```

[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

 
                    HEARING ON SBA COMPUTERIZED LOAN
                  MONITORING SYSTEM: A PROGRESS REPORT
=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON GOVERNMENT
                         PROGRAMS AND OVERSIGHT

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                   WASHINGTON, DC, FEBRUARY 29, 2000

                               __________

                           Serial No. 106-44

                               __________

         Printed for the use of the Committee on Small Business

                    U.S. GOVERNMENT PRINTING OFFICE
65-506                      WASHINGTON : 2000

                      COMMITTEE ON SMALL BUSINESS

                  JAMES M. TALENT, Missouri, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
DONALD A. MANZULLO, Illinois             California
ROSCOE G. BARTLETT, Maryland         DANNY K. DAVIS, Illinois
FRANK A. LoBIONDO, New Jersey        CAROLYN McCARTHY, New York
SUE W. KELLY, New York               BILL PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio               RUBEN HINOJOSA, Texas
PHIL ENGLISH, Pennsylvania           DONNA M. CHRISTIAN-CHRISTENSEN, 
DAVID M. McINTOSH, Indiana               Virgin Islands
RICK HILL, Montana                   ROBERT A. BRADY, Pennsylvania
JOSEPH R. PITTS, Pennsylvania        TOM UDALL, New Mexico
JOHN E. SWEENEY, New York            DENNIS MOORE, Kansas
PATRICK J. TOOMEY, Pennsylvania      STEPHANIE TUBBS JONES, Ohio
JIM DeMINT, South Carolina           CHARLES A. GONZALEZ, Texas
EDWARD PEASE, Indiana                DAVID D. PHELPS, Illinois
JOHN THUNE, South Dakota             GRACE F. NAPOLITANO, California
MARY BONO, California                BRIAN BAIRD, Washington
                                     MARK UDALL, Colorado
                                     SHELLEY BERKLEY, Nevada
                     Harry Katrichis, Chief Counsel
                  Michael Day, Minority Staff Director
                                 ------                                

           Subcommittee on Government Programs and Oversight

                 ROSCOE G. BARTLETT, Maryland, Chairman
MARY BONO, California                DANNY K. DAVIS, Illinois
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
RICK HILL, Montana                   CHARLES A. GONZALEZ, Texas
                        Nelson Crowther, Counsel

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on February 29, 2000................................     1

                               Witnesses

Hochberg, Fred P., Deputy Administrator, U.S. Small Business 
  Administration.................................................     3
Wilkinson, Anthony R., President & CEO, the National Association 
  of Guaranteed Lenders, Inc.....................................     8
Willemssen, Joel C., Director, Civil Agencies Information 
  Systems, Accounting and Information Management Division........    10

                                Appendix

Opening statement:
    Bartlett, Hon. Roscoe........................................    27
Prepared statements:
    Hochberg, Fred P.............................................    30
    Wilkinson, Anthony R.........................................    55
    Willemssen, Joel C...........................................    59

 HEARING ON SBA COMPUTERIZED LOAN MONITORING SYSTEM: A PROGRESS REPORT

                              ----------                              

                       TUESDAY, FEBRUARY 29, 2000

        House of Representatives, Subcommittee on 
            Government Programs and Oversight, Committee on 
            Small Business,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2360, Rayburn House Office Building, Hon. Roscoe Bartlett 
[chairman of the subcommittee] presiding.
    Chairman Bartlett. Good morning. Let me convene the 
Subcommittee on Government Programs and Oversight of the House 
Committee on Small Business.
    Before I begin, let me note that we are this morning 
nationwide live on the Net, so if you would please speak into 
your microphone so that the system can pick it up clearly.
    Good morning and welcome to this hearing of the 
Subcommittee on Government Programs and Oversight of the 
Committee on Small Business. A special welcome to those who 
have come some distance to participate and to attend this 
meeting.
    Today we will examine a matter that is of great importance 
to the taxpayers who expect the 7(a) government guaranteed loan 
program to be well managed and remain solvent. The hearing is 
important to Congress in its oversight role and to the U.S. 
General Accounting Office which is responsible through the 
audit function to provide accurate information as to the 
financial condition of federal government programs. And this 
hearing should be of importance to the Small Business 
Administration known here in Washington as ``SBA'' the federal 
agency that is responsible for the day-to-day direction of the 
7(a) loan program.
    Section 233 of the Small Business Reauthorization Act of 
1997 (Public Law 105-135) requires that SBA complete eight 
mandated planning actions before the agency obligates or 
expends any funds for the development and implementation of the 
proposed new, automated 7(a) loan monitoring system. It would 
seem only a matter of common sense that the planning phase 
should be completed before an agency makes major software and 
hardware purchases for a new computer system.
    The proposed new automated loan monitoring system for the 
7(a) loan program was the subject of a prior hearing of this 
Subcommittee held on July 16, 1998. We were encouraged by 
testimony at that hearing that the Small Business 
Administration had a project plan, but none of the eight 
planning steps had been completed.
    We in Congress support the Administrator's initiative in 
relying more on the private sector in the 7(a) loan program. We 
support SBA's turning over to hometown bankers the decision to 
originate loans and the responsibility for servicing and 
liquidating loans. Certainly the local banker has more 
knowledge of the lender and his or her credit worthiness than 
bureaucrats located some distance from the community in which 
the loan is made.
    Also, there is a broad-based support in Congress for the 
Administrator's efforts to modernize SBA's systems and outlook. 
There is also broad-based support for the Administrator's goal 
for the 7(a) loan program that is, to get SBA out of the loan 
application approval business altogether and to assume the role 
of overseer of the lending institutions.
    This hearing will focus on the progress SBA has made, since 
the July 16, 1998 hearing, in performing and completing the 
planning needed to serve as the basis for funding the 
development and implementation of the 7(a) loan program 
computerized loan monitoring system including the eight 
planning steps required by the Act.
    At this hearing today, we would appreciate your assessment 
of (1) whether any planning has been completed as of today, (2) 
the management decisions made as a result of that planning, (3) 
the planning remaining to be completed, and finally (4) the 
management decisions remaining to be made. Further, we would 
like to know the extent to which SBA has involved the lenders 
in the planning process. Lastly, does the planning for the 
system include maximizing opportunities to reduce needless 
paperwork, regulatory burden and costs borne by the borrowers, 
lenders and SBA?
    It would be unacceptable for SBA to ignore the law and the 
will of Congress expressed in Section 233 of the 1997 Small 
Business Reauthorization Act. It would be unacceptable for SBA 
to bypass accepted system development standards and essential 
planning steps. No successful business could omit prudent 
planning. It is incumbent upon Congress and the U.S. General 
Accounting Office to see that a federal agency does not engage 
in wasteful, willy-nilly project management.
    In a nutshell, the purpose of this hearing is to hold SBA's 
feet to the fire to make sure that they complete the eight 
planning steps required by law before the agency spends any 
taxpayers' money to buy software or hardware for a new 
automated computer system for monitoring its 7(a) loan 
portfolio.
    Again thank you all for participating in this hearing. And 
thank you in the audience for attending this hearing.
    And we are pleased today to be joined by Mr. Danny Davis, 
Ranking Democrat on our subcommittee, and would now turn to him 
for any opening remarks that he would care to make.
    [Mr. Bartlett's statement may be found in appendix.]
    Mr. Davis. Thank you very much, Mr. Chairman, and first of 
all let me commend you for calling this hearing today to review 
the progress of the Small Business Administration's Automated 
Loan Monitoring Program.
    As we all know, Section 233 of the 1997 SBA Reauthorization 
Act, PL-105-135, mandated that SBA perform the necessary 
planning to implement the computerized loan monitoring system. 
Modernization of SBA's loan monitoring system is critical to 
the survival of our small businesses, as it will help expedite 
loans in a more efficient and timely manner. This is most 
important to those programs which embody 7(a) programs and 
disaster assistance.
    As a member of this committee, I have worked tirelessly to 
see that all members of this country receive a fair and 
equitable treatment from the Small Business Administration 
regarding access to capital. I have also seen the same 
commitment from the Small Business Administration. First, 
completing the modernization of SBA's Loan Monitoring Program 
will enable everyone here to evaluate the progress made by the 
Small Business Administration concerning access to capital. 
Therefore, the full implementation of the SBA plan is critical 
to the success of the SBA andsmall businesses who need the 
services that it provides.
    I have complete confidence that the Small Business 
Administration and this committee will work together to that 
end. It is certainly encouraging to see the progress that has 
been made. It is encouraging to know that the Small Business 
Administration is dealing with what I consider to be, 
especially in much of the community that I represent, access to 
capital has and continues to be one of the most significant 
barriers to the development of small business, especially by 
minority groups and women.
    So, I thank you, Mr. Chairman, for this hearing. I look 
forward to the testimony that we are going to hear today, and 
thank all of those who have come to participate.
    Thank you.
    Chairman Bartlett. Thank you very much, and I would like 
now to welcome our witnesses.
