Chair SNOWE. The hearing will come to order. Good morning and

welcome to today’s hearing on the President’s Budget and Legislative Proposal for the Small Business Administration. I want to

thank Administrator Barreto for being here today as we examine

the SBA’s priority for the coming year.

At a small business forum earlier this year, President Bush said,

‘‘Small businesses have been a driving force behind the tremendous

growth and job creation of recent years. By adopting sound policies

that help our small businesses continue to grow and expand, we

will keep the economy moving forward and extend prosperity and

hope in our country.’’

Prosperity and hope do, indeed, embody the spirit of the 25 million small business owners in this country. They take risks others

do not. They transform their ideas and dreams into realities. Their

hobbies become their professions. Their entrepreneurial spirit is everywhere, and their products and services have made the United

States the most prosperous, powerful and generous country on

earth.

Small businesses represent 99 percent of all employers, create

nearly 75 percent of all net new jobs, and employ 51 percent of the

private-sector workforce. They are the foundation, the base, the

core of our economy. America is America because of our small businesses.

Given these facts, I am truly disappointed by the proposed funding level of $624 million for the Small Business Administration for

fiscal year 2007. Excluding the Disaster Loan Program, only $425

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million will go to the SBA’s core programs, which continues a trend

of decreasing SBA budgets over the last 6 years that have reduced

these programs by 25 percent in that period, as you can see on this

chart that I think illustrates the point, and what is happening with

the steady erosion and decline of funding. Moreover, since 2001,

SBA proposes to reduce its overall budget by an astounding 37 percent. It is 25 percent of the core programs, and overall, it is 37 percent since 2001. The SBA’s budget represents less than 3/100ths of

a percent of the total Federal budget. Is this really the place for

the administration to find additional savings when you get more

bang for the buck with small businesses in generating jobs in

America?

The SBA argues that it ‘‘does more with less,’’ but the Agency’s

resources and employees are stretched too thin. We cannot, on one

hand, cite how important small businesses are to our country and

our economy, and on the other hand, refuse to provide the Small

Business Administration with the resources it requires to meet its

mission.

When Hurricanes Katrina and Rita hit to Gulf region, the SBA

desperately needed a full complement of resources to respond to

this unprecedented disaster. To date, the SBA has resolved 90 percent of small business disaster loans and 73 percent of all disaster

loan applications submitted by victims of Hurricanes Katrina and

Rita. The 80,000 loans approved for victims of these hurricanes will

provide a total of $5.7 billion for the rebuilding of homes and businesses in the Gulf region. That is the good news.

On the other hand, only $450.6 million, or 8 percent of the total

$5.7 billion, has actually been disbursed thus far. We are here

today to urge the SBA, as we have been doing over the last 6

months, to improve its processes and its procedures and to get

more money out to the people that need it in order to rebuild these

economies. In fact, as we have also learned, the Agency’s Disaster

Credit Management System was incapable of handling the high

volume disaster loan applications, and we have been working with

the Administrator on this question, which they have had more than

350,000 thus far, and the SBA failed to accurately monitor its disaster financial information to implement its disaster transformation workforce strategy, and this tragic response to a devastating disaster must not be repeated.

We have consistently led efforts on behalf of this Committee to

urge the Agency to improve its loan processing activities. We have

consistently demanded that the SBA provide more effective relief

to the hurricane victims. I have urged, and I know others as well

in the Committee, and the Committee itself, has urged SBA officials to process hurricane disaster loans with greater urgency and

efficiency.

Specifically, among other things, I have asked the SBA to develop a comprehensive disaster response plan that accommodates

different scales of disasters, improve the process for accurately predicting disaster loan volumes, work with local resource partners to

determine individual needs to better coordinate disaster relief efforts, hire additional employees for processing centers, including

business loan offices and data entry staff, to meet the current deVerDate 11-MAY-2000 11:53 Jun 30, 2006 Jkt 027286 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 C:\SBA\27286.TXT CarolB PsN: CarolB
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mand, and hire additional loan verification officers to analyze damaged homes and businesses.

Beyond the doors of the SBA are volumes of small business success stories that remain untold. The SBA and its programs have

generated a tremendous return on investment, helping to create or

to retain more than 4.5 million jobs since 1999. Small businesses

yearn to grow, flourish and thrive, and the SBA has the experience

and the resources to be their bridge to success.

However, a steady decline in the SBA’s budget could jeopardize

its ability to provide these positive economic stimulus in the future.

More importantly, if we fail to provide sufficient support to SBA’s

core lending and business development programs, we threaten to

reduce small businesses’ ability to compete.

In addition to analyzing the SBA’s declining budget request, I am

also deeply concerned about the SBA’s plan to charge additional

fees on small businesses in the 7(a), the 504 and the Small Business Investment Company programs. These are highly successful

programs. None of them receives appropriations to subsidize its

loans. Last year, at no cost to the taxpayer, the 7(a) program provided $14 billion in small business loans, the 504 program provided

more than $10 billion in loans, and the SBIC program provided

$2.9 billion. Now the administration proposes to increase fees on

small businesses to raise $7 million in revenue, which will be used

for the SBA’s administrative costs. Increasing fees paid by small

businesses is not the way to reduce the budget. These small businesses are already paying fees and taxes to fund the Agency. Let’s

not make it more costly for them to access financing.

SBA loan programs have produced success story after success

story, which include Eric Thorson, the Administration’s nominee to

be the SBA’s next Inspector General. At a hearing last week, Mr.

Thorson told the Committee that he began his small business with

an SBA veteran loan after returning from a tour of duty in Vietnam. SBA loans have assisted the founders of Federal Express,

Outback Steak House, Calloway Golf, and thousands of other successful businesses.

The administration is also proposing that disaster loan borrowers

be required to pay a higher interest rate after the first 5 years of

their loan to lower the cost of disaster loans by a total of $41 million for fiscal year 2007. Putting a greater burden on disaster victims is a short-sighted policy that Congress should not adopt, and

I strongly oppose this proposal.

I also intend to fight any attempt to eliminate the SBA’s

Microloan Program, which provides loans of up to $35,000 in technical assistance to new and growing small businesses. It is a relatively inexpensive program that helps entrepreneurs start and

grow businesses throughout our Nation. In my own State of Maine,

almost 90 loans have been made in this program over the last 2

years for a total of $1 million. It is a proven record or helping small

businesses who otherwise could not secure financing, and I regret

the administration’s proposal would eliminate this crucial source of

small business growth.

I will continue to oppose the administration’s proposal to insufficiently fund programs such as the Small Business Development

Centers, Veterans’ Business Development, and Women’s Business

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Center, which served over one million clients in 2005. Not only

have these programs been level funded for the last 4 years, but this

year the SBA proposed to decrease their funding. These programs

have exceeded their potential, and it is time to provide them with

the necessary resources they need to reach and assist more small

businesses.

During the course of this hearing, I also wish to examine the

Agency’s funding and management of Government contracting and

business development programs, which are subject to your executive direction as well.

According to reports prepared by the GAO and the SBA’s Inspector General last year, the SBA failed to review over 80 percent of

bundled contracts. The SBA’s oversight of prime contract awards

and of the 8(a) program are among the Agency’s major management challenges, and large contractors at the Department of Energy have repeatedly overstated their subcontracting achievements.

Despite the claims last year to increase the Government contracting and business development budget by 5 percent, the budget

actually reflects a $5 million decrease, and I applaud your decision

to reverse this decline in 2007.

I think we can all agree in the final analysis that small businesses are essential to America’s success. Therefore, a strong and

vibrant Small Business Administration is instrumental to achieve

that success. The status quo is simply not an option.

Administrator Barreto, this Committee is here to assist you

today, and hopefully we can reverse some of the directions that

have been proposed, because, frankly, I think it is somewhat of a

dismal direction where SBA is headed, and we will get into a number of these issues, but I am deeply concerned.

Given the fact that Small Business, probably more than any

other agency, can create more value for its money, and it seems

counter-intuitive that we are moving in a direction that undercuts

the very programs that created jobs and created businesses in

America.

[The prepared statement of Chair Snowe follows:]

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Chair SNOWE. I now recognize the Ranking Member, Senator

Kerry.

OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY,

A UNITED STATES SENATOR FROM MASSACHUSETTS

Senator KERRY. Madam Chairwoman, thank you very much.

Thank you for this hearing and for that important opening statement.

When I think about it, as I was listening to your statement, it

is a pretty remarkable statement to come from the chairperson of

this Committee, which is the Committee of the majority which represents the same party as the administrator that has come here.

This is not a party issue. It is not Republican/Democrat. It is sort

of amazing that this budget would come to this Committee when

you think of the past hearings that we have had over the last years

with the same administrator and the same administration. It just

seems like a Johnny-one-note process of repetition of the same-old,

same-old, that does not seem to hear what anybody sitting at this

table or on this Committee is saying.

I see this chart that shows increased loans, and I know what you

are going to say. You are going to come in here and say we have

got a big increase in the loans and so forth, but you did not do that.

We did that. I mean you are going to come in here and show us

a chart that says lending went up, and we did that. You did not

propose it. You did not ask for it. You did not fight for it. We had

to fight for it over your objection.

There is a piece of me that really did not want to come to this

hearing. I am going to tell you that frankly. I have been here 22

years, I have never said that. The reason is there is just no dialogue. I do not know if you called the chairperson of this Committee and said, ‘‘Hey, how do we get this to be a working process

this year? Why don’t we sit down before we put the budget together?’’ I do not know if you did that, but I know you did not do

it with me.

I take a look at this, and I sort of say to myself, are you trying

to get rid of the SBA? I mean, is that really what is going on here

over a period of time? Well, the budget request has $624 million

for the SBA. What do we have? $650 billion that has been going

to Iraq, or more, and we got less than a billion dollars going to the

SBA in its entirety, which is a reduction of 17 to 18 million compared to the 2006 budget. This is the sixth consecutive year of

budget cuts for the SBA, resulting in a 37 percent reduction to the

SBA funding since the Bush administration came into office, a 41

percent reduction when compared to the fiscal year 2001 budget request.

The SBA has experienced the deepest budget cuts of any Federal

agency during the Bush tenure. It is the second year in a row SBA

has been demoted as a major Federal agency. OMB no longer lists

SBA among the major Federal agencies, which means it is impossible for Congress and the public to compare that budget with the

previous years of other agencies. I have sent a letter to OMB, urging them to restore SBA to the list of major agencies, which I think

it ought to be.

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For the second year in a row the administration is proposing to

eliminate line items for contracting and counseling programs, including the 7(j) Technical Assistance Program, the HUBZone Program, which Senator Bond from Missouri worked hard to put in

place, and I joined with him in cosponsoring it when he was chairman. The Native American Outreach Program. What is it? Native

American Outreach is complete in America? We got what we need

in terms of Native American participation in the full citizenship of

our country? Who recommended we cut that? U.S. Export Assistance Center Program, we do not need to increase American exports

among small business?

Last year, I opposed that proposal, along with others, because it

limits transparency and reduces the authority of this Committee,

and the Appropriations Committee, to ensure that funds are allocated. It is almost as if it did not matter that we opposed it last

year and changed it. You are back again, same old, same old, without a new rationale.

For the third year in a row the administration has requested

zero funding for the 7(a) program, claiming to realize a savings of

$100 million for the taxpayer. That is not a savings of $100 million

for the taxpayer. That is passing on all the costs to the small business borrowers and lenders. That is an increased tax on them. You

come here and you tell us that you are making a savings by taxing

people more. It is a pretense, it is just a shell game. It is unclear

why the SBA would limit the level to $17.5 billion when people are

requesting 18 billion, and the program requires no appropriation?

So you pass on the cost and you still limit the level.

