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43–214 PDF 2008

S. HRG. 110–590

HOLDING THE SMALL BUSINESS ADMINISTRATION

ACCOUNTABLE: WOMEN’S CONTRACTING AND

LENDER OVERSIGHT

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

AND ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

January 30, 2008

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

(

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

(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

JOHN F. KERRY, Massachusetts, Chairman 

CARL LEVIN, Michigan 

TOM HARKIN, Iowa 

JOSEPH I. LIEBERMAN, Connecticut 

MARY LANDRIEU, Louisiana 

MARIA CANTWELL, Washington 

EVAN BAYH, Indiana 

MARK PRYOR, Arkansas 

BENJAMIN L. CARDIN, Maryland 

JON TESTER, Montana 

OLYMPIA J. SNOWE, Maine 

CHRISTOPHER S. BOND, Missouri 

NORMAN COLEMAN, Minnesota 

DAVID VITTER, Louisiana 

ELIZABETH DOLE, North Carolina 

JOHN THUNE, South Dakota 

BOB CORKER, Tennessee 

MICHAEL B. ENZI, Wyoming 

JOHNNY ISAKSON, Georgia

NAOMI BAUM, Democratic Staff Director 

WALLACE HSUEH, Republican Staff Director 

(III)

C O N T E N T S 

Page

OPENING STATEMENTS

Kerry, The Honorable John F., Chairman, Committee on Small Business 

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

Snowe, The Honorable Olympia J., Ranking Member, a United States Senator 

from Maine ........................................................................................................... 7

WITNESS TESTIMONY

Preston, The Honorable Steven C., Administrator, U.S. Small Business Administration, Washington, DC ............................................................................ 10

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Kerry, The Honorable John F. 

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

Post-hearing letter to Steven C. Preston, SBA .............................................. 4

Letter to Steven C. Preston, SBA .................................................................... 77

SBA response to letter ..................................................................................... 79

Questions posed to Steven C. Preston and subsequent responses ............... 79

Landrieu, The Honorable Mary 

Prepared statement .......................................................................................... 48

Lieberman, The Honorable Joseph I. 

Post-hearing questions posed to Steven C. Preston and subsequent responses ........................................................................................................... 63

Preston, The Honorable Steven C. 

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 14

Responses to questions from: ...........................................................................

Senator Kerry ............................................................................................ 52

Senator Lieberman .................................................................................... 63

Senator Pryor ............................................................................................. 66

Senator Snowe ........................................................................................... 68

GAO reports and recommendations ................................................................ 84

Pryor, The Honorable Mark 

Questions posed to Steven C. Preston and subsequent responses ............... 66

Snowe, The Honorable Olympia J. 

Opening statement ........................................................................................... 7

Chart, SBA rule ................................................................................................ 8

Questions posed to Steven C. Preston and subsequent responses ............... 68

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HOLDING THE SMALL BUSINESS ADMINISTRATION ACCOUNTABLE: WOMEN’S CONTRACTING AND LENDER OVERSIGHT 

WEDNESDAY, JANUARY 30, 2008

UNITED STATES SENATE, 

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:06 a.m., in room 

428–A, Russell Senate Office Building, the Honorable John F. 

Kerry (chairman of the committee) presiding. 

Present: Senators Kerry, Levin, and Snowe. 

OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, 

CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP, AND A UNITED STATES SENATOR

FROM MASSACHUSETTS 

Chairman KERRY. The hearing will come to order. I appreciate 

your patience. We have another hearing in the Finance Committee 

and then we have a markup this afternoon, and both Senator 

Snowe and I are on that, so we are sort of trying to juggle things 

a little bit here. I appreciate it, and Administrator, thanks for 

being here. We really appreciate it. Happy new year to you and to 

others we haven’t had a chance to say it to. 

This is the first hearing of the Small Business Committee for the 

Second Session of the 110th Congress. Last year, we had a pretty 

aggressive hearing schedule. We had 14 hearings, 4 roundtables, 4 

markups, and in fact, the Committee—I don’t know if this is good 

or bad, but we wound up setting a new mark for the number of 

meetings in 1 year. I am not anxious to have meetings for the sake 

of having meetings, and I don’t think Senator Snowe is either. But 

there is a certain amount of business that is just pent up and a 

necessary amount of oversight that we need to do. 