    Let me say first that your prepared testimony will, without 
objection, be included as a part of the record, so we would 
encourage you to summarize in any way that you see fit.
    Our witnesses today are Fred Hochberg, Deputy 
Administrator, Small Business Administration, then Anthony 
Wilkinson, President and CEO of the National Association of 
Guaranteed Lenders, Inc., and Joel Willemssen, Director, U.S. 
General Accounting Office.
    Chairman Bartlett. Mr. Hochberg, we would be pleased to get 
your testimony first.
    Thank you.

STATEMENT OF FRED P. HOCHBERG, DEPUTY ADMINISTRATOR, U.S. SMALL 
                    BUSINESS ADMINISTRATION

    Mr. Hochberg. Thank you.
    Mr. Chairman and Congressman Davis, my oral testimony will 
address the questions that you raised, Mr. Chairman, in your 
opening statement, and all of what we are doing here will also 
address issues of access to capital, because we will have far 
better information from our lenders, where loans are being 
made, and where they are not being made, as a result of our 
efforts through this program.
    Good morning, Mr. Chairman and Members of the Subcommittee. 
Thank you for inviting the U.S. Small Business Administration 
to testify about the progress we have made in planning for the 
implementation of our Loan Monitoring System. My name is Fred 
Hochberg, Deputy Administrator of the SBA. By way of 
introduction, I should add that I come to the SBA from the 
business world. I served as President and Chief Operating 
Officer of the Lillian Vernon Corporation, a business founded 
by my mother which I guided from $6 million to $170 million 
over the course of 18 years.
    One of the projects I undertook at the company was a 
complete enterprise-wide overhaul of my company's computer 
operations. But, before I get started I'd like to just brag a 
little bit. In yesterday's issue of Forbes magazine, the title 
is ``Best of the Web,'' the SBA was cited as having the best 
web site. You can find that on page 76 of yesterday's Forbes 
magazine. So, we are developing a very strong IT program at the 
SBA and we are glad that Forbes recognizes it.
    Joining me today are some of the senior executives who are 
responsible for the Loan Monitoring System. Behind me, you will 
find Kris Marcy, our Chief Operating Officer, Larry Barrett, 
Chief Information Officer, Charles Tansey, Associate Deputy 
Administrator for Capital Access, and Joe Loddo, our Chief 
Financial Officer. We are appearing on behalf of SBA 
Administrator, Aida Alvarez, whose schedule did not permit her 
being with us today.
    Despite her absence, the Administrator is deeply committed 
to transforming the SBA into a 21st century institution, using 
the best practices of the private sector, as well as the most 
recent advances in technology. Let me summarize my rather 
lengthy statement, and I thank you for including this as part 
of the official record as well.
    SBA's legislative mandate is quite clear. Simply put, our 
mandate is to serve as a gap lender, to ensure that those small 
businesses who do not have access to traditional means of 
capital have the funds necessary to start or grow their 
businesses. Our success in carrying out this mission has been 
nothing short of phenomenal. Since 1990, our loan portfolio has 
grown from $17.5 billion to over $50 billion. We now guarantee 
between 45,000 and 50,000 loans a year, three times the amount 
in 1990. And, we have made fundamental, major changes to the 
way we do business.
    Just a few examples. Now, all routine servicing is handled 
in our centralized business and disaster loan centers. Seventy-
five percent of all loans bypass the district offices. SBA has 
reduced burdensome paperwork and increased efficiency with the 
SBAExpress and LowDoc programs, programs that help borrowers 
needing less than $150,000.00 in capital.
    We have completed our first round of safety and soundness 
reviews of the small business lending companies and are in the 
midst of our second round. This is a first for the SBA.
    In accordance with our legislative directive, SBA now 
contracts out about a third of its disaster loan servicing. 
Seventy-five percent of our business loan portfolio is now 
serviced by the private sector, our lending partners, and we 
launched our first ever asset sale, which was quite successful, 
last August.
    And, we did this with 22 percent fewer employees over the 
last decade. Obviously, this meant that the way we deliver 
programs had to change dramatically. You might say at this 
point, well, this is all well and good, but why not centralize 
even more. The answer goes back to our legislative mission, 
small businesses, new businesses, businesses without long 
credit histories, have special needs. Just look at the current 
crisis in the home heating oil industry in New England, and I 
should add in Maryland. If banks were to send these loan 
requests from these small oil companies to our Sacramento 
processing center, they might well be turned down. Many of 
these companies have no borrowing history, many of them need 
technical assistance, and it does take local knowledge of the 
local marketplace to make these loans work. We must give these 
small companies the loans coupled with technical assistance to 
help them get back on the road to recovery.
    We are all for centralization, but only if we can use it 
effectively in assisting our small business clients. SBA once 
made loans directly and did the credit reviews directly. Now, 
as I mentioned, 75 percent of all business loans are being made 
by our lending partners, with no or limited credit review by 
the SBA. This presents a level of risk, which you noted in your 
letter of invitation to this hearing, and this concern, Mr. 
Chairman, is why the agency began planning for a Loan 
Monitoring System back in 1996 and made its first funding 
request to Congress in February of 1997.
    Our computer systems were originally designed 20 years ago, 
when SBA's once primary function was direct loan making. Simply 
put, our systems have not fully evolved to meet the challenges 
and the way our loan products are now being delivered by 
lenders. It is critical that SBA develop a computer system that 
allows us to rapidly identify and respond to variations in 
lending patterns.
    Two major challenges face us as we move ahead. First, as a 
result of recent changes in thenation's banking laws, the face 
of lending has changed and changed dramatically. And, the industry has 
become increasingly polarized as mergers among large and medium-sized 
lenders have created a core of very large multi-state banks on one 
hand, and left an equally large number of rural and small banks on the 
other.
    Secondly, we are challenged by the fact that technology 
systems are evolving rapidly. When we first began planning in 
1996, the full power of the Internet was just beginning to be 
realized. And, its potential as a consumer banking forum was 
understood hardly at all.
    In 1998, 6.9 million households were banking on line. The 
number is expected to grow to over 24 million by 2002. Thirty-
nine of the largest consumer banks in the U.S. now offer 
Internet bill payment, up from just 17 a year ago. SBA must be 
able to keep pace or we will be bypassed.
    Mr. Chairman, you are a scientist with numerous patents to 
your name. I understand you've held key positions in research 
and development. You, probably better than most, understand how 
critical it is to keep up with technology. I know that you and 
this subcommittee recognize the importance of our developing an 
effective Loan Monitoring System for all our loans, not just 
7(a) and 504.
    I recognize the contribution this subcommittee has made by 
outlining the planning steps which, along with the Clinger-
Cohen Act, have guided the development of our system thus far. 
In fact, since the 1997 SBA Reauthorization Act, we have worked 
closely with the staffs of the House and Senate Small Business 
Committees and subcommittees, our appropriators and the General 
Accounting Office, to design a system which makes sense for all 
of our small business clients, and lending partners, and our 
staff.
    As you requested, I have included a detailed description of 
the work we have done to fulfill the eight planning steps in my 
written testimony. These steps have proved to be beneficial. I 
am pleased with the work we have done thus far. We are now 
ready to go forward.
    Let me summarize here some aspects of the planning work 
related to the benchmarking and business process reengineering. 
And, in fact, just yesterday we completed one additional step, 
which was pending and is now in final.
    The purpose of benchmarking was to identify the best 
practices of organizations. At the beginning, our contractor, 
Booz-Allen & Hamilton, emphasized the fact that none of the 
organizations identified in the benchmark report performed 
precisely the same function as the SBA. Freddie Mac, in its 
multi-family program for example, deals with about 40 banks. 
SBA does business with over 6,000. The quasi-government 
entities we studied, like Freddie Mac and Fannie Mae, are also 
significantly different from the SBA, because they are involved 
in housing rather than commercial loans. Housing loans tend to 
be more homogenous. Conventional lenders in the study do not 
have SBA's mission of providing financing to those who do not 
have access to credit on reasonable terms. The difference is 
mainly due to our role as a gap lender, which I mentioned 
earlier. Nevertheless, their systems provided very good models 
for the SBA to use in developing our Loan Monitoring System.
    There was one underlying theme throughout the benchmarking 
process, our inability to capture and analyze information which 
results in increased taxpayer exposure to credit risk. Booz-
Allen & Hamilton recommended that systems be developed that 
would obtain information at loan origination and then 
automatically and seamlessly transfer the information 
throughout the organization.
    I know that you are particularly interested in the use of 
credit scoring. Greater use of credit scoring to make 
objective, standard determinations of front-end risk was 
identified in the bench marking process. By the summer of 2000, 
SBA plans to begin using customized credit scoring to expedite 
the decision-making at its LowDoc centers. Specifically, when a 
loan guarantee request receives a credit score in the low risk 
range, the credit scoring process will replace one of the two 
manual credit reviews now required for loan approval.
    The use of credit scoring, however, must be balanced. 
Credit scoring is not viable for new businesses and first-time 
borrowers, nor does it factor in anticipated business cash 
flows or other factors that SBA uses to determine ability to 
repay.