You are also proposing to increase fees on loans, as the chairwoman said, a million dollars or more for 7(a) working capital, 504

loans for property and equipment, SBIC venture capital programs,

and these new fees will result in combined savings of only $7 million. They will impact 3 percent of 7(a) borrowers, 15 percent of 504

borrowers, and the majority of SBIC deals. These administrative

fees are the first time the SBA has attempted to pass along administrative costs to lenders and small business borrowers in that

field.

In addition, the pressure that puts on programs to make smaller

loans is just a bad precedent, and if Congress were to go along,

which I hope it will not, we will likely see another increase in administrative fees, or a larger number of those loans in coming

years.

In microloans, for the third year in a row, the President is proposing to eliminate the Microloan Program and microloan technical

assistance counseling, the largest Federal program solely dedicated

to supporting the credit needs of the smallest businesses and selfemployed entrepreneurs.

It is stunning when you look at the rate of return on that, the

rate of compliance, the minimalness of loss versus gain, which is

a net gain. Incidentally, you have to ask, what is the rationale?

Why do that? That program serves a completely different kind of

borrower. It serves a special need, and these are people that participate in the program that are not able to satisfy the minimum

score of 680 to 700 required by most conventional lenders. Yet, in

spite of the labeling, since its inception in 1992, the Microloan ProVerDate 11-MAY-2000 11:53 Jun 30, 2006 Jkt 027286 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 C:\SBA\27286.TXT CarolB PsN: CarolB
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gram has had only two total losses, and the program creates one

job for every $1,800 that is loaned, compared to the other loan programs which are about 15 times, 15 times as expensive.

Minority lending, I know you are going to claim you are doing

a record lending to minorities, but the fact is, in the 504 program,

the number of loans and dollars of loans to African Americans have

stayed at a flat 2 percent, the numbers of loans to Hispanics went

up only 1 percent, and the dollars stayed at 6 percent, stayed the

same, and loans in dollars to Asians have increased, but the 504

loans to women, which has always been a major focus of this Committee, have decreased from 19 percent to 15 percent, and dropped

from 16 percent to 14 percent in dollars. Loans to African Americans have dropped in number in the Microloan Program from 28

percent to 21 percent, and dollars have dropped from $7.1 million

to $5.7 million. Loans to Asians and women are essentially flat,

and so forth.

In the Disaster Loan Program—and we have gone through this—

amazingly, the President’s budget includes a request to increase

the cost of disaster loans to homeowners and small businesses by

eliminating the low-interest cap of 4 percent, and raising the interest rates on these loans after the first 5 years. Now, these loans

are typically 30-year loans, so basically you are attempting to save

money on the backs of disaster loan victims, no other way to describe it. That is where the savings comes. You raise the interest

rates, you take away the cap that we have had in there, it is a disaster loan, disaster victims are going to pay more. I know that that

will be a focus of some questions here today.

As early as December 2005, you knew, Mr. Administrator, that

you had underestimated the average size of disaster loans in the

Gulf Coast by one half. You knew you would be running out of

money, but you did not alert the appropriators until the end of January. You did not alert out the Committee until the second week

of February. I wrote to the President to express our concerns about

the late notice, and urged that the administration request full

funding for disaster loan so that we would not be in the same situation in April, with the program on the brink of running out of

money, and we finally managed to get something done. Congress

had to step in three times so far this fiscal year to prevent the Disaster Loan Program from turning away hurricane victims.

I could go on. There are other areas. I do not want to tie this

all up. You know, it is stunning—and the Women’s Business Centers being cut, what is the rationale for cutting Women’s Business

Centers? The Small Business Development Centers, which provide

counseling and training for small businesses, has been at level

funding since 2001, and this year you cut it, a one million dollar

cut, down to $87 million. The fact is that years of level funding

have eroded the SBDC network, challenging the very notion that

it is possible to do more with less. In addition, the total of SBDC

clients has been declining since 2003 due to those budget cuts.

I think you are on a terrific track to undo years of effort by this

Committee and the SBA to grow small business in America in the

most propitious fashion possible. I know you are going to be able

to show, yes, sure, there are loans being made, yes, there are businesses that are still in business and they are still growing, but that

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is not the standard, that never should be the standard. The standard is, are we doing everything in our power that makes sense

within all the limitations and choices of our budget to grow our

small businesses and facilitate their lives, and help people in a disaster situation. There has always been a unanimity in this Committee, a bipartisan approach, with an understanding that we are

not trying to have the Government makes these choices for people.

When you look at the record at Intel and Callaway Golf and FedEx

and a bunch of people who got started with loans through this effort under a different construct that you have created, we have repaid the budget of the SBA many times over in the taxes of just

a few success stories alone. This is an unbelievably shortsighted,

in my mind, and incomprehensible approach to the small business

needs of the country.

Thank you, Madam Chairman.

Chair SNOWE. Thank you, Senator Kerry.

Senator Vitter.

OPENING STATEMENT OF THE HONORABLE DAVID VITTER,

A UNITED STATES SENATOR FROM LOUISIANA

Senator VITTER. Thank you, Madam Chairman, for this important hearing on the SBA budget, and thank you, Administrator

Barreto for being here.

Obviously, I guess it goes without saying, I am particularly focused on the SBA and this proposed budget with our recent disaster experience, Hurricanes Katrina, but also Rita. We always

need to underscore that. There is enormous need and challenge in

the Rita devastated area with all of that in mind. Certainly, I am

going to work with you on this budget with all of those needs in

mind.

I have to say we continue to be frustrated in the disaster area

with the lack of speed and lack of efficiency in terms of getting approved SBA loans to the people that need it. It has been ramping

up. I thank you for that. We have much further to go. I am looking

carefully at this budget to see how it can improve that dramatically

and get us there.

With that in mind, I do want to focus on one very specific issue

that the Chairwoman mentioned, which I also have grave problems

with, and that is the proposal to raise interest rates in the future

after the first 5 years on disaster loans. I have to tell you flat out,

in the present context, and with the recent experience on the Gulf

Coast of last year, I really find this proposal offensive, quite frankly. I think it has no place in our continuing challenge to get needed

help to those businesses.

I realize it is prospective. I realize it will not impact the immediate Gulf Coast need, but again, just as a gut reaction in light of

the failure of the SBA to meet the enormous challenge, which I understand is of historic proportions unlike the SBA has ever faced,

I just think that proposal in particular is offensive, and certainly

unacceptable to me. With that in mind, I will certainly be proposing a budget resolution amendment to reverse that.

That is all I have, Madam Chairwoman.

Chair SNOWE. Thank you, Senator Vitter.

Senator Landrieu.

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OPENING STATEMENT OF THE HONORABLE MARY LANDRIEU,

A UNITED STATES SENATOR FROM LOUISIANA

Senator LANDRIEU. Thank you. Madam Chair and Senator Kerry,

thank you for your really extraordinary leadership in holding the

SBA’s feet to the fire on the Disaster Loan Program, and particularly, the number of hearings you have called, the number of letters that you have sent, and the bipartisan leadership that you

have given to this issue. Those of us along the Gulf Coast, and

speaking for our constituents, truly appreciate the extra efforts

that are being made.

Before Katrina and Rita hit, Mr. Administrator, Louisiana had

more than 95,000 small businesses. Today the SBA is a lifeline for

the 18,000 businesses that were completely destroyed in Louisiana

by the storm, and the 365,000 residents that were left homeless,

many of whom still are homeless in temporary, inadequate shelter

throughout the country. The SBA’s handling of the Disaster Loan

Program, in my view, has been a disaster in itself. Loan processing

delays, not enough loss verifiers in the region, consistent resistance

to bridge loans—although they have proven to work in Florida, in

Mississippi, and in Louisiana—consistent resistance to working in

the right partnerships with banks and credit union to get loans to

people more quickly.

I was hopeful, after the hearings that we have conducted and the

leadership of both of these leaders on this Committee, that this

budget that we are considering would reflect the lessons we have

all learned in painful ways, and unfortunately, it does not. Instead

of budgeting for potential staffing needs to handle future disasters,

the budget cuts Disaster Loan Program staff. Does that make any

sense? We have already seen how long it took the SBA to staff up

to handle the workload of Katrina and Rita. Do we think we are

not going to have any storms again? The hurricane season starts

again in June, just a few months from now.

Back in late January, as Senator Kerry said, the SBA almost ran

out of money for the Disaster Loan Program. In the midst of the

worst, unprecedented natural and manmade disaster in the history

of the country, we almost ran out of money in this program. I have

put up a chart to express and to reiterate the timeframe of what

happened along that line. As Senator Kerry said, we had to step

in twice at the last minute to reprogram to keep this vital lifeline

open for our businesses that want desperately to get back to work.

Given all this information, the Disaster Loan Program is too important to have come that close to going belly up. That is why the

Members of this Committee, both Republicans and Democrats, are

tired of what seems like SBA mismanagement and the inability to

grasp the magnitude of the disaster, and its inability to be agile

and flexible, to listen, to hear what is happening on the ground and

make those adjustments, and as a result, many businesses in Louisiana are suffering.

One particular business that was highlighted, Hubig Pies, anybody from Louisiana has eaten many Hubig Pies. They come in all

different flavors, apple, cherry, cinnamon, et cetera. Mark Ramsay,

President of Hubig Pies, was on—this is one of our most outstanding businesses, 92 years in business, Hubig Pie trucks all

over Louisiana, south Louisiana, Mississippi and throughout the

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Gulf Coast—applied for a loan just weeks after the disaster, still

had not gotten response. They went through their own sources to

get that company up.

I brought the phone book in the event that this might be helpful

to people that work at the SBA. Here is a whole list of businesses

that were in business in Louisiana. If they want to verify if people

were in business, you know, let your fingers do the walking, look

right here to see if they were in business, and verify the fact that

these loans need to get to these people. Without the SBA, I do not

know how we rebuild the Gulf. I do not know how we rebuild it

without small businesses. We do not have major Fortune 500 companies along the southern part of Louisiana and Mississippi that

got hard hit. We have a few. The cluster, the backbone, the energy,

the innovation, the strength, is in our small businesses.

I just want to say, Madam Chair, the hurricanes did not do us

in, it was the Federal collapse of a levee system that did. These

businesses paid their taxes, they paid their insurance, they paid

their bills, and they have been in business for 60, 80, 90 years, and

come to the Small Business Administration—never before having to

need help—but come to the Disaster Loan Program and either they

cannot get processed, cannot get verified, and then to pour salt on

the wound, as Senator Vitter said, what they get is a recommendation to increase their rate for next year to bail out the Federal Government. Who needs bailing out? These businesses need a hand up.

Let me just end by saying that, Mr. Administrator, we do not

need a cheerleader for a structure that does not work. We need a

champion for small businesses in the Gulf that want to get back

to work. We expect that from you. If we cannot get it, we will get

someone else.

Chair SNOWE. Thank you, Senator Landrieu.

[The prepared statement of Senator Landrieu follows:]

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Senator Coleman.

OPENING STATEMENT OF THE HONORABLE NORM COLEMAN,

A UNITED STATES SENATOR FROM MINNESOTA

Senator COLEMAN. Thank you, Madam Chair. I would second the

comments of my colleagues from Louisiana in terms of what we

need. My assessment is, well, a little less overall damning, but certainly in regard to Katrina, the issue about flexibility and agility,

need to move quicker, is absolutely critical, and I think the overall

response, the State response, the local response and the Federal response to Katrina was clearly a failure, and we simply have to do

better, and so we need that greater flexibility.

I have to pat you on the back for the success of the 7(a) program

in terms of the number of loans and the number of dollars. I am

going to applaud your efforts at joint increase efficiencies, not a

bad thing to do. I even note in regard to the disaster loans, as I

understand the proposal here, it is deep interest subsidies for those

in need now, but then after 5 years, when people are back on their

feet, presumably, maybe we have to extend that time, maybe it has

to be longer than 5 years. At a certain point in time when folks

are on their feet, then they will be treated as other businesses in

the same category. It seems to be pretty logical. Again, when the

need is great, we have to meet the need, and then when people get

back on their feet, they are treated like other businesses, and that

is probably not a bad thing, maybe a timing issue here.