I am very appreciative for the continuous, consistent support of 

the Ranking Member in these efforts. There is very little that we 

haven’t done that we haven’t worked on jointly and in a bipartisan 

way in the whole committee. It is a great tradition of this committee and I really appreciate her partnership in this effort. 

I am also glad to report that the Committee did make significant 

progress on a number of issues. We reported out six bipartisan 

small business reauthorization bills. We are going to continue to 

work to fully reauthorize those programs and the Small Business 

Innovation Research Program, which expires on September 30. 

2

I am also glad to report that working with other committees of 

jurisdiction, which we have done, I think, fairly effectively, we have 

provided the first real increase in funding for small business programs since 2001. We have also cut taxes for small firms. We have 

increased transparency in contracting at TSA. We have passed legislation to help small firms become more energy efficient. And we 

have expanded research and development opportunities for small 

firms. 

But as we know, there is still a lot yet to do, and right now, our 

focus is on trying to help some of these small firms through very 

tough economic times. 

Just last week, Senator Snowe and I each introduced small business stimulus bills. I guess it is an advantage that we both also 

happen to be on the Finance Committee and we are able to work 

both sides of that, tax and small business. We are supporting proposals to expand small business expensing and net operating loss 

carry-back provisions and also to provide significant tax incentives 

for small business. The Finance Committee is going to be marking 

that up this afternoon and I am pleased that we will see the inclusion of small business tax provisions in the stimulus that are going 

to help spur business investment and free up capital to create jobs 

and expand the economy. The legislation I put forward, cosponsored by Committee Members Levin and Landrieu, will also encourage government-backed lending. 

Today, this is an accountability hearing to follow up on the 

issues from various hearings which we agreed we would come back 

and revisit, and in which the Administrator and/or representatives 

of the agency said this would be the time by which certain things 

would be in place and we would be able to sort of take stock. So 

I appreciate the opportunity to do that, particularly on matters as 

diverse as energy guidelines, disaster reform, lender oversight, and 

contracting. I appreciate the Administrator being here to help us 

in that process. 

One of the central focuses of today’s hearing will be the Women’s 

Procurement Program. I think it is fair to say, Mr. Administrator, 

that we are deeply concerned. I haven’t actually had a chance to 

talk at great length with Senator Snowe about it, but I know 

through the staff discussions that there is a lot of concern on the 

Committee about this rule. It really presents some very serious 

concerns to the Committee, to be honest with you. In fact, some 

people see it as just a rank affront to the engagement of women 

in the business world today. 

We as a Congress determined some time ago that it was important to make certain that women have an equal opportunity to be 

able to provide their goods and services to the Federal Government. 

It is an enormous procurement opportunity, and it has taken 7 

years of pushing in a bipartisan manner from this committee, completely bipartisan—this was put in place in the year 2000—asking 

for a rule to implement the means by which administrators can set 

aside a specific amount of contracting for women businesses. 

Out of the 140 industries, more than 2,300 contracting categories, the SBA is now suggesting that there are only 4—only 4—

that are underrepresented by women. Now, women-owned businesses account for over 30 percent of all firms, yet they get only 

3

3.4 percent of Federal contracting dollars, far short of the 5 percent 

goal that we set. I think we feel very strongly that that goal is not 

an unachievable goal and it is not a phony goal. It is something 

that really ought to be achieved. It ought to be exceeded, if not 

met. 

So we really believe here that this ought to go back to the drawing board and we ought to come up with a workable rule that people can get behind. I have written a letter to the administration 

outlining my objections to the proposed rule in a more formal way. 

I will make that letter available to the entire committee. 

[The letter of Chairman Kerry follows:]

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Chairman KERRY. I hope the Committee will join me in sending 

a message regarding this rule, and we will come back to that, obviously, in the question period. 

We are also going to follow up on the lender oversight issue. The 

BLX $76 million loan scheme showed that SBA needs oversight—

we need to understand where we are in making the oversight process more effective. 