    SBA's BPR represented an important step in the agency's 
modernization planning. The BPR study was conducted from 
December of 1998 through June of 1999, with a 40-member team 
composed of a cross section of SBA field and headquarter staff. 
The team recommended incorporating technology advances that 
were not even available five years ago. After the BPR, we made 
a number of management decisions. Using GAO's BPR Assessment 
Guide, SBA conducted a feasibility study. Senior management and 
a panel of program experts, who are not part of the BPR team, 
reviewed the 38 recommendations. Ultimately, 30 of the 38 
recommendations were adopted without any change. The remaining 
eight were adopted with slight modifications to better meet our 
legislative mission as a gap lender.
    Then, at the October field managers conference, SBA's 
senior staff reviewed the future role of the district office 
and the degree of appropriate centralization and 
decentralization. That subject was fully discussed and debated. 
In December, following review by senior staff, the 
Administrator adopted the recommendations of the feasibility 
study mentioned above.
    What are the hallmarks of our Loan Monitoring System? We'll 
be electronic with our lenders. We will be paperless. We will 
use high-quality data and be timely. We'll hold lenders to 
strict performance standards. We will proactively perform risk 
management. We will strengthen our ability to do timely and 
accurate subsidy rate calculations.
    Mr. Chairman, we have created a safe system. We can handle 
the challenge of doing business electronically. We have worked 
with the public key infrastructure group as we set up a secure 
Internet site for conducting SBA business and tested the use of 
digital signatures. We have two solid years of experience in 
addressing cyber intrusions and threats. SBA has taken 
aggressive steps to implement a proactive computer security 
program, including Internet monitoring, fire walls and two-step 
authentication to gain access to our site.
    As a result of the planning process, we are ready to begin 
the initial development of the system. No further management 
decisions remain to be made for Iteration One. Also, we have 
nearly completed orientation of our field staff who will be 
using the new system. We will continue to solicit feedback from 
our private sector lending partners. We have been meeting with 
them monthly to implement a system which will work best for 
them, too. These forums are an essential ingredient to ensure 
we develop a system that works for the SBA, our lending 
partners, and small business owners.
    Mr. Wilkinson will further elaborate on that.
    I stress that we are ready to begin the initial 
implementation of the system. Through extensive consultation 
with GAO, we have recently provided greater detail on Iteration 
One, which we believe demonstrates that we are ready to begin. 
We will continue to work closely with GAO as we evaluate this 
prototype effort. We have purposely adopted an evolutionary or 
iterative approach. It is less risky. We are mindful of the 
mistakes that have caused other organizations to stumble.
    Let me go back to our commitment. I hope I have convinced 
you that Administrator Alvarezand I, backed by the team who are 
sitting behind me, are totally committed to bringing the best of the 
technology to our agency. We will use electronic commerce in every 
facet of our operations, using it in our work and communications with 
every member of our staff and SBA family, our resource partners, and 
our small business clients. We are modernizing, and we are mindful of 
the risk associated with major IT projects. We are also aware of the 
greater risk of not proceeding.
    As a result of our planning, we are now fully appreciative 
of the exposure we face. As stewards of federal resources, our 
failure to proceed would be irresponsible and imprudent.
    Thank you for inviting the SBA to discuss with you the 
Automated Loan Monitoring System. I appreciate your continued 
support of this effort, and I ask for your support in the 
future.
    I'd be happy to answer any questions you may have.
    [Mr. Hochberg's statement may be found in appendix.]
    Chairman Bartlett. Thank you, Mr. Hochberg.
    We now will turn to Mr. Wilkinson for his testimony.

   STATEMENT OF ANTHONY R. WILKINSON, PRESIDENT AND CEO, THE 
        NATIONAL ASSOCIATION OF GUARANTEED LENDERS, INC.

    Mr. Wilkinson. Good morning, Mr. Chairman, Congressman 
Davis, Congressman Toomey. My name is Tony Wilkinson, and I'm 
the President and CEO of the National Association of Government 
Guaranteed Lenders, or NAGGL as we like to call it. We 
represent nearly 700 lenders and other program participants who 
cumulatively make approximately 80 percent of the 7(a) loans 
guaranteed by the SBA annually. We thank you for holding this 
hearing today and requesting our input on SBA's automation 
efforts.
    I have learned today that one of the other reasons I was 
asked to be here today was to help bring the average size of 
the testimony down. My two colleagues have done an excellent 
job in covering the technical sides of the issue in front of 
us, and I'm going to speak briefly on what is going on from the 
lender's perspective.
    Over the last decade, the SBA 7(a) loan program has 
experienced tremendous growth. What once was a fairly small 
program is today a $10 billion plus program. In the early part 
of the 1990s, the SBA processed the majority of the 7(a) loans. 
To better leverage private sector resources, so that we could 
provide access to capital, this process had to change and we 
had to rely more on preferred lenders and other means to 
deliver the product, and that has happened. This transformation 
is well underway at the SBA, and as Mr. Hochberg just said, 75 
percent of all 7(a) loans last year were processed under the 
PLP program or other limited review procedures. So, again, the 
SBA is now better leveraging private sector resources, 
providing greater access to capital to small business, and 
doing so with fewer employees.
    An integral part of SBA's success will be the development 
and implementation of the new Loan Monitoring System, and from 
the lender's perspective this will be no easy task. The agency 
must deal with the smallest of community banks, all the way up 
to the largest multi-district commercial banks, and non-bank 
lenders. These banks and lenders serve various geographical 
areas, so the needs of the lenders that will be involved in 
this new Loan Monitoring System are very different, and SBA has 
had a challenge in figuring out how to meet the needs of both 
extremes and every lender in the middle.
    We agree that the SBA must gather sufficient data to manage 
its loan portfolio in a responsible manner, while not creating 
a reporting burden on either the borrower or the lender.
    NAGGL thanks the SBA for the ongoing dialogue that we've 
had with our Automation Committee. It's been a pleasure to work 
with Mr. Hochberg and his staff, and from our perspective they 
are doing an excellent job in putting together the new Loan 
Monitoring System.
    We hope this dialogue will continue. We do have regularly 
scheduled meetings, and we hope this continues especially since 
we are nearing the stage of refinement. One of the things that 
we are looking for in the not too distant future is a set of 
specifications with the data file elements that will help our 
lenders determine what we will have to do to comply with the 
new Loan Monitoring System.
    NAGGL concurs that the Internet should be the standard 
medium for submitting loan applications and servicing actions. 
Reliance on the automated flow of information should create 
efficiencies both with the lender and SBA. We also appreciate 
SBA's willingness to work with lenders who are not 
technologically capable, by agreeing to accept applications by 
paper.
    As well as having ongoing dialogue with the lending 
community, we hope that SBA is having a similar dialogue with 
their current contractors to make sure that they can 
specifically integrate their computer systems with what the SBA 
is planning. Hopefully, this will maximize results and there 
will be no duplication of efforts.
    As equally important to the process of collecting the data, 
is the establishment of performance standards by which lenders 
will be reviewed. The SBA has recently established the Office 
of Lender Oversight, and it is our understanding that 
development of performance standards is one of high priority. 
NAGGL has long said that the SBA needed to be in the business 
of lender oversight, and we hope to work with the agency to 
develop performance standards that are appropriate to protect 
SBA's interests, but also reasonable, fair and focused on 
compliance with SBA rules.
    Mr. Hochberg said in his testimony, both written and 
verbal, that one of the uses of the data collected in the new 
Loan Monitoring System will be to predict more accurately the 
future cash flow of loans and help with subsidy rate 
calculation. We, at NAGGL, hope this actually happens. For the 
last several years, the Administration has materially 
overestimated the cost of the 7(a) program by using a default 
estimate that is much higher than actual defaults. This means 
that borrowers are being charged fees higher than necessary.
    In just the last few years, the Office of Management and 
Budget, per the agency's Fiscal 2001 budget request, now says 
they overestimated the cost of the 7(a) program by a total of 
$1 billion. Compared to the request of 7(a) appropriation for 
Fiscal 2001 of only $142.6 million, this to us is a serious 
problem. But, even though OMB has reported they overestimated 
the cost of the program in the past, primarily due to excessive 
default estimates, they did not change the default estimate, or 
materially change the default estimate, for Fiscal 2001. OMB is 
still using a default estimate that we believe is more than 40 
percent higher than necessary. A 40 percent decline in the 
default estimate in the subsidy model would mean a 7(a) program 
subsidy rate of approximately zero. We would not need an 
appropriation for Fiscal Year 2001. NAGGL would appreciate any 
help this committee could provide in helping obtain a more 
reasonable and fair subsidy rate calculation for the 7(a) 
program.
    Mr. Chairman, thank you for the opportunity to appear 
today, and I'd be happy to answer questions.
    [Mr. Wilkinson's statement may be found in appendix.]
    Chairman Bartlett. Thank you very much.
    Now we welcome Mr. Willemssen, and look forward to his 
testimony.
    Thank you.