I do have concerns about the President’s budget in regard to

some very specific program. I share the concern of my colleagues

about reducing, eliminating funding Small Business Development

Center. I share the concerns expressed about the HUBZones, and

I, in particular, share the concerns expressed by the Microloan Program. We went through this last year. I understand, by the way—

I have read the rationale, I understand that the cost of the

Microloan Program is significantly greater per loan than it is for

7(a) program, so 7(a) minimal costs, Microloan Program greater

costs. The nature of Microloan financing is you are going to have

greater costs, but these are the kind of programs we need.

I chair the Western Hemisphere Subcommittee in Foreign Relations. We are touting microloans as one of the great U.S. initiatives

that should be copied throughout the world, but then at home we

are not funding them, and I just think that is a mistake. I understand there is a rationale on the table. The rationale has to do with

cost of processing loans, in an effort to increase efficiencies, that all

Government agencies should be looking at ways to do that, but I

think when you weigh it out and you look at some of these,

Microloan in particular, Small Business Development Centers,

HUBZones, I think we have to go in a different direction.

I think you have a challenging job. We all understand that the

future, the growth of the American economy is tied to the success

of small business, and Government does have a role to play here,

it does have a role to play. I look forward to working with you. I

do hope that we measure twice before we cut once, and if we do

that, I think we will be well served.

Thank you, Madam Chairman.

Chair SNOWE. Thank you, Senator Coleman.

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Senator Pryor, do you have any comments?

OPENING STATEMENT OF THE HONORABLE MARK PRYOR,

A UNITED STATES SENATOR FROM ARKANSAS

Senator PRYOR. Thank you, Madam Chair. I really just have one.

First, thank you for your leadership on this, and your vigilance on

helping small businesses around the country.

Secondly is that we received a call yesterday into our office here

that there is a woman who is dislocated from Louisiana after the

hurricane, and she has been denied an SBA loan, and she needs

the SBA loan in order to establish the fact that she is going back

to New Orleans to reclaim her property. Otherwise, her property

may be taken away from her down there. She was denied the loan

from the SBA, even though her credit score apparently was fine,

because she missed two payments to the IRS after the hurricane.

She lost her job, lost her business, lost her home, lost everything

she owned. She misses two payments to the IRS, which I think

most people would understand, but nonetheless, the SBA has denied the loan.

I just bring that to your attention and to the Committee’s attention because it shows sometimes how the SBA sometimes misses

the forest for the trees, where they have to have all their boxes

checked, and they really are not helping people that need the help

the most, and certainly, we want to encourage people like this

woman, Louisianian, living in Arkansas now—does not want to be

in Arkansas, no offense to Arkansas—but she wants to be back

home in Louisiana. She wants to get back there and get her life

back together. I would like to visit with you about that when you

have time.

Thank you.

Chair SNOWE. Thank you, Senator Pryor.

Administrator Barreto, please proceed. I think you can understand the depths of the concerns that have been expressed about

the direction of these proposed cuts, and otherwise fees and so on,

and also the response to disaster with the hurricane. I hope that

we can have a discussion with respect to a variety of these issues

that have been raised by Members of the Committee.

I also inform the Committee Members that we intend to vote on

the Eric Thorson candidate for the Inspector General off the floor

after a vote.

Please proceed, Administrator Barreto.

STATEMENT OF HON. HECTOR V. BARRETO, ADMINISTRATOR,

U.S. SMALL BUSINESS ADMINISTRATION

Mr. BARRETO. Thank you, Madam Chairman, Ranking Member

Kerry and Members of the Committee. Thank you for inviting me

here today to discuss the President’s budget request for the U.S.

Small Business Administration, and related legislative issues.

Since 2001, the SBA has been on a mission, a mission to deliver

more services to the Nation’s small businesses as efficiently and as

effectively as possible. We are proud of the SBA’s successes in that

quest, and the fiscal year 2007 budget reflects a continuation of

this goal.

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Lending is at an all-time high, more clients than ever are being

served by our Entrepreneurial Development Programs, and we are

improving methods to assist small businesses gain fair access to

Government contracting opportunities. Many measures have been

implemented to further that goal. We realize that any time that

you strive to be more results driven, as President Bush has directed us, there are going to be challenges. Nonetheless, we remain

keenly focused on our efforts to serve the needs of America’s small

businesses.

By restructuring key Agency operations and re-engineering the

Agency’s largest loan programs, the SBA has achieved record program growth, while reducing its total budget by 37 percent since

2001. The SBA has also improved effectiveness of the taxpayers’

dollars by supporting small business development.

With these improved efficiencies in fiscal year 2007, SBA will be

able to serve record numbers of small businesses with a total budget request of $624 million.

SBA lending has seen record setting growth in our Flagship Loan

Program. Since 2001, the number of loans has more than doubled

in the 7(a) and 504 loan programs. In fiscal year 2005, we made

nearly 98,000 small business loans in our two primary lending programs, compared with only 42,000 in 2001. In 2005, minorities received 31 percent, and women received 17 percent of 7(a) and 504

dollars that we funded. The fiscal year 2007 request will support

28 billion in financing to the U.S. small business community. This

represents a 42 percent business lending increase over fiscal year

2005 through the 7(a), 504 and SBIC debentures programs.

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

the growing demand for loans in fiscal year 2007 without fear of

shutdowns or caps because all three programs operate at a zero

subsidy. Zero subsidy is still the best policy for promoting the longterm stability and growth of the SBA’s loan programs. As you can

see with our results over the last year, it has not impacted our

lending.

In addition to better results, we have also increased efficiencies

in lender oversight functions, loan processing and liquidating, saving the taxpayer millions of dollars. Further consolidations and efficiencies planned for 2006 and 2007 will result in additional savings.

In keeping with these savings and efficiencies, the administration is proposing an administrative fee for 7(a) and 504 and SBIC

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

these loans and will save the taxpayers $7 million in fiscal year

2007.

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

as well. The key to this is close collaboration with our resource

partners, the Small Business Development Centers, the Service

Corps of Retired Executives, which are the counselors to America’s

small businesses, and Women Business Centers. With the help of

these partners, as well as through our extensive online resources,

we provided training, education and counseling to over 1.1 million

clients.

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To reach new clients, SBA is encouraging our partners to utilize

online development and maximize the resources we provide to them

to increase capacity for outreach. We are certainly going to use

technology at the SBA to the greatest extent possible to reach additional clients.

With respect to Government contracting and business development, I can report that we now have 58 Procurement Center Representatives. That is the most since the administration began, and

the most in many, many years. They are assisting small business

with Federal procurement issues.

SBA Office of Government Contracting and Business Development has also instituted enhanced practices and technological improvements. These have provided many benefits and increased efficiencies concerning Government contracting opportunities and

monitoring. Strides have been made to maximize staff resources

and monitor contracting activities, as well as to improve the communication and interaction with the small business community

through the automation of many of these basic systems.

SBA’s focus in fiscal year 2007, as it has been since I became Administrator, and also part of the President’s small business agenda,

will continue to be to work to increase small business participation

and competition in the Federal procurement arena.

I would also like to speak about what is the top priority right

now at the SBA, and that is our disaster response. To date, we

have received an unparalleled 386,000 disaster loan applications

from homeowners, renters and businesses, more than 9 times what

we received after Hurricane Andrew. Approximately $6 billion in

disaster loans have been approved to over 83,000 victims. Our response has been Agency-wide, not only the 4,000 people that are

working in our Office of Disaster Assistance, but also it includes

hundreds of staff in our district offices across the country who are

helping us to process these loans. I am very proud of their hard

work, of their dedication, of their compassion, and the urgency our

staff is demonstrating.

The SBA has already surpassed by almost $2 billion what was

previously the largest disaster response in U.S. history. That was

the 1994 earthquake in Northridge, California. I remember that

well. I lived in California at the time. Following that disaster, it

took over a year for the SBA to process 250,000 applications. In the

response to the 2005 Gulf Coast hurricanes, the SBA has already

processed more than 251,000 applications in half the time.

The fiscal year 2007 budget requests funding to support $900

millon for loans to homeowners and businesses struck by natural

disaster. That is an estimate based on the 5-year average. The fiscal year 2007 budget proposed to continue providing preferential

loan terms to victims of disasters. However, in order to contain escalating costs of these loans, the budget proposes to adopt a graduated interest rate for the disaster loan program. Without such an

action, the subsidy costs of disaster loans will increase 20 percent

over this year’s rate.

During the first 5 years after a disaster, interest rates will remain deeply subsidized, as they are currently structured, although

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

revert to a rate reflective of comparable Treasury instruments deVerDate 11-MAY-2000 11:53 Jun 30, 2006 Jkt 027286 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 C:\SBA\27286.TXT CarolB PsN: CarolB
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termined on the approval date of a loan, and still below the market

rate. This structure would continue to provide borrowers with deep

interest subsidies when they need them the most, immediately

after a disaster, and after 5 years the subsidies would be reduced

for the remainder of the loan term.

The SBA operates like the businesses that it helps to succeed, by

continually meeting challenges and evaluating cost effectiveness.

The SBA has succeeded in achieving record growth in its programs,

while at the same time reducing the overall budget request through

focused, practical implementation of the President’s management

agenda, the PMA, and related initiatives. To maintain these trends

and build on the Agency’s achievement, SBA’s budget reflects a

commitment to the improvement of management systems and processes, to investing in new and upgraded infrastructure, to improving the efficiency and skill level of our staff, and to continuing

transformation of Agency operations.

The Agency is committed to continuing our mission and legacy,

to deliver more services efficiently to the Nation’s small businesses.

The SBA’s fiscal year 2007 budget request does just that.

Madam Chair, Members of this Committee, thank you again for

the opportunity to meet with this Committee this morning. I would

be happy to answer any of your questions.

Chair SNOWE. Thank you, Administrator Barreto. Let’s just begin

with respect to the overall decline, because, obviously, there is a

disconcerting trend since 2001. Now, I understand we have to

make cuts somewhere, but as I said earlier, it seems to me that

Small Business is one of the areas of the Federal Government that

actually generates and leverages jobs and job creation in creating

new business in America. It just simply does not make sense that

we are undercutting the very programs that are contributing to job

growth and economic growth in America. The one value we get

from one of the programs in the Federal Government is the very

one that we are targeting for significant reductions.

Now, in looking at the budget request, as I said in my opening

statement, and looking at the chart here in the SBA non-disaster

programs, as you have seen the decline, 25 percent over the last

5 years, the last 6 years. I mean, that is significant, and then overall, 37 percent for all combined. That is non-disaster and disasters,

37 percent, 25 percent for the disaster. That is a serious decline in

a budget that has never been robust, but clearly, as you can see

from the figures, the 2007 request is $425 million when it comes

to non-disaster, and $624 million overall, combined disaster and

non-disaster. That is, I think, troubling.

Then, as you mentioned, in addition to that, which I found curious in the budget, generally on each of the programs within SBA,

you talk about the number of jobs created, and for the first time

those numbers have been eliminated in the budget. Is there a reason for that?

Mr. BARRETO. One of the things——

Chair SNOWE. Would you not want to elaborate and tout the

value of each of these programs when it comes to job creation, and

have the job creations numbers alongside the program? Now they

have been eliminated in this year’s budget. Why would that be?

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Mr. BARRETO. First of all, let me say that I agree with you 100

percent that small businesses are the engine that fuels the economy. We talk about that all the time. Let me address all parts of

that question. First of all, as I look at the budget request up there,

and the comparison, one of the things that is clear to me as I look

at that, is that, obviously, in 2005 and 2006, you had a number of

supplemental appropriations that are included, which are not included in our 2007 request because we do not know what disasters

may befall us in 2007. Right there, that is not a complete apples

to apples comparison. Also, one of the things that we do not ask

for are congressional initiatives, and congressional initiatives

would be included in 2005 and 2006. In fact, that number has

steadily gone up, and of course, we know that much of that money

does not go into the programs of the SBA.