The subprime mortgage problem is affecting all aspects of our 

economy. It is one of the things we are trying to address in the 

stimulus package today, if we can, with a mortgage revenue bond 

proposal that Senator Gordon Smith and myself and others have 

put forward. In my travels around my State, I am talking to mayors who are seeing their property tax base shrink as they go 

through hundreds of foreclosures. In Brockton, Massachusetts, 

about 1,200 foreclosures are staring them in the face, and that just 

rips the community apart. It affects the schools, it affects public 

safety, and it affects the tax base for all of their efforts. 

We need to deal with that. It is an example of why catching lender fraud at the early end is such an important effort, more important even than it was when we met on this issue several months 

ago. The SBA is responsible for some $50 billion in 7(a) and 504 

loan guarantees and we need to make certain that the basic 

changes that make a difference in protecting the taxpayer are in 

place. 

Also, we want to make a few inquiries about the overall redaction issue that we discussed last time regarding the Inspector General’s report on the SBA oversight of BLX based on the basic belief 

that the public deserves as much transparency as possible to facilitate a legitimate understanding of what is happening. Unnecessary 

secrecy just thwarts most of the goals of the Congress and the 

Committee and the country in that regard. 

There are several other issues, including the Gulf Coast disaster 

reform, making sure the SBA is helping small firms to become 

more energy efficient, and we look forward to talking about the 

Women’s Business Centers Renewal Grants Program. I might add 

that, Mr. Administrator, everything that I have heard is very positive in that vein and we really want to congratulate you and your 

Deputy Administrator. We have had tremendous positive feedback 

from the centers around the country who really feel there has been 

a terrific take-up on that, so we really congratulate you on that and 

thank you for that. That sort of represents the good upside that everybody looks for in this kind of effort, but we thank you for that. 

I know that the funding issue from Congress last year created 

some of your own issues, and obviously we hope that that can be 

improved. The Senate passed a higher amount. The House did not. 

We wound up with a lower amount from the House. So I think the 

Senate acted in good faith on it and we hope we can try to upgrade 

that this year. 

This is a particularly important time. In all the years I have 

been on this committee, I guess about 23 years now, we have had 

ups, we have had downs. We have been able to weather them. But 

always, the SBA has been an important leverager in that effort and 

can be very, very important to whatever recovery efforts we iniVerDate 0ct 09 2002 15:22 Nov 13, 2008 Jkt 043214 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\DOCS\43214.TXT CELINA PsN: BACKUP
7

tiate, so we look forward to working with you on that, and again 

I thank you. 

Senator Snowe. 

OPENING STATEMENT OF THE HONORABLE OLYMPIA J. 

SNOWE, RANKING MEMBER, A UNITED STATES SENATOR 

FROM MAINE 

Senator SNOWE. Thank you, Mr. Chairman. Thank you for a very 

productive year, as you indicated, on issues that are so critical to 

small business. I also thank you for starting off this year with vigorous oversight on some of the key small business programs that 

we discussed in our oversight hearings last year. This obviously reflects a strong mutual commitment to ensure accountability on 

many of these programs. 

I welcome the SBA Administrator, Mr. Preston, for being here 

today before the Committee to answer all the questions and for his 

commitment to honor those programs that we discussed last year, 

particularly in the contracting programs, lender oversight, and the 

issues that the Chairman also cited. Our economy couldn’t be more 

fragile, couldn’t be more front and center on our agenda, and that 

is why I am pleased, Mr. Chairman, that we were able to include 

the small business expensing provision and extending the net 

carry-back of operating losses from 2 to 5 years that is in the 

Chairman’s mark that is pending before the Finance Committee 

today. That is an important way to ignite job creation in this country, by allowing small businesses to have access to more capital for 

investments and stimulating the economy. 

I am concerned about the Small Business Women’s Contracting 

Program, and the implementation of it, through the rulemaking 

process that is pending. I’ve had discussions with you, Mr. Administrator, when I addressed that the SBA has an opportunity to hit 

a home run with respect to this rulemaking process and implementing the contracting program and the set-asides for women’s 

contracts by women-owned businesses. 

Frankly, I am concerned that the rule would have little, if any, 

measurable benefit given the way it has been structured. It is a 

law that was enacted back in 2000, long before your tenure. We 

have had numerous hearings. We had two proposed rules, three reports, and it appears that we are no closer today than we were 

then with respect to developing an equitable approach to contracting for women-owned businesses and helping them to access 

Federal agencies, contracts and the hundreds of billions of dollars 

that are available to them. 