   STATEMENT OF JOEL C. WILLEMSSEN, DIRECTOR, CIVIL AGENCIES 
  INFORMATION SYSTEMS, ACCOUNTING AND INFORMATION MANAGEMENT 
                            DIVISION

    Mr. Willemssen. Thank you, Mr. Chairman, Ranking Member 
Davis, Congressman, thank you for inviting GAO to testify 
today. As requested, I'll briefly summarize our statement.
    Overall, SBA has made substantial progress in completing 
the eight mandated planning actions for its Loan Monitoring 
System. SBA has now completed final or draft products for each 
of those required actions. For example, SBA has benchmarked its 
business processes against those of leading organizations, and 
has conducted a reengineering study to identify and select new 
processes to improve its operations. The reengineering study 
addressed the key business functions within SBA, such as 
guarantee procedures and lender oversight, and made numerous 
recommendations for improving the agency's business processes.
    SBA has also started to identify the data needed for the 
proposed Loan Monitoring System, begun defining data quality 
standards, started addressing the target information 
architecture, initially defined system requirements, and 
estimated the costs to complete the project. Based on the 
results of the reengineering study, SBA has developed a general 
description of the Loan Monitoring System. The system is 
expected to be on line to all users around the clock. 
Internally, SBA staff are to have access to records from 
anywhere in the agency, while externally the system is expected 
to allow lenders to view their own portfolios. SBA plans to 
have the Loan Monitoring System linked to the Internet and be 
integrated with a secure web site. Currently, SBA estimates 
that the new system will cost about $27.7 million.
    While SBA has made substantial progress in its planning for 
the Loan Monitoring System, it still must take a number of 
actions to reduce the project's risk. Let me highlight just 
some of those key actions.
    First, SBA needs to identify the costs and benefits of a 
range of business process and systems alternatives to provide 
greater assurance that it is pursuing the most cost effective 
options.
    Second, SBA needs to ensure that the system it is building 
will be integrated with its future agency-wide information 
technology architecture, so that the Loan Monitoring System 
will be able to work seamlessly with SBA's other systems.
    Third, SBA needs to make sure that it implements plans for 
improving data quality, including defining standards and 
developing a schedule of actions to include data quality in the 
current systems.
    Fourth, SBA needs to make sure it's defined key 
requirements for the Loan Monitoring System before proceeding 
with development.
    And finally, SBA needs to provide a clear rationale for why 
automation of many of its business functions must be custom 
developed, rather than addressed through the use of commercial, 
off-the-shelf products.
    As it proceeds with the Loan Monitoring System, SBA will 
also need to continue strengthening its project management 
processes and controls. It has started to implement these basic 
policies and processes, and they are really critical for such 
an effort as the Loan Monitoring System. For example, 
instituting capabilities such as project tracking and oversight 
are essential to be able to monitor actual results and 
performance against the schedule. In addition, implementing 
configuration management policies, which are a set of controls 
over changes to computer and network system changes, are 
important to successfully managing systems that intend to be as 
complex as the Loan Monitoring System. Further instituting 
quality assurance activities, to verify that system development 
complies with applicable standards, provides SBA's management 
with the information they need on whether the project is 
adhering to established standards and procedures.
    Another key aspect that must be addressed is security and 
privacy of automated information. SBA's planned reliance on the 
Internet poses security challenges that must be addressed early 
in the project's life. Because of this, SBA needs to update its 
security operating procedures before it begins wide-scale 
development of the Loan Monitoring System.
    That concludes the summary of my statement, and I'd be 
pleased to address any questions you may have.
    Thank you.
    [Mr. Willemssen's statement may be found in appendix.]
    Chairman Bartlett. Thank you very much for your succinct 
and informative testimony.
    Let me turn now to our Ranking Member and ask Mr. Davis for 
his questions and comments.
    Mr. Davis. Well, thank you. Thank you very much, Mr. 
Chairman.
    Let me just indicate that I find this kind of testimony, 
especially the technical complexity of it, very intriguing.
    Mr. Hochberg, I know that many lenders use credit scoring 
when they are processing small loans. My understanding is that 
credit scoring may not work well with small and new businesses.
    I also noticed that you mentioned credit scoring and credit 
worthiness in your testimony. Can you indicate how you will use 
this information to assist start-up businesses, small 
businesses, real small businesses?
    Mr. Hochberg. Thank you.
    I think credit scoring is not really going to be applicable 
for very small businesses and start-up businesses. It looks at 
past payment history. However, we can use credit scoring on 
some of the more established businesses, where right now we 
have two separate financial analysts who review some of these 
loans. It will replace one of them, so that we can use those 
resources better, perhaps, to work on more complex or trickier 
loans.
    But, credit scoring is just one tool that we'll be using, 
one tool that we'll be importing from the outside, not 
reinventing, but use as an outside resource, an off-the-shelf 
program that we'll customize in some ways.
    Mr. Davis. You really wouldn't have to have any fear that 
there is any possibility that this process or this mechanism 
could be used to redline. I'm always fearful of redlining, in 
terms of having gone through those experiences and having seen 
how sometimes the establishment of standards and criteria will 
box some people out because they just, for a number of reasons, 
may not be there.
    Mr. Hochberg. I think that with this Loan Monitoring System 
we will have better information on which banks are making 
loans, where they are making the loans, and the kind of 
businesses they are financing. So, in some ways I believe the 
opposite will happen, we'll have far better data to understand 
where the gaps exist, so that we can better address those gaps. 
And, if we find in certain districts or neighborhoods that 
there is lower lending activity, which we'll have a better 
handle on, we can go out and recruit other banks and other 
lending institutions to makesure that access to capital is not 
part of the problem.
    Mr. Davis. In his testimony, Mr. Wilkinson mentioned a 
desire or the desirability of SBA being a bit more specific in 
terms of specifications for compliance. How would you respond?
    Mr. Hochberg. I'm not sure I fully understand that 
question.
    Mr. Davis. Well, I think he, could you mention that again?
    Mr. Wilkinson. I'm not sure I understand the question 
either.
    What I said was, we were looking for a set of 
specifications that they expect to publish soon, so that our 
lenders will know exactly what data file elements the SBA is 
looking for, so that we can then sit down with our computer 
folks to see what we have to do to comply.
    Mr. Davis. That is exactly my question. Is that 
forthcoming?
    Mr. Hochberg. We will be putting out the performance 
standards and how we will evaluate and analyze different lender 
performance, so that banks will know precisely what are the 
criteria in terms of their PLP status and how they operate with 
the SBA. That will be much more explicit than it's been in the 
past.
    Mr. Davis. Also, Mr. Willemssen mentioned in his testimony 
some question in relationship to custom development of data 
quality, in terms of whether or not there can be a boilerplate, 
I would assume, set of data as opposed to having to customize 
for so many different entities and, perhaps, at different 
times. How would you respond to that question?
    Mr. Hochberg. It is our desire to use as much off-the-shelf 
software as we possibly can in each phase of the program, 
because this is a large system that has a lot of components to 
it. We mentioned credit scoring. We'll be using D&B or a 
similar company in terms of getting credit analysis, but we 
will be, as much as possible, using off-the-shelf systems 
because they are, frankly, less expensive.
    What we did find, though, up to this point, is that we 
found fewer parallels, fewer exact matches in the private 
sector or in other government agencies than we, perhaps, had 
thought at first. So, we probably will rely a little bit more 
on customization than, perhaps, we would desire, but we don't 
have a choice in this matter.
    Mr. Davis. Thank you.
    Mr. Willemssen, I thought that you were quite complimentary 
to the SBA, in terms of progress that it has made towards 
compliance. Are there any areas beyond what you have discussed 
where you think there is a need or that they could make more 
progress or more effort?
    Mr. Willemssen. I think, Ranking Member Davis, I tried to 
summarize those pretty well in the opening statement, and what 
we've seen on the part of the Deputy Administrator and his 
staff is a real willingness over the last few months to work 
with us. They have been very responsive to the issues we've 
raised.
    We do have some remaining issues that we would like them to 
pursue. I'm not aware that they disagree with the need to 
implement those actions. There may be a slight disagreement on 
what that means in terms of the roll-out of the eventual 
system, but we'll continue to work with them to help ensure the 
project's success and reduce the risks as much as possible.
    Mr. Davis. Thank you.
    Mr. Wilkinson, you, likewise, were quite complimentary, and 
I think we always like to see various partners being able to 
work cooperatively and work well, because that generally means 
there's going to be a different level of success.
    Are there any other areas that you'd like to see some 
additional effort or additional movement in?
    Mr. Wilkinson. Well, as I said in my testimony, one of the 
key areas that we want to watch is the development of 
performance standards, and once we've figured out, okay, what 
do we have to submit up front on a loan application to comply, 
we've now collected certain amounts of data, well now, what are 
we going to do with that data, and how is the lender going to 
be graded, if you will. And so, we are looking forward to 
working with the agency on developing those standards over the 
coming months.