With regard to the numbers that we talk about, we classify those

numbers in two ways. One is that we say the programs that the

SBA provides—enable businesses to create and retain jobs, and

both of those are very important to us. Oftentimes the way that we

get that data is because when somebody, for example, takes out an

application for a 504 loan, oftentimes they will tell us how many

jobs will be created when they purchase that building or purchase

that equipment. I just want to be really clear that——

Chair SNOWE. Are they providing that now, or they are not anymore?

Mr. BARRETO. Oh, they do, and I——

Chair SNOWE. What is the answer to the question? Why are

those numbers not associated with the programs any more to tout

the impact that they have in job creation? I think it is important

for Members of Congress to appreciate the value of these programs.

What better way to emphasize the contribution that these programs are making?

Mr. BARRETO. What I am trying to explain is that we take that

information and make those estimates based on the information

that our small businesses give to us and I would be happy to provide that because the number——

Chair SNOWE. They have traditionally been provided in the budget is the point I am making here, Administrator Barreto, and now

for the first time they are not being included in the budget alongside each of the programs. It is simple as that. I am just asking

the question, yes or——

Mr. BARRETO. I am happy to provide that to you, Chair, and

I——

Chair SNOWE. It should have been in the budget.

Mr. BARRETO. I apologize for it not being there, because we are

proud of the jobs that are retained and created by SBA programs.

In fact, our Office of Advocacy, that does research on this, continues to tell us that on a year-to-year basis, the small businesses

of the United States are still creating 60 to 80 percent of the net

new jobs in the economy. That is an incredible success story, and

that is one of the reasons that we continue to refer.

Chair SNOWE. I know. That is why I am asking as to why the

budget does not include what has traditionally been part of the

budget, the number of jobs that each program leverages, because

it is important. It is important information for Members of ConVerDate 11-MAY-2000 11:53 Jun 30, 2006 Jkt 027286 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 C:\SBA\27286.TXT CarolB PsN: CarolB
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gress, and it was not part of the budget this year, and I think it

is very vital.

Mr. BARRETO. I think that was an omission.

Chair SNOWE. Oversight? Okay. That is fine, and that would be

great if we could get it, because I think——

Mr. BARRETO. I promise you that you will have that. We are

proud of those numbers.

Chair SNOWE. It will help me and the Members of this Committee to do our job in explaining this, because, unfortunately, I do

not think many Members of Congress appreciate the value of these

programs, and I am not so sure many in the administration, for

that matter.

Mr. BARRETO. Oh, we appreciate it.

Chair SNOWE. Because if you did, you would be doing more. It

seems as simple as that. I do not know any program that gets more

bang for the buck than these programs.

Mr. BARRETO. I agree, and that is why we are so proud that

every year that we have been here, we have broken historic levels.

I mean I think that is part of the story too that people do not talk

about. We have literally doubled the number of loans in every category. We have trained millions of small businesses, facilitated billions of dollars worth of contracts.

One thing that I am very clear of when I appear in front of this

Committee is that we want the same thing. We want to help more

small businesses, and every year we do more than we did the year

before and we break new records.

Chair SNOWE. That gets me to my next point, which we disagree

with, that you are serving more with less.

Looking at the second chart here, for a Small Business Development Center in the SCORE Program, as you will see, these counseling programs, in fact, the impact of the level funding over the

last 5 years has had an impact in serving less clients and fewer

clients. For the SCORE Program, a difference of over 84,000 clients. Between SBDC and SCORE, 84,000 clients between 2004 and

2005. The SBA’s declining budget is jeopardizing your ability to

serve more clients, to help create more small businesses. I mean

that is a fact. That is what is happening here. That chart illustrates it, and that is disconcerting in terms of the fact we are moving in the wrong direction, contrary to your numbers. Okay. We are

getting these numbers from your budget.

Mr. BARRETO. I understand. May I explain how you got those

numbers? May I explain that?

Chair SNOWE. Are you saying they are wrong?

Mr. BARRETO. No. I am saying that they are more accurate then

ever is what I am saying.

One of the things that we noticed a couple of years ago is that

in a lot of our programs there was a lot of double and triple counting. For example, sometimes somebody, a client, would go to an

SBDC and get some service, and then they would partner up with

a SCORE counselor, and they would get some service. We would

treat that as two separate businesses. It was not two separate businesses, it was one business who was receiving training and counseling. One of the things that we have done is we have been a lot

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more precise in our counting to make sure that we are not double

and triple counting.

You talked about the job numbers. It is critically important that

we give you accurate job numbers, and at the same time it is critically important that we also give you accurate counts——

Chair SNOWE. You are saying it is not accurate though? I mean

I am just asking because I am not clear on that. Is it accurate or

is it not?

Mr. BARRETO. It is the most accurate that it has ever been.

Chair SNOWE. Okay. That means we are serving fewer clients

then.

Mr. BARRETO. No. It means that before when we used to give

these numbers, we used to give aggregate numbers that were double and triple counting sometimes, and we are not doing that anymore.

Chair SNOWE. I would like to see the justification and rationale.

Mr. BARRETO. Sure, I would be happy to provide it.

Chair SNOWE. I really would, because to say—then you should be

clarifying, making that distinction in your budget if that is what

you are suggesting. I would like to see those numbers.

Mr. BARRETO. Be happy to provide those.

Chair SNOWE. Because the numbers in your budget would very

much indicate to the contrary, and that is disconcerting. It, frankly,

would stand to reason. If you are moving a different direction in

the budget, which is a major decrease as opposed to any increases

over time——

Mr. BARRETO. It has been actually pretty level funding for the

last couple of years. We are not eliminating any major programs,

closing any major offices. The good news is that what I am here

to tell you is that we are going to do more loans this year and more

loans next year. The real story, the real bottom line to this budget is $28 billion in lending authority, $28 billion, that is historic levels of lending

authority.

Chair SNOWE. Finally, one other question here. On the proposal

to increase fees in the 7(a) and the 504, you are saying that zero

subsidy has had no impact. Now you are proposing increases on

these major programs.

Mr. BARRETO. Let me make sure I clarify that. The fee increase

we are talking about has nothing to do with the subsidy rate. It

is not going to affect the subsidy rate. We are——

Chair SNOWE. I understand that. I know that. Now you are going

beyond that. There is no subsidy, and now you are proposing to

charge fees associated with these programs. That is a major departure and direction in terms of these programs.

Mr. BARRETO. On the million dollar loans which represent 3 percent of the borrowers, yes, we are proposing to increase that. By

the way——

Chair SNOWE. It would be paid for by the borrowers or the lenders?

Mr. BARRETO. This is a fee that is going to go up to the lenders,

and if it is passed on—and oftentimes they are passed on—the differential in the payment is going to be $10 a month. For a lot of

small businesses that can afford a million dollars, $10 a month difVerDate 11-MAY-2000 11:53 Jun 30, 2006 Jkt 027286 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 C:\SBA\27286.TXT CarolB PsN: CarolB
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ferential on payment for them to be able to access a loan whenever

they wanted in the larger amounts is not a significant amount of

difference for them.

Chair SNOWE. It is also unclear whether these fees are legal

under the Federal Credit Reform Act. Do you have any idea——

Mr. BARRETO. I have no knowledge that they would not be legal.

Chair SNOWE. Because it prohibits agencies from making a profit

from loan programs, so I think we will have to, obviously, evaluate

that.

Mr. BARRETO. I am not sure that we would be making a profit.

Chair SNOWE. The fees vary, obviously, under the SBIC program,

up to $45,000. They vary under each of these programs. Some $623

per loans. The 504 could be $11,000 for loans of maximum 10 million.

Mr. BARRETO. That would be about 12.

Chair SNOWE. SBIC was $45,360, so they vary considerably.

Mr. BARRETO. Absolutely. As I said, on the 7(a) side, again, 3

percent of the loans of all the loans that we did, are those million

dollars loans. The differential payment is going to be about 8 to 10

dollars. On a 504 loan, which is 15 percent of all the loans in that

portfolio over a million dollars, it would be about $12 a month differential. And, yes, you are right, on the SBIC, which is the venture capital portfolio, you are talking about loans that are much,

much larger, and so the fee is going to be larger, but it is also

something that can be financed. It is not something that it is going

to be a lump sum differential. It is something that will be spread

over the length of that loan.

Chair SNOWE. Thank you.

Senator Landrieu.

Senator LANDRIEU. Thank you, Mr. Administrator. Let me ask a

couple of very specific questions about your disaster plan. You have

stated in previous hearings that the Small Business Administration was conducting an unprecedented response to Katrina and

Rita. Do we have on the record of this Committee a proactive disaster plan that was in place prior? A proactive disaster plan, did

the SBA have one?

Mr. BARRETO. Sure. As you know, Senator, SBA has responded

to every disaster in the last 50 years, and so there is a disaster

model that we employ and that we execute.

Senator LANDRIEU. Is that in writing?

Mr. BARRETO. Yes, it is.

Senator LANDRIEU. Could you submit it to my office and to the

Committee?

Mr. BARRETO. I would be happy to.

Senator LANDRIEU. Considering that we have learned many lessons since Rita and Katrina, and you have just submitted the new

budget for next year, do we have a revised model of that?

Mr. BARRETO. That is something that we are working on right

now. Let me say this, one of the things that we are very clear

about, you know, SBA right now is responding to other disasters

in other parts of the country. On a year-to-year basis there is, on

average, about 50 disasters that the SBA responds to, from things

as large as 9/11 or the four hurricanes that we had the year before.

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We execute basically the same way in every one of those disasters

and we have been——

Senator LANDRIEU. That is the problem. Let me just say, that is

the problem.

Mr. BARRETO. I agree.

Senator LANDRIEU. Hold on, that is the problem. There are all

sorts of disasters, and what we are trying to get this administration to understand in many different committees, is that not every

disaster is the same.

Mr. BARRETO. I agree.

Senator LANDRIEU. A tornado coming through a town and wrecks

14 house and knocks down trees and disrupts one farm is one kind

of disaster, but a disaster that puts a major American metropolitan

area out of business, that is in the heart of America’s energy coast,

is a whole other disaster, and that is what the problem is. There

does not seem to be an understanding of the magnitude of this

across many different departments. It is imperative that this department understand it as quickly as possible.

My question is, I would like you to submit as soon as possible,

a revised disaster management plan, in hopes that we never experience this again. Given everything we know about the hurricane

season, the predictions of more storms, the importance of the coast

from Maine—although they do not get hurricanes up there, they

get Northeasters and very tough storms—all the way through to

Texas, I think we might want to look at a revision. If you could get

that for us, that would be appropriate.

Mr. BARRETO. Yes, ma’am.

Senator LANDRIEU. For loan approvals, what is the specific

days—how many days does it take the SBA right now to approve

business and homeowner loans under our disaster program? Do we

know how long that takes?

Mr. BARRETO. I will give you an up-to-date real-time estimate. I

will tell you that the velocity of those approvals, as you know, has

increased significantly. It took us 90 days to do the first billion dollars. We have done 4–1/2 billion in the next 90 days. The velocity

of the approvals and the processing has increased significantly.

Senator LANDRIEU. I know we are trying to go faster. The question is, are we going fast enough for the disaster that we are dealing with? That is the question, and the record reflects, according

to our data—and I would like your staff to confirm this—that it

takes 81 days for a business loan to be approved, and then another

21 days for closing, so that is over 100, 103 days. That might be

the best we can do. I do not know. I suggest that since the recovery

really begins with small business—and I know there are many

complications, housing, health care, schools, you name it—but truly

the small businesses of this region will help to lift this region back

up. I am asking you, is there an industry standard, and is it lower

than this, and if so, what can we do to expedite this timeframe?