So I feel that the rule is deficient and unlikely to have any practical impact in helping the government satisfy its 5 percent goal, 

which is ultimately our purpose. And as you can see here with the 

chart, it indicates that the gross disparity means that only 1,238 

businesses really will be affected by the rule that is now pending, 

and during this comment period, hopefully we can put forward 

some of our own suggestions. Hopefully, we can get this modified. 

Only 2 percent out of the 55,000 businesses, only 1,238 businesses 

that are women-owned would benefit under this rule, and, in fact, 

only 2 in my home State, of the hundreds of businesses that are 

women-owned businesses. I know you discuss some of the issues, 

8

and hopefully you can get into the methodology that was utilized, 

because I think it is important. 

[See chart attached:]


43214.003
9

But secondly, when this proposed rule goes into effect, Federal 

agencies must admit to a history of gender discrimination, and I 

find it difficult if not impossible to envision a scenario where a Federal agency would make such an admission. It certainly isn’t required anywhere in the Small Business Act, and again, it could be 

one other barrier to the full implementation of an equitable rule. 

This Women’s Contracting Program isn’t new. We have repeatedly insisted that it be implemented. It has been seven long years, 

and unfortunately, through our countless efforts, it isn’t until now, 

and I thank you for at least honoring your commitment as you told 

this committee that you would propose a rule. But I hope that ultimately we can find some ways to modify that rule and promulgate 

a final rule that would be far more equitable for women-owned 

businesses. 

It is too limited, as is indicated by this chart, and also I think 

it just doesn’t get the job done in maximizing the effectiveness for 

women business owners and an entrepreneurial climate that is 

more conducive to grow. If there is any time to secure new avenues 

to generate revenue for the economy, that time is certainly now. 

And so I hope that we can begin to modify the rule. I am certainly going to submit comments, and hopefully in conjunction with 

the Chairman, as he indicated, or introduce legislation—that is one 

step in the process that is a much lengthier process to get that 

done—so that we make a real difference, not just a 2-percent difference. I think that there were many ways in examining the methodology that was used, there were many more options for measurement that would have delineated the number of industries that are 

women-owned that are underrepresented in the contracting process. 

Frankly, we should modify the test. I am talking about this past 

discrimination as a prerequisite for participation. And we also 

should substantially broaden the range of applicable business industries for women across this nation and eliminate the unnecessary barriers that have been recently proposed under this contracting rule. 

It is important and incumbent upon the Small Business Administration to satisfy this commitment that was made to our committee 

through the five oversight hearings with respect to this rule and 

to the other lender oversight issues that have been raised. One was 

the implementation of the Women’s Business Centers Renewable 

Grant Programs that the Chairman and I along with Senator 

Sununu made permanent last year as part of the emergency supplemental. 

We also heard testimony from the SBA’s Inspector General and 

former SBA staff regarding the problems surrounding the SBA Office of Disaster Assistance, and so we are anxious to hear what 

progress has been made on those questions. 

And also, the Energy Policy Act of 2005 directed the SBA, working with the EPA and other agencies, to develop the Small Business Energy Clearinghouse to assist small businesses in becoming 

more energy efficient, and it has been more than 3 years since this 

requirement went into effect, and yet additional energy legislation 

had to be passed last month to compel SBA to fulfill its obligation 

under law. 

10

So I think that these are some of the issues that we need to address here this morning and to follow through in implementation 

and to make sure that it is consistent with the spirit of the law and 

the intent of the law. Some of these issues are long overdue, and 

as I said, it certainly predated your tenure. But hopefully we can 

work together as partners to mitigate some of these issues and to 

resolve the litany of issues that we are going to discuss here today, 

which are hindering our nation’s small businesses at a difficult and 

challenging economic time. 

And so I hope that we can be more collaborative in that process 

and trying to make sure that small businesses are able to thrive 

and increase access to capital through the loan programs, which 

have also seen a decline in that respect, and the number of lenders 

have declined, as well. So there are an array of issues that I think 

that we have to address here this morning and hopefully that we 

can forge a partnership for this year in addressing these issues, 

and most especially, first and foremost, is to modify this rule during this comment period, which is scheduled to close, I gather, on 

February 25. 