    And, the only other comment I would have is, the agency is 
hard at work at this. They have dedicated some serious 
resources to getting this done. Iteration One is scheduled to 
be finished by summer of 2000. My only concern is that if, for 
whatever reason, that doesn't get finished by the summer of 
2000 and we slide, we'd move into a presidential election, a 
change of administration, changes in leadership at the agency, 
that the project could get bogged down.
    So, we in the lending community are hopeful that while the 
ball is rolling that this project does get finished, at least 
Iteration one, this summer, because they've got a lot of folks 
working on it right now.
    Mr. Davis. Perhaps, this is my last question, Mr. Chairman.
    Mr. Hochberg, you heard that question. It's also a thought 
that I've had, in terms of sometimes if administrations change, 
and when they do, certain policies within agencies sometimes 
will also change. As a person inside the agency, can you give 
us any assurance, while you can't ever give absolute 
assurances, but can you help belay any concerns that we might 
have in relationship to that, relative to what's being 
instituted internally to make sure that there is a 
continuation?
    Mr. Hochberg. One, I just want to add, I think we've been 
working hard and have a very good relationship with the General 
Accounting Office and NAGGL, so, one, our outside partners, 
that is not going to change, and that is a steady factor.
    Additionally, the team that is sitting behind me, our Chief 
Operating Officer is a career person, and our Chief Financial 
Officer is a career person. Larry Barrett is our Chief 
Information Officer, career person. They will be here 
regardless of a change in administrations. But, I do think that 
Tony mentioned one important thing. The best way to ensure that 
there is less interruption is for us to get moving and start 
implementing, to get this project underway.
    The concern always is with a change of administrations that 
when things are simply in draft form or planning form, there's 
a good reason to reevaluate everything, but if we are making 
progress, as Tony mentioned, having Iteration one installed, 
working it through, we will learn so much by installing that 
first iteration that will inform the rest of the process. I 
think that's the best assurance that we keep this thing moving 
and moving rapidly.
    Mr. Davis. It seems to me that progress is, indeed, being 
made, and so I want to compliment you on, not only the effort, 
but what appears to be a great working relationship, and 
certainly it seems to me that you are moving positively towards 
implementation.
    Mr. Chairman, I don't have any other questions. I thank you 
very much.
    Chairman Bartlett. Thank you very much.
    We'll turn now to Mr. Toomey.
    Mr. Toomey. Thank you, Mr. Chairman.
    Just a couple of quick questions. Mr. Hochberg, it's my 
understanding that this Loan Monitoring System has been 
designed with the 7(a) program in mind. Could you just comment 
whether there's any applicability at all to the other loan 
programs, or where that stands?
    Mr. Hochberg. Yes. This loan program was designed initially 
with the 7(a) program in mind. It does include the 504 program. 
It includes microloans and those loans are really made 
tointermediaries. In addition we did some disaster planning models in 
modules for our disaster loan, which is a direct loan program. So, we 
did some front-end work to make sure that this system will encompass 
the full range of lending that we do.
    Mr. Toomey. Okay.
    And, I think it was Mr. Willemssen who suggested that one 
of the areas that continue to need development, if I understood 
correctly, was to ensure that the system is fully integrated 
with the MIS agency-wide, and could you just comment on that, 
how you see that proceeding?
    Mr. Hochberg. Let me emphasize, we know this is a large 
project for the SBA. This is a big systems development effort, 
larger than we have tackled before, which is why it has been 
such a deliberate process, why we've gone through the eight 
steps, why we've worked so closely with GAO, with our outside 
partners, and have brought in a number of consultants and 
contractors.
    But, the architecture has been developed. We are waiting 
for the final draft of that to come back from our contractor to 
review. That is an essential platform that has to be in place 
before we go further.
    So, we are fully in agreement on that.
    Mr. Toomey. And, last question, when all is said and done 
and this is finished, what do you think the total cost will 
have been?
    Mr. Hochberg. Well, I think the total cost we currently are 
estimating at $27.7 million, will be the total cost for phase 
one of this system. That is for the Loan Monitoring System. 
That does not include the overhaul of our financial systems, 
which we have just begun, including our human resources as well 
as contracting programs, and some of the other technical 
assistance programs. So, I should just add that's the cost 
estimate only for phase one.
    Mr. Toomey. Okay, thank you.
    Mr. Hochberg. And, that is an estimate.
    Mr. Toomey. Okay, thank you.
    Chairman Bartlett. Thank you very much.
    Let me ask a technical question or clarification first. I 
wonder if you could put back up the chart which is entitled, 
``Doing More With Less.'' You said in your oral testimony that 
you were now doing more with less, and that you were now using 
22 percent less employees in the last decade.
    If I look at the chart, it would appear that in the last 
decade your number of employees has dropped to about 50 
percent. I was just wondering, was your oral statement wrong or 
is the chart drawn incorrectly?
    Mr. Hochberg. Our total employees are down. The problem 
with the chart is we should have a scale on the left side to 
show total number of employees.
    Chairman Bartlett. I'm presuming the scale was linear, no 
matter what the scale is, if it's linear why it would appear 
that in the last decade it's dropped almost 50 percent. Has it 
not?
    Mr. Hochberg. Let me just get a clarification. The staff in 
1992 was 3,874 employees. In 1999, we are looking at 3,123 
employees, which is a reduction of 751 to be precise, so that 
would be the exact number.
    Chairman Bartlett. Okay. So then, the chart is drawn 
incorrectly.
    Mr. Hochberg. Probably the scale is off. The staff part of 
the chart appears to be on the high side.
    Chairman Bartlett. Okay, thank you very much. The two just 
didn't jibe, and I wanted to make sure why.
    Mr. Wilkinson, you mentioned that the default rates were 
too high, which means a lot of monies have accumulated because 
they were not needed to cover those default loans. One of two 
things presumably could happen as a result of that. One is that 
less monies could be appropriated because monies have built up. 
Is there a second alternative, and that is that we now could 
make more loans because we have the monies there?
    Mr. Wilkinson. No, sir, that money automatically goes to 
Treasury. It is gone. There is the agency cannot use those 
funds.
    Under the Federal Credit Reform Act, the agency must 
estimate what the net present value cost of their program is, 
and that is done based on entering the future cash flows, how 
much fees we are going to charge borrowers and lenders to be 
involved in the program, so all the fees are set up front. As 
time passes and we get actual numbers, the actual numbers 
replace the estimated numbers, and there's a reestimate amount, 
either positive or negative, that either flows to Treasury or 
is borrowed from Treasury. Borrowed is the wrong word, or 
received from Treasury, to settle up the account.
    But, what has happened over the last several years is, 
there's always been too much money estimated up front, so that 
the amount of appropriations, fees charged to borrowers and 
fees charged to lenders, has been more than has been necessary. 
But, under the Federal Credit Reform Act, those monies flow 
straight to Treasury and they are gone.
    Chairman Bartlett. I thought I heard you say in your 
testimony that enough monies had accumulated that we wouldn't 
need any appropriations for the next year.
    Mr. Wilkinson. No, well I was trying to draw the comparison 
of how much had been overestimated, how much the cost of the 
program had been overestimated, in relation to what we had to 
obtain in appropriations for the Fiscal Year 2001 budget.
    Chairman Bartlett. Okay, but there are no monies that are 
available to you, because at the end of the year they simply 
return to Treasury.
    Mr. Wilkinson. That is correct.
    Chairman Bartlett. So, we need to take cognizance of that 
in future appropriations, so that surplus monies don't need to 
be appropriated, is what you are saying, because they can't be 
used and simply go back to Treasury.
    Mr. Wilkinson. Well, each year we must get an appropriation 
to fund a certain program level, and what we are saying is that 
the estimates used in that are too high. We still have to have 
those appropriations, because once OMB sets the subsidy rate 
number it is set, and we have to live with that. So, the Fiscal 
Year 2001 subsidy rate is set, and for us to have sufficient 
monies to loan to small business we must obtain the 
appropriation.
    Where we need to focus is more on the Federal Credit Reform 
Act and the kinds of estimates that OMB is allowed to use in 
the model.
    Chairman Bartlett. Thank you very much.
    The purpose of our hearing today, of course, was to 
determine the status of planning or implementation of this Loan 
Monitoring System. Mr. Hochberg, in your oral testimony you 
said that we were now ready to go forward. I gather from 
subsequent remarks you made that you feel that you are now 
ready to implement the system.
    The monies, of course, as a result of Section 233 of the 
Small Business Reauthorization Act of 1997 Act, have been 
fenced, and they will not be released from the appropriators 
until a signal from our committee, and that signal will not be 
made until we get a signal from GAO that you, in fact, have 
completed those eight planning steps that were mandated by that 
Act.
    Mr. Willemssen, in his testimony, and his summary, went 
through and I think I numbered them correctly, a dozen items 
that in his view need to be completed. I am presuming, Mr. 
Willemssen, that your position is that these actions need to be 
completed before you can certify that these eight planning 
steps have been completed, so that the system can now be 
procured.
    Mr. Willemssen. The majority of those actions we would want 
to see completed before SBA embarks on major design and 
development activities associated with the Loan Monitoring 
System. To the extent, and this is the subject of some 
discussion that we've had with SBA over the last day or two, to 
the extent that their Iteration One is viewed as more of a 
prototyping effort and something that helps them learn more 
about what they want the system to do, then I would reduce that 
list to a much smaller number.