Mr. BARRETO. I do not know if there—I would not call it an industry standard, but I think that we have our own standard from

every disaster that we have ever responded to. Obviously, in this

disaster, because of the scope of it, things have not gone as quickly

as any of us would like to see it, but let me say this. We have now

processed almost 100 percent of the economic injury disaster loans,

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and over 90 percent of the small business loans. I think that is

very important to note. We do not have a huge backlog of small

business loans right now. We put a lot of focus, a lot of resources,

a lot of priority on those loans, and we are almost done processing

business loans. We still have a number of homeowner loans, and

one of the things that is also very important to note, we continue

to receive applications all the time. In fact, the deadline, as you

know, Senator, is this Saturday for physical damage, and we do not

know if that deadline is going to change, but we know that we are

going to get a huge spike up this week.

We are constantly receiving applications, but, a lot of the stuff

that we were talking about before have already been processed.

Now, you mentioned——

Senator LANDRIEU. Can I just say this, Madam Chair, and I am

going to leave the record open at this point, because that is just

not what we are hearing from our people at home, and there has

to be some sort of meeting of the minds on this, where the Small

Business Administration is saying they processed 90 percent, they

do not have a backlog. Yet every time—and you have gone down

and hear the same thing—we hear that there are loan applications

pending, so people have just sort of given up and gone elsewhere.

Now, maybe some people found help elsewhere, but that is my

point. Let me leave it open and ask one more.

Chair SNOWE. I think one of the real problems is that they have

been processed, but the money has not been disbursed.

Mr. BARRETO. Right, yes.

Chair SNOWE. That is 8 percent out of the $5.7 billion, 8 percent. That is $480 million.

Senator LANDRIEU. Thank you, Madam Chair, because process is

different than getting money into the hands or lines of credit——

Mr. BARRETO. Yes, that is very true.

Senator LANDRIEU. Businesses can repair their roof, put their

trailers next door for their workers to live, and start firing up the

printers or the ovens or the manufacturing, the tools necessary to

produce their products. This is a major disconnect.

My last question that my business leaders asked me to ask—and

I have asked it before but I will ask it again because they keep saying, please get this answer. The GO loans, you all touted GO loans

as the answer. To date, how many GO loans have we processed?

86 businesses have received GO loans. 18,000 were destroyed, 86

businesses have processed GO loans. Could we agree that at least

this is not working? Could we agree that maybe we should try a

different approach that some of our bankers and credit unions have

suggested and that this Committee passed within 4 weeks I think

of the storm? Could we try to revisit that, and agree that this GO

Loan Program that has only given 86 loans to date is not working

very well?

Mr. BARRETO. Can I just clarify that a little bit?

Senator LANDRIEU. Please.

Mr. BARRETO. GO loans are part of the SBA working capital loan

portfolio. It is a 7(a) loan. The only thing that is different on a GO

loan, because our lenders asked us to, is they said, ‘‘We would like

to look at making some of those small loans, but we want you to

put a higher guarantee on it.’’ Usually with SBA Express loans the

33

guarantee is 50 percent, and they said, ‘‘Look, this is a different

situation. We would like you to raise the guarantee to 85 percent,’’

and we did that.

The important thing to note, Senator, and I want to be very clear

about this, is that the SBA has done about a quarter of a billion

dollars in working capital loans and in our regular 7(a) loan portfolio since the hurricane, a quarter of a billion dollars. GO loans

was just one tool inside of our 7(a) loan portfolio. The lenders

choose which one of those that they want to use. Do they want to

do regular SBA Express loans? Do they want to do GO loans? Do

they want to do the larger working capital loans? Do they want to

do 504 loans? They are the ones that choose which one they want

to do.

Senator LANDRIEU. I understand that. Let me, on their behalf,

just say they do not like the GO Loan Program. The prepayment

penalties, the high interest rates are not appealing. Could we just

revisit that? Thank you.

Mr. BARRETO. Absolutely. If I can also, just because I know that

we are going to go on to some other questions, I do want to clarify.

There is a difference between processing loans and disbursing the

monies. There is a big difference, and I want to just spend 1

minute on what is happening with that.

When SBA approves a loan, the money is available immediately,

subject to the borrower arranging the closing. It is up to the borrower to arrange the closing.

Now, what is the problem with the closing? First of all, this is

not like any other disaster the SBA has ever responded to. Normally, when there is a disaster, even a big disaster, people are still

in the general vicinity. This is something that you know very well,

Senator. We have borrowers that are spread over 40 different

States. It is not like we can set up an appointment and they can

drive down to the office or we can go to their office and we can do

the closing. A lot of the closings are happening by mail. I would

not say mail. They are happening by Federal Express. That is not

the whole story.

One of the requirements to be able to get a long-term disaster

loan, is that if your business or home is located in a floodplain, a

Federal requirement—not my requirement—Federal requirement is

that you must have flood insurance, and many of these individuals

are struggling to get flood insurance. Over 40 percent of the approved loans have still not been able to provide flood insurance.

That is not the only thing. These are construction loans. Some

of these folks have not been told whether or not they will be able

to rebuild their business, their home, whatever that they had before. They are having trouble getting permits.

That is not the only thing. Oftentimes a small business would

come to us and say, ‘‘Look, I got the flood insurance, I got the

building permit, but I can’t find a contractor to come and rebuild

my property. I called the contractor, and he said, call me in 6

months. I don’t want to take the loan until’’——

Senator LANDRIEU. Mr. Administrator, hold on a second. I do not

mean to interrupt you and I want to be respectful, but I know everything. I represent the State. You are describing to me my life.

This is what I live through. What I am suggesting is, you are the

34

Administrator of the Small Business Administration. You have

thousands of businesses spread out all over America, desperately

trying to get back. We would like some creative suggestions how

to change the system, make it better, and work with this Committee to do that. I do not want to take any more of the Chairwoman’s time, but we do not need problems, we need solutions.

That is what the Small Business Administration should be doing

instead of cutting budgets and raising interest rates.

Mr. BARRETO. The solution would be to waive the Federal requirement for flood insurance and the local requirements for building permits. That would be the only way that we would legally be

able to disburse those monies.

Chair SNOWE. Could I just say—suggest to you? I would be interested in having a breakdown on every problem you have just suggested, so we get a true picture here.

Mr. BARRETO. Be happy to provide it.

Chair SNOWE. It says subject to SBA’s approval, how many of

those applications are subject to SBA’s approval? How many are

subject to getting an inspection——

Mr. BARRETO. They have been approved.

Chair SNOWE [continuing]. Of flood insurance. We would like to

have all the information so we can deal with the actual facts.

Mr. BARRETO. Happy to provide it.

Chair SNOWE. Another point that Senator Landrieu was referring

to, you have suggested rejecting over 50 qualified loan offices. I do

not want to take Senator Coleman’s time. I just want to get to this

point—and I am going to get to it in a moment—but the fact is you

have rejected 50 of them to conduct on-site inspections, 50 qualified, trained, on-site loss verification inspectors, and I do not understand that when you have 2,700 applicants that are waiting for

on-site inspections. 1,200 of those applications are 42 days or older,

and the average has been 57 days or older. I want you to talk

about that point, her point, but I am going to go to Senator——

Mr. BARRETO. I would be happy to.

Senator COLEMAN. Madam Chairman, I have to be on the floor

at 11:30, Madam Chair, so I am just going to actually make some

comments and speak to the Administrator.

Two programs. You talked about in your opening statement

about collaboration with partners, one of the great collaborative efforts of the Small Business Development Centers. In my State they

have helped create or retain 2,000 jobs in 2005 alone. I could walk

through the Federal taxes that have been paid. This is a net positive. Last year I think we funded that, supported $110 million in

funding. This year I believe the administration is proposing $88

million in funding, so I have concerns about lessening of funding

for a program that really is, I think, one of the hallmarks of collaboration which you touted.

Then the second issue, which a number of us have talked about

again, Microloan and Microloan Technical Assistance Program, I

went through in my opening statement. The bottom line is I think

we are doing $300 million through USAID to encourage micro enterprises in Africa, and we are proposing to eliminate this program

here at home. Big mistake, big mistake. Again, I understand. I

think people looking at it with green eyeshades and cost per loan,

35

and they are really missing the impact that this Microloan Program has.

I have to be on the floor, but those two issues in particular. Then

I would associate myself with the comments of the colleague from

Louisiana. Help us come up with some ways to fix the problem. I

think we all understand what the problem is, but we are depending

on you as the Administrator to say, ‘‘Here is what we can do.’’ If

part of it is changing, let us know, but let us sit down and figure

out a way so that in the end we are not looking at what the problems are, but we are seeing people moving forward to build a

brighter future.

With that, you have a very tough job. I appreciate what you are

trying to accomplish and I look forward to working with you.

Mr. BARRETO. Thank you, Senator.

Senator COLEMAN. Thank you.

Thank you, Madam Chair.

Chair SNOWE. Thank you, Senator Coleman.

Is there anything you care to respond to for the record in response to Senator Coleman’s comments?

Mr. BARRETO. I can provide you some responses in writing. I

would be happy to talk about any of those issues.

Chair SNOWE. Senator Pryor.

Senator PRYOR. Thank you, Madam Chair.

Let me start by asking about the fiscal year 2007 Disaster Loan

funding. SBA is requesting funding to support lending, almost $900

million to homeowners and businesses struck by natural disasters.

Your testimony says that the request of $900 million is based on

a 5-year average. However, that amount is not significantly higher

than $810 million the President requested in 2006. It does not

seem to be a factor that you are factoring into this, the cost of the

hurricanes. It seems like we have an enormous need out there that

you are not factoring in. Explain how you have come up with that

$900 million figure.

Mr. BARRETO. Sure. One of the things—and I think people understand this—SBA does not have thousands of people sitting in offices all across the United States waiting for the big one. We just

do not. We never know where a disaster is going to hit. Now, the

way that we budget is based on what has happened in the past.

We take a 5-year look-back when we are trying to calculate what

it is we are going to need. What always happens when there is a

disaster—and this happened after 9/11 several times, this happened after the four hurricanes in Florida—no one could have predicted that. This is happening now for Hurricane Katrina and Rita

and Wilma, and it will happen again in the future. At a certain

point in time when those things happen, and we do not have

enough resources in hand, we must go back and ask for a supplemental.

This allows us the necessary operating funds that we are going

to need to operate going forward next year. Should there be another major, major one—and I think Senator Landrieu said this, it

is not even a question of if, it is when—sometime in the future

there will be another major one. We will need to go back and request more money.

36

Let me also say that after the four hurricanes, we requested

money for those hurricanes that went unspent, and we got a little

criticism on that saying, wait a second, you asked for this money

and it did not get spent. Why did you do that? The best barometer

that we have is the look-back period, because there is no way for

us to predict what is going to happen in the future. What actually

happened is that money that was left over carried over into this

year, and that is one of the things that helped us hit the ground

running when the hurricane came, because usually, by that time,

we would have been very low on funds.

Senator PRYOR. Let me see if I understand your answer then.

You are basically saying that you will be relying on a supplemental? You are pretty much acknowledging to the Committee that

$900 million is probably not enough?

Mr. BARRETO. There is no way to predict what is enough.

Senator PRYOR. We do know about last year’s hurricane season.

Mr. BARRETO. We just cannot predict it will happen again next

year.

Senator PRYOR. Do you have enough in this budget to handle the

aftermath of those hurricanes last year?

Mr. BARRETO. Yes, we did. We had billions of dollars left over

from the hurricanes from the year before, and we got a little criticism for that. People said, wait a second, Congress appropriated

this money for you and you did not use it all up.

Senator PRYOR. I heard you say that.

Mr. BARRETO. That money carried over into this next year.

Senator PRYOR. Well, also, on the Disaster Loan funding, in February, the SBA’s Disaster Loan Program almost ran out of money

twice; is that right?

Mr. BARRETO. No. I do not think we ran out of money twice, but

one of the things that has happened—I mentioned this before—it

took us 90 days right after the hurricane to do the first billion. We

have done 41⁄2 billion in the next 90 days, and so the pace of those

approvals—and I know from this Committee that it is critically important that we approve loans as fast as possible, to get the money

out.

The other thing that happened, Senator, and I think it was alluded to in a prior comment, is that the average loan size for

hurricane——

Senator PRYOR. I am not asking about that. Stop. You are just

talking. You are just filling time. Let me ask my question.

Mr. BARRETO. Trying to explain it.

Senator PRYOR. Let me ask my question.

Mr. BARRETO. Yes, sir.

Senator PRYOR. You have kind of gone off on a tangent here. I

am not even asking about that. Here is my question. As I understand it, in February, the Disaster Loan Program was in danger of

running out of money.

Mr. BARRETO. We would have run out of money if we did not get

reprogramming.

Senator PRYOR. That is right. As I understand it, your staff,

maybe you, but your staff, your key people at the SBA, had a series

of briefings with, as I understand it, Senator Snowe’s staff, Senator

Kerry’s staff, the Committee staff generally, our Member staff that

37

is on the Committee. We were not told about that. Do you know

if that is true?

Mr. BARRETO. Well, we briefed Senator Snowe in our meeting

with her as to what we were doing on the issue, and, obviously, we

were working very closely with the Appropriations Committee to

help to do the reprogramming.

Senator PRYOR. That is the point. Apparently, there is a letter

that you sent to the Appropriations Committee, but we were not

copied on it. No one on this Committee was copied on that letter,

and it appears to me that this Committee is just an afterthought

to the SBA.

Mr. BARRETO. Absolutely not.

Senator PRYOR. Are you saying that this Committee and its staff

was always in the loop?

Mr. BARRETO. I am not sure—when you say who on the Committee was in the loop and who was not, but we did have this conversation with the Chair, and we were in regular communication

with the Appropriations Committee about doing the reprogramming. Yes, that is true.

Senator PRYOR. Let me also ask this about—I want to continue

on this issue of transparency with you—and that is, Senator Kerry

and Senator Landrieu have sent you a letter requesting that you

provide them with information on daily reporting of the funding in

a Disaster Loan Program similar to what the SBA provides on loan

activity and what Homeland Security provides on FEMA funding.

Are you aware that you have that letter?

Mr. BARRETO. Yes, I am.

Senator PRYOR. They have requested that you start providing

that information this Friday.

Mr. BARRETO. Sure.

Senator PRYOR. You will be doing that?

Mr. BARRETO. Absolutely. We are doing it already. One thing

that I am very clear about is that this Committee knows what has

been appropriated to us because they are involved in voting on the

appropriation, and they are also receiving our daily reports of what

our production is. It would be very easy to figure out how much

money we have left based on what was appropriated to us and

what we are producing. We will provide the information in any format, any way this Committee would like it, on a daily basis or

more frequently if necessary.

Senator PRYOR. I think that Senator Kerry and Senator Landrieu

have requested that. As I understand that, to be done daily, and

I think that is important.

Mr. BARRETO. We are happy to provide it daily, and as I said,

we are providing regular reports on our production. Of course, we

know what has already been appropriated because this Committee

has been involved in the voting on that.

Senator PRYOR. Let me ask this about disaster generally, because

I have been to New Orleans, and I am going to tell you, you can

look back at 5-year averages and all you want, New Orleans is in

a class by itself.

Mr. BARRETO. I agree.

Senator PRYOR. Anyone who has been down there and seen it

knows it. You have probably been down there.

38

Mr. BARRETO. Five times.

Senator PRYOR. I am telling you, it is in a class by itself. You all

have a plan specific for New Orleans, or are you just going to sort

of be generally available to the people in New Orleans if they need

your help, or do you have a specific plan?

Mr. BARRETO. No. We are working in many different ways. I

mentioned to you that we have already processed over 90 percent

of the business loans. We have not closed all those loans yet for

some of the reasons that we talked about. We have processed about

70 percent of the homeowner loans, and we anticipate that we will

be completely done with our processing within the next 45 days.

On top of that, one of the things——

Senator PRYOR. Processing does not necessarily mean paid.

Mr. BARRETO. Processing means that we have gone through the

application and made a determination about whether or not we are

going to have to decline that loan for a variety of reasons, or

whether or not that loan can move towards closing.

We are also helping people every day in our regular SBA operations. We are doing the regular loans. I mentioned to you that we

have done about $250 million in regular loans. We are training

people on the ground, our regular SBA office is already open back

down there. We are working with our resource partners, and of

course, we are trying to help businesses access Federal contracts.

There are a number of efforts under way right now to help the

small businesses in New Orleans, and for that matter, the whole

Gulf Coast.

Senator PRYOR. Madam Chairman, I have one last question.

I mentioned in my opening statement we received a call yesterday from a Louisiananian, who is temporarily living in Arkansas

until she can get her life back together and move back down there.

She has been denied, apparently been denied an SBA loan because

she is not current with her IRS payments. Is that consistent with

this policy?

Mr. BARRETO. No, it really is not, and I would be happy to personally follow up on that. Oftentimes, there is a misunderstanding

of folks of how our process works, and if there is a misunderstanding, that is our responsibility to clarify it and make sure they

know exactly what the status of their loan application is.

Senator Landrieu mentioned that there was a baker who had not

gotten any response on their loan. I do not know if it was the same

baker that was written up in a big profile piece in the Washington

Post. We went back and we researched that, and that individual

never submitted a loan application. It was very difficult for us to

give them an answer on their loan application when we never got

a loan application. They actually admitted to us later on, well, we

thought it was going to take too much time, so we did not actually

submit a loan application.

Any time those situations come up and are brought to our attention, we will follow up on it and get them an answer immediately.

We would be happy to work with your office and get the particulars

on that individual.

Senator PRYOR. We will be in touch on that. I guess what you

are saying for the record is, that because someone is late on their

IRS payments, that does not——

39

Mr. BARRETO. That would not be a normal reason. There would

have to be something much more extensive. For example, it is true

that we look at judgments by the IRS. If the IRS has made a judgment on a small businessperson for prior years’ activities, that is

something that is factored into our decision. That is part of our requirement. There are other issues like that, but being late, you

know, being current on a recent tax bill because you have been dislocated, that does not sound right to me and we will look at that.

Senator PRYOR. Thank you.

Thank you, Madam Chair.

Chair SNOWE. Thank you, Senator Pryor.

Just mentioning on the question of the supplemental, we did

meet, Administrator Barreto, it was about a week from running out

of money. I think the issue here is being able to be forewarned long

in advance. That trend is occurring long before it actually happens.

If you are running out of money in the Disaster Loan program, you

must sense the fact that you need that additional lending capability.

Mr. BARRETO. Absolutely.

Chair SNOWE. The problem is that we did not find out until less

than 2 weeks out from actually running out of money, and that is

something that you ought to be able to establish in your office long

before it actually occurs, to see the trend lines in what is happening in the demand on those loans and the need for additional

money.

Mr. BARRETO. We put a lot of controls in place to do that. We

are monitoring this on a daily basis, as we always have been, but

we have our CFO now doing some very extensive reports and modeling to make sure that this does not happen. The truth of the matter is, as I mentioned to you before, the rate that we are approving

right now, and also the average loan size, that affects how much

money that we have left. Normally, a disaster loan is about low 30s, $30,000, $35,000, and

that has to do with the fact that SBA is not the only funding.

Meaning they are getting money from insurance or something else.

In this particular case the average loan size has been double, double what we normally see, which makes the money not go as far

when you are seeing loans that are twice what the average would

be for any hurricane that you have ever done before. That has to

do with a lot of folks who are being told now by their insurance

companies that they are not going to get anything paid because the

insurance company does not consider it to be a valid claim. That

is not something that we normally see, and it is something that we

have to deal with, and something that we are factoring into our

modeling going forward.

Chair SNOWE. Senator Thune.

OPENING STATEMENT OF THE HONORABLE JOHN THUNE,

A UNITED STATES SENATOR FROM SOUTH DAKOTA

Senator THUNE. Thank you, Madam Chair, for holding this hearing.

Thank you, Administrator Barreto for coming and testifying

about the fiscal year 2007 budget. If you look at SBA numbers over

time, there is one thing that is very clear, and that is that you are

40

being asked to do more, and are doing more with less. If you look

at the growth in many of the programs at the same time that total

budget expenditures are reducing by about 37 percent, and that is

something clearly that with the budgetary constraints that we have

to operate this year under, it would be nice if there were other

agencies who could bring that kind of record to the table.

Obviously, we recognize that as the economy continues to grow

and expand and create jobs, that most of those jobs are created by

small businesses. That is the driver in this economy. It is the economic engine that keeps the economy going forward, and so it is

critically important that we have policies in place that enable small

businesses to continue to grow and prosper, and it seems to me at

least that there are a couple of things, in talking to small business

owners, that are of particular interest to them. One, clearly, is

taxes and regulation, which you hear a lot about, and I think that

extending or making permanent the tax relief that has been passed

earlier so that small business owners will know with some predictability what their tax rates are going to be going forward, and particularly being able to pay at the lower rate is going to be critically

important to their ability to invest more in their businesses by purchasing new equipment and hiring new employees.

Also, the cost of health care, which is a huge problem for small

businesses, and we just have to address that. I believe we are going

to get a vote on association health plans. It is a reform that many

of us have supported for some time, and I am hopeful that we will

be able to get a vote on that on the floor this year, and maybe finally put some of those reforms in place that will enable small

businesses to join larger groups and thereby drive down the cost

of their health care.

I do have a couple of questions with the budget. One, of course,

that has been, I think, probably noted before I got here, some of

these proposals, fee increases on loan programs including 7(a), 504

and SBIC. My understanding is that those fees are proposed on

high dollar loans, and I guess I would be curious to know if you

could explain how you think that will impact the demand for those

types of loans. Secondly, do you see that fee increase altering the

decisionmaking process for the entrepreneurs who are considering

some of these programs or applying for some of these larger loans?

Mr. BARRETO. Thank you, Senator. The fee increase that we are

talking about is on a very small percentage of loans. For example,

in the 7(a) loan portfolio, the working capital loan portfolio, it is

3 percent of the loans that we make. The differential in their

monthly payment is going to be somewhere between 8 and 10 dollars a month.

On the 504 loan portfolio, which is usually the larger loans—that

is the real estate and fixed asset portfolio—you are looking at

about 15 percent of the lenders fall into the category of more than

a million dollars, and their differential in payment is going to be

about $12 a month.

What these small businesses have told us, and what the lenders

have told us, is, ‘‘Look, the main thing to us, and what we are glad

that we are not facing any more, is that a couple of years ago we

were always nervous that you guys were going to run out of money

because you were always on this continuing resolution, and you are

41

depending on that $100 million appropriation to be able to fund

your programs.’’ The bankers would tell us, ‘‘Look, we cannot afford

for the program to be even shut down 1 day. We have millions of

dollars dedicated to these programs, thousands of people working

in these offices and our banks all across the country trying to generate these loans. You close the loan program for 1 day, that kills

us, and if you keep doing it, we are not going to do 7(a) loans any

more.’’

What they would also tell you is that they did not want any caps

on the loan. What would happen to us, a couple years ago—and you

are very familiar with the Agency. I like to brag that you used to

be an SBA employee, that is, that when you put caps on those

loans, that also kills the lenders and the borrowers. If you are a

borrower and you are ready to take your business to the next level,

and I say, ‘‘Hey, we are sorry. We are running through some budgetary problems here. I cannot do a million dollar loan. I can only

do 500,000.’’ That ruins that small business’s game plan.