    We have received some information from SBA on exactly what 
that first iteration associated with the system is, but not 
enough yet to make a final determination.
    Chairman Bartlett. Thank you.
    Let me go through the list, if I might, and just ask each 
of you your position on it, and then I would like to get an 
estimate of time to complete. It's my understanding that there 
are more than adequate monies there to complete the planning?
    Mr. Willemssen. Correct.
    Chairman Bartlett. Okay.
    Number one was, completing the analysis of benefits and 
costs for alternative business processes identified through 
SBA's business reengineering effort. This is a task that needs 
to be completed, in your judgment, Mr. Willemssen, before we 
can certify the system as ready to be implemented?
    Mr. Willemssen. Yes. We would like to see additional 
information on costs and benefits associated with a range of 
alternatives for going forward with the major system 
development activity.
    Chairman Bartlett. Mr. Hochberg, do you understand what GAO 
is interested in here, and do you agree?
    Mr. Hochberg. My understanding in working with Joel, is 
that what is needed is a more explicit articulation of what the 
cost benefits are program by program, not the total system, but 
by elements of the program. That's my understanding. But, 
associated with what options that the agency will pursue is 
making sure that those are the most cost effective options, so 
that we are getting a system that meets everyone's needs at the 
lowest possible cost.
    Chairman Bartlett. And, how long should it take for that to 
be implemented? Your guess, Mr. Willemssen, and then I'll ask 
Mr. Hochberg his.
    Mr. Willemssen. I would say it would still take a couple 
months more work on the part of SBA to do that.
    Chairman Bartlett. Any argument with that, Mr. Hochberg?
    Mr. Hochberg. I probably should ask Larry Barrett, our 
Chief Information Officer, to give a more precise estimate of 
that kind of information.
    Mr. Barrett. Larry Barrett, Chief Information Officer, 
Small Business Administration.
    I estimate it slightly shorter than that. We are estimating 
somewhere from four to six weeks to accomplish those tasks.
    Chairman Bartlett. Thank you very much.
    The second one I have identified here is performing benefit 
cost analysis for systems alternatives.
    Mr. Willemssen. Correct, and that can actually be 
associated with the item that we just talked about. As SBA goes 
through the business and system alternatives, it should 
determine the costs and the benefits of each.
    Chairman Bartlett. So, if they completed the first project 
that we talked about, they would have to finish the second
    Mr. Willemssen. The two should be done in concert.
    Chairman Bartlett. Okay, so the two months, or the four to 
six weeks estimate on the part of the agency, should accomplish 
both of those first two. All right. Thank you very much.
    The third one I have identified here is completing the part 
of its information architecture that specifies the rules and 
standards for interoperability and maintainability of 
interrelated systems.
    Mr. Willemssen.
    Mr. Willemssen. If SBA puts the necessary resources to that 
task, there's no reason that they can't have an initial 
identification of the standards and protocols they want to 
adhere to in a matter of several weeks. It's just a matter of 
putting the resources on it.
    Chairman Bartlett. Mr. Hochberg, you have the resources to 
get this done, and do you agree with several weeks?
    Mr. Hochberg. Let me just add, Mr. Chairman, that the money 
you mentioned, the $8 million that was appropriated for 2000 
that is fenced off, some of this project can be done by 
internal staff that is dedicated to this project. However, the 
funds to pay that staff are actually in that $8 million 
appropriation. The only money we have is fenced off, parked at 
FEDSIM to be used for outside contractors. But the money needed 
to have our internal staff keeping doing this work and doing it 
more thoroughly, we do not have access to those funds.
    Chairman Bartlett. Mr. Willemssen, from your testimony it 
was my understanding that adequate monies were there, do you 
understand that some of those monies are fenced so that they 
are not available, and who needs to take action to make sure 
they are not fenced so that they can complete the planning?
    Mr. Willemssen. Well, our view of the monies available, 
it's a matter of whether SBA wants to decide to use in-house 
resources or contractor resources to get some of these 
activities accomplished, and then laying out a clear schedule 
of activities for who is going to do what and when.
    It would certainly appear to us, based on the information 
we have at this point in time, that adequate funds are 
available for those planning activities. If SBA or the Deputy 
Administrator has information to the contrary we'd be more than 
happy to look at that.
    Chairman Bartlett. But, the information you now have 
available, you would indicate that probably there should be 
enough monies there to complete the planning?
    Mr. Willemssen. Yes, sir, Mr. Chairman.
    Chairman Bartlett. And, they are not fenced and we do not 
have to take action to release them?
    Mr. Willemssen. I do not have evidence of that for the 
planning side.
    Chairman Bartlett. Mr. Hochberg, if that is true, if monies 
which you need are fenced and some action needs to be taken to 
release them, would you please indicate what is fenced and what 
actions need to be taken, so that your progress will not be 
slowed due to lack of available monies?
    The fourth one was identifying requirements and data 
elements for reports.
    Mr. Willemssen.
    Mr. Willemssen. SBA has made progress on this and is 
getting close to having a standard set of data elements. I 
think it was discussed somewhat in the testimony earlier that 
the lenders want to have this information too. SBA just needs a 
little bit more on the input and output side on the level of 
detail, but I think they are getting fairly close on that.
    Chairman Bartlett. What is close in terms of time to 
complete?
    Mr. Willemssen. I would say, again, within a period of 
several weeks.
    Chairman Bartlett. Several weeks?
    Mr. Hochberg.
    Mr. Hochberg. Mr. Chairman, generally GAO is conservative, 
so if they say several weeks I'm comfortable with that 
estimate.
    Chairman Bartlett. Okay, thank you.
    Let me ask a question, when you are saying several weeks, 
and four to six weeks, and two months and so forth, are you 
presuming, are both of you presuming that there are adequate 
resources there that these times can run concurrently, or they 
have to run sequentially?
    Mr. Willemssen. No, many of these activities can run 
concurrently, and that's why I would echo the comment I made 
earlier, it's a matter of SBA putting the needed resources on 
these activities to get them done in that time frame.
    Chairman Bartlett. When we finish this list, we'll go back 
again and ask you to look at the longest one of these and ask 
the question, are there enough resources to complete them all 
within that time period, or do some of these have to be 
sequential, simply because maybe some of them can't be done 
until others are done, or because the same people are needed to 
do two of them. You can't do two things at once.
    Mr. Willemssen. Right.
    Chairman Bartlett. So, we would like to come away with a 
feeling as to the maximum amount of time it's going to take in 
addition to the amount of time it's going to take for each of 
these components.
    Five, completing the definition of specific data, quality 
standards, did we cover that one?
    Mr. Willemssen. Yes, among the items we'd like to see there 
is more specificity on SBA plans to clean up the data before 
embarking on major software design efforts.
    Again, depending on how Iteration One is defined, something 
like this can possibly be delayed. The data quality standards 
are absolutely essential eventually but not as pivotal in terms 
of finishing them before proceeding.
    Chairman Bartlett. In other words, you are saying that you 
could certify to us that they were ready to buy equipment 
before this was necessarily completed?
    Mr. Willemssen. Right, there would be other activities that 
would be higher on the priority list to address. Data quality 
must be addressed, it's absolutely essential. But in terms of 
doing this before proceeding with the initial system design, 
I'm not as concerned.
    Chairman Bartlett. With an adequate understanding between 
GAO and the agency, you then could certify to us that they were 
ready to procure if you had a good feeling about how they were 
going to address this?
    Mr. Willemssen. Right, and we saw the specific milestones 
that SBA officials have laid out for when they are going to do 
this and how, and then they have the project management 
oversight to track what actually happens against that schedule.
    Chairman Bartlett. Okay, thank you.
    Number six, ensuring that systems requirements document 
include capacity and performance requirements.
    Mr. Willemssen. This is possibly the one of the eight that 
would take the longest, in my opinion, especially if Iteration 
One is the beginning point of a typical system design and 
development effort.
    Among the things that SBA needs to still look at here are 
specifying exactly what they want the system to do from a 
capacity perspective and a performance perspective. For 
example, how big is this going to be? How many lenders are 
going to be accessing it? How many employees and, therefore, 
how much horsepower do we need, how much communication 
throughput do we need? What kind of performance are we 
expecting? Are we expecting immediate on-line access 24 hours a 
day? That has ramifications for the size of the system, which 
has ramifications for the cost.
    So, there are still some issues here that SBA needs to look 
at. Again, I want to reemphasize, to the extent that Iteration 
One is more of a prototyping effort, where SBA tries to learn 
more about what they want the system to build, then we're less 
concerned with making sure this is fully done before they 
proceed.
    Chairman Bartlett. But, if you don't know the system's 
capacity needed and the performance requirements, how can you 
size the system?
    Mr. Willemssen. Well, you can't from a traditional life 
cycle approach to system development. Again, and that's why if 
they wanted to take an initial prototyping effort to get some 
more indication and validation of where they think they are 
going is correct, then that's a more appropriate strategy. But, 
starting on a major system design and development effort with 
not knowing those exact specifications on capacity and 
performance, that's a little more risky.
    Chairman Bartlett. I'm familiar with prototyping in the 
defense area, where you acquire a prototype system and you gain 
experience with it. You now know what you need to change so 
that the next one will be better, that's not what we are 
talking about here. You are not talking about a prototype 
system that they are going to get some experience on and then 
discard and buy the real thing?
    Mr. Willemssen. I don't have the full description of the 
system at this point, for example, a statement of work on 
exactly what would be involved right now in SBA Iteration One. 
I'd defer to the Deputy Administrator, but I know SBA is 
considering looking at testing some different scenarios, some 
different prototype systems, to see that the requirements that 
they've laid out to date are reasonable.
    Chairman Bartlett. Am I also correct in assuming that this 
cannot be done until some of the other things are done, because 
you will have to have completed some of the others before you 
could get an estimate of the capacity needed and the 
performance requirements, would you not?
    Mr. Willemssen. That is correct.
    Chairman Bartlett. So, this will be sequential.
    Mr. Willemssen. That one is, from a couple perspectives, a 
bit more sequential, and, again, is the one that probably holds 
SBA up the longest.
    Chairman Bartlett. Now, once they are able to start with 
that, have the information necessary to start, how long will it 
take to complete it in your judgment?
    Mr. Willemssen. To complete Iteration one?
    Chairman Bartlett. No, to complete ensuring systems 
requirements document, include capacity and performance 
requirements. You can't do that until some of the other things 
are done. Once the other things are done, how long will it take 
to do this one?
    Mr. Willemssen. I would say my best estimate would be early 
summer 2000, to have it all done, from a system requirements 
standpoint.
    Chairman Bartlett. Okay, so you are talking about four 
months.
    Mr. Willemssen. And again, those time frames are driven 
based on the point that you made a few minutes earlier. We have 
to look at where the resources are, and does SBA have available 
resources from a contractor and in-house perspective. And my 
other caveat is, as the Deputy Administrator mentioned earlier, 
dependent upon the approach they want to take with Iteration 
One.
    Chairman Bartlett. Okay.
    Mr. Hochberg, do you agree with this estimate?
    Mr. Hochberg. Let me respond to that. I'd also like Larry 
to respond, since it is his direct responsibility to do this 
implementation.
    I should add for a point of clarification that I will also 
follow up in writing, the funds for 2000, to pay for staff to 
do this work, because this is a blend of both contractors and 
staff, are held by Chairman Rogers' Appropriations 
subcommittee. We cannot use those funds, to pay internal costs 
to do this work until that money is released.
    The money we have access to at the moment is at FEDSIM, 
which can only be used for outside consultants and outside 
contractors. None of that can be used to pay the people that at 
the direction of the committee we have brought in house to 
ensure continuity in the planning process. Therefore, we are 
using regular salaries and expense funds--not modernization 
funds--until we get that release from Chairman Rogers.
    But, let me ask Larry to respond to the timing issue.
    Mr. Barrett. Larry Barrett, CIO.
    We disagree with GAO's estimates. We think that we can do 
it probably in a slightly shorter period of time for two 
reasons. The first reason being that we think that we have 
collected a lot of that information already, although we 
haven't provided it to GAO yet, and the second reason is that 
we view Iteration One as a prototype, and we need that 
prototype or we need that first iteration to provide additional 
information for us to do the capacity planning for the full-
blown system that will come later.
    Chairman Bartlett. Okay.
    Let me ask Mr. Wilkinson, I gather that you have not yet 
determined whether prototype equipment needs to be acquired and 
work lists before completing final system design. At what point 
will you be comfortable with whether or not that needs to be 
done, so that the monies necessary for that, I'm gathering that 
the monies necessary for acquiring the prototype are fenced, 
and they would need to be released, and that will require your 
agreement and the agreement of this committee and the 
Appropriations Committee before that's released?
    Mr. Wilkinson. I would be more comfortable with Iteration 
One when I saw a document such as the statement of work, for 
what the contractor is exactly supposed to do for that 
particular iteration, and we have evaluated that, discussed it 
with SBA, and made some determination as to the adequacy of 
that approach.
    Chairman Bartlett. Okay. So you need proper documentation
    Mr. Wilkinson. And, I have not seen that to date.
    Chairman Bartlett. So, that needs to be done before you can 
reach a considered judgment.
    Mr. Wilkinson. And, the SBA may have it done, we have not 
yet been provided that document.
    Chairman Bartlett. You've just not seen it yet. Okay.
    Now, the seventh one was ensuring that sound justification 
exists for pursuing custom development functions. I gather that 
GAO has a concern that not enough COTs, commercial off the 
shelf, is being planned, and that the agency is considering 
pursuing some custom developments that may not be necessary in 
your judgment?
    Mr. Wilkinson. Well, the Deputy Administrator has discussed 
this point, the fact that they will, to the extent possible, 
try to pursue commercial off-the-shelf products. We think 
that's the right approach, because generally speaking you can 
get those done quicker and at less cost.
    It was a bit surprising to us to see that about 40 percent 
of the functions needed non-COTs products, and we just wanted 
to see the written justification and rationale for why it was 
that high. So, it's not to say we don't believe SBA, we would 
just like to see what documents support that, given that that 
kind of approach generally results in higher costs and 
lengthier time frames.
    Chairman Bartlett. Okay.
    Mr. Hochberg, does the agency have the justification for 
the custom developments, rather than going commercial off the 
shelf?
    Mr. Hochberg. Mr. Chairman, we are looking at that. There 
are many parts of the Loan Monitoring System. So on a system-
by-system basis we are looking at commercial off the shelf 
versus in-house programming across the board.
    I come from the private sector. I ran a business for 18 
years. The last thing I would want to see done is reinventing 
the wheel, developing things that can be found on the outside. 
I have zero interest in that whatsoever.
    I agree with Joel entirely, it takes longer, it costs more 
money to do a custom solution. So, to the extent possible we 
want to find off-the-shelf programming in the same way we want 
to centralize as many processes as possible.
    Chairman Bartlett. When will you have completed that 
analysis, to be able to get that information to GAO?
    Mr. Hochberg. I should ask Larry to give you the precise 
timing on that.
    Mr. Barrett. The COTs decision will be an ongoing 
evaluation as we go through the various iterations of the 
system. We will constantly be looking to see if we can purchase 
off-the-shelf software. We'll make a decision on Iteration One 
before we proceed in Iteration One, and then use that 
information in terms of deciding about the software for the 
succeeding iterations as we go through them.
    Chairman Bartlett. Thank you.
    Mr. Willemssen, the eighth item I have here is estimating 
the cost to completion that are based on an analysis of the 
benefits and costs of system alternatives. Do I conclude from 
this that you aren't sure that the, what, $27 million is the 
right amount?
    Mr. Willemssen. Yes, in terms of SBA's effort on this 
particular action, it is substantially completed at this point. 
However, when they embark on additional analyses and costs and 
benefits of alternatives, that figure could change, and so they 
will have to refine the figure after the cost benefit analysis. 
And, we also think it's important for SBA to look at the Loan 
Monitoring System from a life cycle perspective. That's what's 
typically done on major information systems, is you don't only 
look at the design and development costs, but the operation and 
maintenance costs down the line, and the anticipated life of 
the system.
    Chairman Bartlett. Thank you.
    You have also identified four areas in the project 
management area where SBA shouldstrengthen its project 
management process and control, and I just wanted to go through those 
briefly to see how much time that was going to take, and would their 
ability to do these things impact the final schedule.
    The first of these was to include putting in place project 
tracking and oversight capabilities.
    Mr. Willemssen. Yes, project tracking and oversight are 
very important for a major effort like this. In the grand 
scheme of information technology government-wide this is not 
such a huge effort, but for SBA it is. It's the biggest one 
they've ever undertaken.
    The reason that these four are a little different than the 
other eight, is they transcend boundaries. These have more to 
do with key processes and controls that SBA needs to implement 
agency-wide. This is not something that like the eight actions 
before that we can point to and say, do it for this project. 
It's something that has to be implemented more from an agency-
wide perspective. It's almost cultural, that when we have a 
major system effort like this, we are going to have project 
tracking and oversight activities.
    On all of these, not just project tracking and oversight, 
SBA is committed to the changes. But it does take time, and 
it's not something that you can say will be done at a certain 
point in time. They have to continue strengthening those 
processes.
    Chairman Bartlett. Was it your presumption that they would 
have done these four things when you gave us the time estimates 
for completing the first eight?
    Mr. Willemssen. It was our belief that these would be in 
the process of being implemented, but not fully mature. Fully 
mature information technology processes take a long time to 
implement, and most of the federal agencies are not there yet.
    To the extent that those processes and controls become more 
mature, you've reduced the risk of systems that don't work as 
you expected, and you reduce the risk that they go over budget. 