The main thing for the lenders and the bankers, what they have

told us, is they want a consistent program. They do not want the

program to shut down because we are worried about budgets, and

they do not want the program to have caps on it. This differential

in payment, you know, $10 a month, $12 a month, for somebody

that can get a million dollars, that is not going to be a determinant

whether or not they take that loan or not.

Senator THUNE. Your best guess is based on—obviously, you

have a lot of data over time, loan applicants, that people who are

in that, applicants who are in that range, or are asking for that

sort of financing, are unlikely to be influenced in a negative way,

in an adverse way in terms of whether or not they are going to continue to——

Mr. BARRETO. That is absolutely correct. The proof is also that

since we have gone to zero subsidy, our loan programs are at alltime highs. The 7(a) loan program was up 30 percent last year. The

504 loan program is up 30 percent this year. All across the board,

you know, a third of those loans now are going to minorities, a lot

of those loans are going to women-owned businesses, which are the

fastest growing segments of small business. I think we are on a

good course to continue that growth.

Senator THUNE. I have one other question that pertains a little

bit to my area of the country. One of the things in your statistics

and the data that was provided I observed that about 30 percent

of 7(a) loans and 25 percent of 504 loans were made to members

of minority groups. These numbers are up substantially from previous years, which is commendable. I guess, as you know, my State

has 9 Indian reservations which are in desperate need of economic

development, and I am wondering if the SBA has seen increased

loan volume among Native American populations, specifically? If

not, what do you think we might be able to do to make that number go up?

Mr. BARRETO. There has been an increase, but, you know, I will

be perfectly frank. When your level is so low, any kind of an increase is good, but there is still a lot more to do. One of the things

that we have done is we brought on a full-time director of our Native American office, and I am very excited about that. This is an

42

individual that is very well respected in the Native American community. His name is Bill Largent. He has really hit the ground

running. We have had different people working in that office over

the years, but to have somebody with his entrepreneurial background and the network that he has I think is going to be able to

help us. He is very creative, very energetic, and I think we are

going to be able to do some pretty exciting things in the Native

American community.

Senator THUNE. We look forward to engaging in dialogue with

him because it is an area in my State, and I would say in a broader

way—and we have had some correspondence with your office—the

South Dakota congressional delegation has about just increasing

the presence of SBA in western South Dakota, an office in Rapid

City. The reservations, the larger ones at least, fall on the western

part of the State. I am very interested, obviously, in pursuing that

with this office and seeing what we might be able to work together

on because it is an area of our State that just desperately needs

economic development. It needs job creation, and we just have to,

I think, double down and figure out how we get that done.

Thank you for your testimony, and, Madam Chair, thank you.

Chair SNOWE. Thank you. I want to inform the Members of the

Committee we have a 2 o’clock vote on Eric Thorson, who is the

nominee for Inspector General.

In response to the question that Senator Thune raised on the

loan programs, the loan programs are already at a zero subsidy.

Mr. BARRETO. Yes, they are.

Chair SNOWE. The caps and shutdowns are irrelevant to this

process because we do not get any appropriations, it is not subsidized. These fees that you are recommending to be imposed on

the loan programs would go towards administrative costs.

Mr. BARRETO. That is correct, that is absolutely correct.

Chair SNOWE. Caps and shutdowns are not a problem any more,

not subject to appropriations.

Mr. BARRETO. I am just making the argument that the loan program has grown since we went to zero subsidy, and I think it will

continue to grow.

Chair SNOWE. Well, it is a risk in imposing these fees in this direction.

Furthermore, in talking about increasing the—getting back to

the Disaster Loan verification officers, as I understand it, that the

SBA rejected 50 qualified Disaster Loan verification officers that

had been trained and were ready to report to the Gulf region to assist with on-site inspections. Is that true?

Mr. BARRETO. I want to make sure that we clarify that. We are

constantly training people. I mean, one of the reasons I think we

are able to make so much progress in such a short period of time

is that we brought on a significant amount of these inspectors in

January. We spent all of December training them. There was a

class that started at the beginning of this year. In fact, toward the

end of January, we started a new class.

One of the things that has happened is that the inspectors that

we have had on board have been so productive that we are very

close to being done with our inspections. In fact, the people, the reVerDate 11-MAY-2000 11:53 Jun 30, 2006 Jkt 027286 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 C:\SBA\27286.TXT CarolB PsN: CarolB
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sources that we already have on the ground are perfectly capable

of finishing the inspections that we have.

Chair SNOWE. There is still a backlog for that process, as I understand it. Maybe our figures are wrong.

Mr. BARRETO. No. I think——

Chair SNOWE. It says there are 2,700 applicants waiting for an

on-site inspection of their home and business by loss verification officer. Over 1,200 of those applications are 42 days or older. The average age just for this process is an outstanding 57 days. That is

the question, why would you send back 50 trained officers when

you have a backlog?

Mr. BARRETO. My understanding is—and I will be happy to get

you all the specifics on this—but we literally have hundreds of inspectors in the field.

Chair SNOWE. It does not matter how many you have. How many

do you need? That is the issue here. We are trying to solve the

problem, Administrator. We want to get it down. It is easy for us

to sit here in this room in Washington in the comforts of our surroundings, but talk about the people who are trying to rebuild their

lives and their businesses in the Gulf region. That is the issue

here. We have to meet with haste. We have to get a tempo here.

Mr. BARRETO. Absolutely.

Chair SNOWE. The fact is, I think you would appreciate it if we

could move things along.

Mr. BARRETO. Sure.

Chair SNOWE. I mean we are not talking about a normal situation here, the normal process.

Mr. BARRETO. I agree.

Chair SNOWE. We are talking about a disaster that happened

last fall. Six months later they need to get it done. That is what

this is all about. Let’s move with a sense of urgency with respect

to all of this. That is the issue here.

Mr. BARRETO. Absolutely. We are committed to——

Chair SNOWE. I do not care if you have hundreds. If you need

thousands, then we have to get thousands. We have to get it done

for these people who need to rebuild their lives, their homes, their

businesses, and to rebuild their communities.

Mr. BARRETO. Absolutely.

Chair SNOWE. That is the issue here. Do not send any qualified

officers back when you have a backlog of 2,700 applications for onsite inspections.

Mr. BARRETO. Again, I think you are referring to a trainee class,

not an experienced——

Chair SNOWE. I do not know if it was a trainee class. I do not

know what it is.

Mr. BARRETO. It is a trainee class that started at the end of January.

Chair SNOWE. Great. If they are now trained, let us use them.

Mr. BARRETO. I am not sure that they are completely trained. In

fact, some of those individuals that you mentioned, we wanted to

get them into the field. They refused to go into the field for training.

Chair SNOWE. You are going to raise a thousand reasons, Mr. Administrator. I know you are going to raise a thousand reasons.

44

Mr. BARRETO. Oh, now.

Chair SNOWE. You know what the bottom line is here?

Mr. BARRETO. We want to get done.

Chair SNOWE. We want to solve the problem now.

Mr. BARRETO. Absolutely.

Chair SNOWE. It is easy for you to sit there and all of us to sit

here and talk about it——

Mr. BARRETO. It is actually not easy.

Chair SNOWE. Meanwhile, these people need to rebuild their

lives. We have to move with the program here, and get this tempo

moving. That is the issue.

Mr. BARRETO. I agree.

Chair SNOWE. In the final analysis that is what this is all about.

Mr. BARRETO. I agree.

Chair SNOWE. A thousand reasons and rationales are not going

to make their lives easier. What they need are solutions, and if

there is a problem, we would like to know about it on the Committee, we would like to do something about it, we would like to

pave the way, and chart a course for them to get this done sooner

rather than later. Saying, well, it will take another month, and

then it will take a new month, think about the circumstances they

find themselves in. Just think about it. We are talking about rebuilding a whole community. Eighty-five percent of the businesses

in New Orleans were small businesses. You have only 8 percent of

the 5.7 billion being disbursed in financing. That is a serious problem.

You can tell me a thousand reasons why it is not happening

today. We want solutions.

Mr. BARRETO. I agree.

Chair SNOWE. We need solutions here, and we are more than

happy to assist you in any way. We have had that conversation,

but we have to get this job done for these people. I just want you

to understand that. I am hearing all this stuff this morning with

the whys and why nots. We need to get this done.

Mr. BARRETO. I agree.

Chair SNOWE. We are prepared to help you and assist you in any

way. Do not send back verification officers. Do not send back loan

officers. Do not send back anybody.

Mr. BARRETO. Sure.

Chair SNOWE. Because it is clear we need them on the ground

in the Gulf region. I would hope that you understand that.

Mr. BARRETO. I am crystal clear.

Chair SNOWE. Okay, great. Finally, on imposing fees on the disaster loans, out of probably a billion dollars, we are now talking

about $41 million imposing fees on 5 years beyond. Is that a new

precedent? Would that be setting a new precedent?

Mr. BARRETO. I do not think the proposal is a new precedent, because my understanding is that that proposal has been made in the

past.

Chair SNOWE. But has it become a reality anyplace?

Mr. BARRETO. I was not here for all those budget discussions, but

I am not sure if it has become. Here is what we are saying: One

of our responsibilities is to come in front of the Committee and tell

you what the reality of our situation is. The bottom line is that the

45

cost of the Disaster Loan Program, if we do not do something about

it, it is going to increase about $41 million. One of the ways to

mitigate that is to subsidize those future loans the first 5 years

when they need it the most, and then allow the interest rate to

float what a Treasury instrument would be. That by itself will close

that $41 million hole.

If this Committee and Appropriations disagrees with that, then

they will make that decision. I think it would have been irresponsible for us to come and say, hey, we have a $41 million hole, but

we do not have any way to close that hole.

Chair SNOWE. On the Microloan Program, why is it you are recommending elimination? I know it is the third consecutive year. It

creates jobs, obviously. These entrepreneurs would not otherwise

access financing either because of their credit history—it is a risk,

obviously, that is why they cannot secure from conventional lenders. The question is—it has been a very successful program overall.

It certainly has been in my State which creates 308 jobs, and in

other part of the country. It is really how you nurture a lot of entrepreneurs that may represent, obviously, because of their collateral, their business history, so on and so forth, but that there are

other mitigating factors, that potentially could offer enormous possibilities for them to start a business.

In any event, why is it that you are recommending eliminating

this program once again?

Mr. BARRETO. Microloans are smaller loans, under $35,000, and

oftentimes those loans go to new businesses, which are oftentimes

minority businesses and women-owned businesses. Some years ago,

at SBA, the only small loans that it did was in the Microloan Program. That is not the case today. Last year the SBA did over

50,000 loans under $35,000, and almost 40 percent of those loans

under $35,000 went to minorities, and a large percentage went to

women.

Senator Coleman mentioned the cost, and there is a cost involved. It costs us almost a dollar for every dollar that we lend out

in that program, and at the same time, in our Flagship Loan Program, the 7(a) loan program, it costs us one third of one cent for

every dollar that we facilitate through there.

On top of that, SBA is not the only microloan program. By the

way, SBA did about 2,500 microloans nationwide. At the same time

that we were doing 53,000 7(a) loans of that size, we did 2,500

microloans nationwide. The truth of the matter is that there are

many microlenders in the United States. We did a survey, and

there are about 400 microlenders in the private sector. Many of

those are nonprofit, who do a much better job, and are much less

expensive than our program. Every year we come and we let you

know that.

Now, as you have mentioned, Congress has disagreed with us,

and we understand that, but we think that that is something that

we need to bring to your attention and let you know, at least the

good news, which is that we are doing 52,000 of those loans in our

regular Flagship Loan Program.

Chair SNOWE. Now, how many of these microloans would be able

to access 7(a)?

Mr. BARRETO. Those were all 7(a).

46

Chair SNOWE. How many would be able to be eligible if you did

not have the Microloan Program?