This is more of a agency-wide scope, it's a little bit broader 
than just the Loan Monitoring System. It's the way information 
technology should be done, not only the federal government, but 
all major organizations. This is followed predominantly on a 
model initially developed by the Software Engineering Institute 
out of Carnegie-Mellon.
    Chairman Bartlett. Thank you.
    Mr. Hochberg, let me read these four to see if you agree 
that these are things that need doing and that you are doing, 
and that it's your judgment that you are working with GAO to 
accomplish these goals. The first was putting in place project 
tracking and oversight capabilities. The second was 
implementing configuration management processes. The third was 
acquiring independent verification and validation for the Loan 
Monitoring System project and establishing an internal quality 
assurance function, and the fourth was addressing the security 
challenge posed by internet-based access to Loan Monitoring 
System functions and data.
    Mr. Hochberg. Mr. Chairman, it is my understanding and my 
sense, as the Deputy Administrator, I am not the Chief 
Information Officer, that all four of those are in place. I can 
particularly speak to two, and I can let Larry fill in some 
details.
    On the independent validation and verification, again, 
coming from the private sector, again, looking at how other 
agencies have tackled major systems projects, I wanted that IV 
& V to make sure that we don't stumble in the way that some 
other organizations have stumbled.
    In terms of security, this was a material weakness that was 
cited in the 1998 audit of the agency. The Administrator put 
into place, upon receiving that audit, immediate plans to 
upgrade the security of computer data, as well as internet 
security. We've brought in a contractor, and added a number of 
staff to specifically address that item.
    The other two I'm going to let Larry address, and certainly 
he may want to add to what I've just said.
    Mr. Barrett. As was indicated, this is going to be an 
ongoing effort, but we have taken significant steps, I think, 
to address project tracking and configuration management.
    A couple of things that we are doing is that we have 
provided our staff, internal staff, with formal training in 
both project management and configuration management, and we 
have been given the authority to hire additional people. One of 
the requirements and one of the things that we are looking for 
when we bring in new staff members is for people to bring in 
people with experience in these basic areas, so not only will 
we have people already on staff, but bringing in new people. In 
the interim what we are doing is hiring contractor support to 
mitigate any weaknesses that we have in both the project 
tracking area, as well as configuration management and quality 
assurance.
    As the Deputy Administrator indicated, we have a big effort 
underway in terms of Internet security, and just security in 
general within the agency. We started that over six months ago. 
The Administrator made a major commitment in terms of both 
resources and dollars to enhance our programming, and that's 
well under way.
    Chairman Bartlett. Thank you very much.
    I want to thank the witnesses very much for their 
testimony. This is a necessary oversight responsibility of the 
Congress. We are pleased with the progress that SBA has made in 
the roughly year and a half since our first hearing. We are 
pleased that SBA and GAO are working together. We are pleased 
that there is a general meeting of the minds as to what yet 
needs to be done and how long it will take to do that, and I 
promised that we would come back to look at an overall time.
    If things go reasonably well, Mr. Willemssen, you are 
saying it will be early-mid summer before we would be in a 
position to proceed with procurement?
    Mr. Willemssen. The caveat I would have is based on a 
comment that Larry made. If the agency does have additional 
documentation associated with system requirements that we 
haven't seen, that substantially address the issues we've laid 
out, then I would up my estimate further, but I haven't seen 
those documents.
    Chairman Bartlett. So, with what you've seen you are saying 
it's mid-summer?
    Mr. Willemssen. Then I'd say early summer.
    Chairman Bartlett. Early-mid summer.
    Mr. Hochberg, that's reasonable?
    Mr. Hochberg. It's reasonable to me.
    Chairman Bartlett. Mr. Hochberg is nodding in the 
affirmative that it's reasonable.
    Well, let me thank you very much, and if you need some 
action to release funds, GAO is not sure that those funds need 
to be released. Our staff is not sure they need to be released, 
but if in the judgment of the agency you do not have adequate 
funds and you need funds released, please substantiate that, 
document that, and get it to us, and also to GAO so that if 
there are necessary steps to be taken they can be taken, 
because we would like the control of these lending programs to 
be moved from the agency to the private sector. That cannot be 
finally accomplished and implemented until this is done, so we 
are anxious that it be done expeditiously.
    Let me thank all of the witnesses very much for your 
testimony, and we will keep surveillance of this program and 
there may need to be an additional hearing before the funds are 
finally released.
    Thank you very much.
    Mr. Hochberg. Thank you, Mr. Chairman.
    Chairman Bartlett. The meeting is in adjournment.
    Mr. Wilkinson. Thank you.
    Mr. Willemssen. Thank you.
    [Whereupon, at 11:29 p.m., the subcommittee was adjourned.]
    [GRAPHIC] [TIFF OMITTED] T5506A.001
    
    [GRAPHIC] [TIFF OMITTED] T5506A.002
    
    [GRAPHIC] [TIFF OMITTED] T5506A.003
    
    [GRAPHIC] [TIFF OMITTED] T5506A.005
    
    [GRAPHIC] [TIFF OMITTED] T5506A.006
    
    [GRAPHIC] [TIFF OMITTED] T5506A.007
    
    [GRAPHIC] [TIFF OMITTED] T5506A.008
    
    [GRAPHIC] [TIFF OMITTED] T5506A.009
    
    [GRAPHIC] [TIFF OMITTED] T5506A.010
    
    [GRAPHIC] [TIFF OMITTED] T5506A.011
    
    [GRAPHIC] [TIFF OMITTED] T5506A.012
    
    [GRAPHIC] [TIFF OMITTED] T5506A.013
    
    [GRAPHIC] [TIFF OMITTED] T5506A.014
    
    [GRAPHIC] [TIFF OMITTED] T5506A.015
    
    [GRAPHIC] [TIFF OMITTED] T5506A.016
    
    [GRAPHIC] [TIFF OMITTED] T5506A.017
    
    [GRAPHIC] [TIFF OMITTED] T5506A.018
    
    [GRAPHIC] [TIFF OMITTED] T5506A.019
    
    [GRAPHIC] [TIFF OMITTED] T5506A.020
    
    [GRAPHIC] [TIFF OMITTED] T5506A.021
    
    [GRAPHIC] [TIFF OMITTED] T5506A.022
    
    [GRAPHIC] [TIFF OMITTED] T5506A.023
    
    [GRAPHIC] [TIFF OMITTED] T5506A.024
    
    [GRAPHIC] [TIFF OMITTED] T5506A.025
    
    [GRAPHIC] [TIFF OMITTED] T5506A.026
    
    [GRAPHIC] [TIFF OMITTED] T5506A.027
    
    [GRAPHIC] [TIFF OMITTED] T5506A.028
    
    [GRAPHIC] [TIFF OMITTED] T5506A.029
    
    [GRAPHIC] [TIFF OMITTED] T5506A.030
    
    [GRAPHIC] [TIFF OMITTED] T5506A.031
    
    [GRAPHIC] [TIFF OMITTED] T5506A.032
    
    [GRAPHIC] [TIFF OMITTED] T5506A.033
    
    [GRAPHIC] [TIFF OMITTED] T5506A.034
    
    [GRAPHIC] [TIFF OMITTED] T5506A.035
    
    [GRAPHIC] [TIFF OMITTED] T5506A.036
    
    [GRAPHIC] [TIFF OMITTED] T5506A.037
    
    [GRAPHIC] [TIFF OMITTED] T5506A.038
    
    [GRAPHIC] [TIFF OMITTED] T5506A.039
    
    [GRAPHIC] [TIFF OMITTED] T5506A.040
    
    [GRAPHIC] [TIFF OMITTED] T5506A.041
    
    [GRAPHIC] [TIFF OMITTED] T5506A.042
    
    [GRAPHIC] [TIFF OMITTED] T5506A.043
    
    [GRAPHIC] [TIFF OMITTED] T5506A.044
    
    [GRAPHIC] [TIFF OMITTED] T5506A.045
    
    [GRAPHIC] [TIFF OMITTED] T5506A.046
    
    [GRAPHIC] [TIFF OMITTED] T5506A.047
    
    [GRAPHIC] [TIFF OMITTED] T5506A.048
    
    [GRAPHIC] [TIFF OMITTED] T5506A.049
    
    [GRAPHIC] [TIFF OMITTED] T5506A.050
    
    [GRAPHIC] [TIFF OMITTED] T5506A.051
    
    [GRAPHIC] [TIFF OMITTED] T5506A.052
    
    [GRAPHIC] [TIFF OMITTED] T5506A.053
    
    [GRAPHIC] [TIFF OMITTED] T5506A.054
    
    [GRAPHIC] [TIFF OMITTED] T5506A.055
    
    [GRAPHIC] [TIFF OMITTED] T5506A.056
    
    [GRAPHIC] [TIFF OMITTED] T5506A.057
    
    [GRAPHIC] [TIFF OMITTED] T5506A.058
    
    [GRAPHIC] [TIFF OMITTED] T5506A.059
    
    [GRAPHIC] [TIFF OMITTED] T5506A.060
    
    [GRAPHIC] [TIFF OMITTED] T5506A.061
    

```