Mr. BARRETO. You are talking about the microlenders? I do not

know. I would have to see what each of those 2,500 cases are. I am

sure that a microlender customer is probably different in Maine, as

it is in Texas, as it is in California, so we have to look at that. As

I said, many of the people that we are making loans to are very

new businesses, businesses with very little track record, minority

businesses, women-owned businesses, that is who are getting a

large share of those SBA Express loans.

Chair SNOWE. The uniqueness of the microloan is that they cannot access other conventional lending. The point is, how many

would be able to secure a loan under the 7(a) program if the

Microloan Program did not exist?

Mr. BARRETO. What we like to tell small business people that

come to us, because a lot of small business people actually are

entrepreneurs——

Chair SNOWE. The point is 7(a) lenders say none. That is the

point. They are saying none. That is the issue here.

Mr. BARRETO. Our job is to get them ready to be bankable.

Chair SNOWE. I understand, but these are otherwise—you created 308 jobs in Maine, for example. I do not know what the total

numbers are across America, but it has worked very well in Maine,

because 62 different enterprises were able to benefit from the

Microloan Program. The question is, how many of those who benefited from the Microloan Program would be able to benefit under

the 7(a) program? The 7(a) lenders are saying none.

Mr. BARRETO. I do not know what they base that ‘‘none’’ on because I am sure that they do not know all 2,500 of those microloan

customers, but we would have to take a look at that on a case-bycase basis.

Chair SNOWE. The point is, you are losing capability there. You

are denying a capability for small businesses to start up be accessing microloans because of their credit history, collateral or their

business history, something that represents a risk to conventional

lenders but on the other hand there are other factors that sort of

mitigate. That is the point here.

Mr. BARRETO. We do a lot of those kinds of loans that you are

referring to in our Community Express Loan portfolio. Actually, we

do twice as many Community Express loans than we do

microloans, and a lot of those same cases that you are referring to.

Chair SNOWE. Senator Pryor.

Senator PRYOR. Thank you, Madam Chair.

Let me just follow up in that same line that you were asking

there about microloans, but let me just change the area of the

budget just slightly, and that is, Small Business Development Centers. I am sure, as in Arkansas, Maine has had some very positive

success with Small Business Development Centers. They help

small business clients. In fact, last year, 2004, they helped more

than 16,000 new businesses get going, created more than 74,000

new jobs. They saved 80,000 jobs in 2004. At the same time, Small

Business Development Centers helped generate $234 million in

Federal revenue, and that resulted in economic growth. It was $234

47

million in Federal revenue. All that with a Federal investment of

only $88 million.

To me, that is a very good return on Federal tax dollar investment. It has a positive ripple effect around the country.

However, when I look at your budget this year, you are cutting,

I think, it is $743,000. It is a modest cut, but nonetheless, you are

cutting that program. If anything, if you adjust for inflation, it

might be more than that in relative dollars, but if anything, it

would seem like we would be putting more money there and trying

to stimulate the economy. Again, we have talked about in this

Committee many times already today, that small business really is

where the action is in the U.S. economy.

Why not—I am not saying double the money—but why not add

money to this program and spur the economy, and have a positive

ripple effect? Why are we cutting that?

Mr. BARRETO. I do not know that we are cutting the program. We

have actually been asking for level funding for that program for

some time now, but there was a congressional rescission last year

across the board that affected all of these programs. I think that

is where that $743,000 comes from. I think it was a one percent

rescission, and that is what brought that down.

One of the other things that I think is very important to note,

Senator, is I kind of think of that program as a $200 million program, not an $88 million program. The reasons I say that is because, as you know, what the Government basically does is that

they provide money, an investment, if you will, to those SBDCs,

which they leverage, which is a great thing. They match every dollar that we give to them. It is not an $88 million program. I mean

just a one-on-one match would be about $176 million, but many

SBDCs also raise money from other sources as well. They do an incredible job.

What we have seen is that they are very focused on increasing

the number of people that they are providing training and counseling on. We work very closely with them. We have a very good

relationship with them. We participate in a lot of their national

events, and host them at our offices often. I think the key thing

is that we have been asking pretty much for flat funding for that.

The rescission you brought it down, $800,000, and then again, remember that they leverage the dollars that we give them.

By the way, they have to. SBA cannot just give them money if

they do not have that match already lined up.

Senator PRYOR. Why are you asking for flat then? Why are you

not asking for an increase?

Mr. BARRETO. Obviously, what we have seen in the budget, what

we are presenting is, that it is a tight budget. It has been a tight

budget for us for the last couple of years. We believe that it is fiscally responsible, but it still allows us to accomplish the things that

we have been talking about doing. I think it would be very difficult

for me to come in front of you and say, ‘‘We are asking for less

money, and by the way, last year I did less loans, and I guaranteed

less dollars unless people had access to training, and forget about

Government contracting. Government contracting has gone way

down.’’ That is not what has happened, and that is not what I beVerDate 11-MAY-2000 11:53 Jun 30, 2006 Jkt 027286 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 C:\SBA\27286.TXT CarolB PsN: CarolB
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lieve is going to happen this year or next year or in the years to

come for the SBA.

I think we have a much more agile model. I think we are a lot

more entrepreneurial. I think we have a lot of partners now that

help us to accomplish our mission.

Senator PRYOR. Thank you, Madam Chair.

Chair SNOWE. Thank you, Senator Pryor.

Just one final question, Administrator. On Government procurement, you mentioned that the current number of SBA Procurement

Center representatives are 58, which is more than ever before.

Mr. BARRETO. Yes, ma’am.

Chair SNOWE. Although——

Mr. BARRETO. More than ever before for us.

Chair SNOWE. Oh, okay. A point of clarification.

Mr. BARRETO. In our tenure.

Chair SNOWE. Okay, in your tenure. So you understand that.

Mr. BARRETO. I think that 20 years ago or something there was

probably a lot more of them.

Chair SNOWE. Well, I guess 7 years ago, 1993, actually. The GAO

submitted a report to this Committee in 2000, indicating in 1993

that SBA had about 58.

These representatives obviously have an enormous challenge in

reviewing the Federal contracts in the contract centers, which are

now at 2,250, as I understand it. Is that correct, procurement centers, SBA?

Mr. BARRETO. I would have to verify that number.

Chair SNOWE. Since 1993 the volume of Federal contracts has

doubled to 300 billion. I think that the point is here, that these

representatives, their volume of contracts has more than doubled

over the last few years, and this trend has a major impact on small

businesses, small contractors, as you well know, because we know

that many of the agencies are not complying with the requirements, and small businesses are being overlooked, and larger contractors are accessing these contracts, or representing themselves

as small contractors. Here we have 80 percent of the potential bundled contracts not being reviewed due to the lack of these Procurement Center representatives, according to the Inspector General’s

report within the SBA.

That is a major problem. What can we do to alleviate this problem? Obviously, I think we need more representatives without

question, but there is something much beyond that.

Mr. BARRETO. We have hired more than we had before. By the

way, just to put this in perspective, we have them report to us, and

we monitor their activities. These 58 PCRs are covering 255 of the

major buying activities, the major procurement activities, and that

represents $200 billion of the Federal procurement. In other words,

75 percent of that $300 billion is being right now covered by these

58, and the reason is, as you know, that there is a lab or some

other major procurement entity, where a tremendous amount of

contracting is occurring, and we will have PCRs that are dedicated

to that.

We are looking at different ways. One of the things that we have

talked to this Committee about is to use technology for these folks.

If you have this great tool called technology, you should be able to

49

use it so that you do not necessarily have to have a physical body

driving someplace to be in communication or relationship with

these. We are working on an electronic procurement center representative program. We should have that online definitely by the

2007 budget, and we are working very closely with these other

agencies to make sure that we are doing everything that we can

to—a lot of the examples of these contracts that may be going to

a large business, I think there is a lot of misinformation about

that. We have done a review.

I had a meeting with the IG this week on this issue, and a lot

of times it is not because the business did anything wrong. Sometimes it is because a lot of these procurement officers have never

been trained on small business procurement. You have people in

agencies that are doing small business procurement that have

never had any training on small business procurement. There is a

lot of miscoding, or sometimes there is a situation where a small

business gets a contract, but then over a period of time grows, and

they outgrow that size standard. Or sometimes that small business

gets bought by a larger entity, and then somebody will say, well,

the larger entity took a contract away from a small business. No,

they did not. They bought a small company that had a small business contract.

By the way, we think it is a good thing when small businesses

grow, and oftentimes if they grow too big they will exceed the size

standard. That is a good thing. Or if they grow so big that they decide to sell their business, that is their decision. That is not a bad

thing.

We know that there is more work to be done. We need to work

even closer in concert with these agencies to make sure that we are

minimizing contract bundling, and we need to make sure that

these PCRs have all the tools that they need, electronic and otherwise, for them to continue covering the majority of procurement opportunities in the Federal Government.

Chair SNOWE. I think we need more, obviously. That is what the

Inspector General’s report indicated, that 80 percent of the bundled

contracts are not being reviewed because of the lack of these representatives, and of the 58, 5 are down in the Gulf region. It is

clear to me that you need far more to address this problem. We

have to get to the bottom of it. I am just surprised that you would

not have recommended more representatives.

Mr. BARRETO. Well, we have more now than ever before, but——

Chair SNOWE. I know, but that does not solve the problem. It

may well be, relatively speaking, but it is not solving our problem

and so we have a huge problem. I know it does not match up.

Mr. BARRETO. As you said, the problem keeps getting bigger because Government keeps buying more and more. When I first started, Federal Government was buying about $200 billion. Now it is

buying $300 billion.

Chair SNOWE. That is exactly right, and small business is being

left behind. That is the key issue.

Mr. BARRETO. Last year the Federal Government bought $69 billion from small business. That was about 23 percent. By the way,

that was the second year in a row that we hit 23 percent. I do not

think that has ever happened before. I do not think we have had

50

2 consecutive years, as I understand it, where the Federal Government did 23 percent, but we got 23 percent the year before last,

we got 23 percent last year, and obviously we are working hard to

make sure we get 23 percent this year.

Chair SNOWE. Eighty percent of the potential bundled contracts

are not being reviewed. That is the point. 80 percent is a very high

figure. That is the point. We need more. Maybe we have more than

ever before, but we certainly need a greater number than exists

today, and especially where you have 5 down in Gulf region, so

that leaves you with 53.

Mr. BARRETO. We are trying to focus attention on the Gulf and

make sure that——

Chair SNOWE. That is fine. Obviously, I do not dispute that, I do

not question it. The point is, you need more. 58 is not sufficient.

There is a gap in coverage now, but there will continue to be in

the future, because, obviously, this 80 percent did not occur recently. It has been over time, and so, obviously, even before the

hurricanes. We have a problem there, and I hope that we can work

to address it.

Mr. BARRETO. Sure.

Chair SNOWE. I want to just thank you for your testimony.

Mr. BARRETO. Thank you, Madam Chair.

Chair SNOWE. We will be working with you, Administrator. Obviously, there are a number of issues. You have heard them here

today, with a variety of Members of this Committee, but we want

to make sure that you continue to have the resources you need to

address the immediate of what is occurring in the Gulf until we

can complete our responsibilities and obligations, and it is really

critical that we discharge them to the best of our ability, and to

make sure that those who want small businesses’ resources and assistance, that they get them, and that is what it is all about.

The record for this hearing will remain open for an additional 2

weeks until noon on March 23rd. In addition, any written questions

for the Administrator must be submitted to the Committee by noon

on March 16th, and we will forward them to Administrator Barreto

for written responses.

Again, I just want to thank you, Administrator Barreto for being

here.

Mr. BARRETO. Thank you.

[The prepared statement of Mr. Barreto follows:]

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Chair SNOWE. This Committee hearing is adjourned.

[Whereupon, at 12:10 p.m., the Committee was adjourned.]

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