So I thank you, Mr. Chairman, and I sincerely hope this will be 

a turning point for working out these issues and becoming a partnership and making substantive differences on these and other 

issues that are important to small businesses. Thank you. 

Chairman KERRY. Thank you very much, Senator Snowe. I appreciate your comments enormously. 

Well, Mr. Administrator, I think you have got it sort of outlined, 

some of the concerns, and we welcome your testimony. 

STATEMENT OF THE HONORABLE STEVEN C. PRESTON, ADMINISTRATOR, U.S. SMALL BUSINESS ADMINISTRATION, 

WASHINGTON, D.C. 

Mr. PRESTON. Thank you very much. Thank you for inviting me. 

I have reiterated it many times, but Senator Snowe, I appreciate 

your request for a partnership. Any time we can come up and brief 

you, work through these issues, we are happy to do it, and I know 

recently we had our team up here briefing the Committee staff on 

lender oversight. 

The proposed rule that will implement the Women-Owned Small 

Business Federal Contracting Procedures has been published in the 

Federal Register. It is currently in the 60-day comment period. 

SBA has been and remains committed to implementing the statutorily authorized set-aside for the program. 

I would also like to take this opportunity to discuss SBA’s ongoing efforts to improve lender oversight in our loan processing centers in Herndon as well as Sacramento. 

Let me start by discussing the Women’s Procurement Program. 

Based on nonpartisan guidance that we received from the National 

Academy of Sciences, the RAND Corporation conducted a statistical 

review to determine underrepresentation for women-owned small 

businesses in Federal contracting. RAND recommended—or, excuse 

me, NAS recommended considering a variety of data sources and 

methodologies in order to gain a broad perspective, but in addition, 

they provided much more specific guidance based on solid reasoning that weighed heavily in our thinking. 

11

First, NAS indicated that greater weight should be given to 

measures based on contracting dollars going to women-owned small 

businesses rather than the numbers of contracts. In addition, NAS 

emphasized the importance of considering more detailed industry 

information, which is represented by four-digit North American Industry Classification System codes, NAICS codes, rather than the 

very broad industry classifications. They also highlighted the need 

to demonstrate that businesses were ready, willing, and able to 

perform in Federal contracting. 

To determine underrepresentation and substantial underrepresentation, RAND identified 28 possible approaches that considered data in the Central Contractor Registry, the Federal Procurement Data System, as well as the Survey of Business Owners from 

the 2002 Census. After careful consideration of the remaining approaches and in keeping with the direction of NAS and RAND, 

SBA adopted the approach that we believe best captured the most 

appropriate measures based heavily on the guidance we received 

from those institutions. 

First, based on the NAS comments and the need to align our 

findings with Federal policy, we did use measures that considered 

contract dollars going to businesses rather than numbers of contracts. Clearly, the goal of the statute is to achieve 5 percent for 

women-owned businesses in terms of contract dollars. Getting revenue from contracts is what creates business value. The entire appropriations budgeting contract and the accounting process in the 

Federal Government is also based on dollars. 

Second, NAS guidance is clear that SBA should use NAICS code 

levels that more clearly disaggregate between industries performing similar activities. SBA determined that the four-digit 

NAICS code level best met these criteria. Only the CCR data provided the detail at the four-digit level. SBO data was only available 

at the two-digit level. In addition, only the CCR data base gave us 

women-owned small businesses. SBO data compiled them with 

businesses that didn’t meet the small business standard. NAS also 

questioned whether SBO data would be characterized as ready, 

willing, and able since it represented all companies in the economy 

rather than those signed up to do contracting through the CCR. 

Frankly, I and many people on my team were surprised by the 

results of the study. We learned that those women-owned small 

businesses registered in the CCR actually generally receive a higher percentage of revenue from Federal contracting dollars than 

other businesses and that the data only showed underrepresentation in four NAICS codes, and that is four out of the 140 that they 

studied, and I want to avoid any confusion with 2,000 industries. 

This is four out of 140. The 2,000 relates to some different issue. 

According to the study, once women in small businesses register 

to do business with the Federal Government, they received a higher percentage of their gross receipts from the Federal Government 

compared with others in their industry sector. The study indicates 

that the real issue, we believe, is an increase in the number of 

women-owned small businesses who compete for government contracts. Our goal at the SBA is not only to develop regulations implementing these procedures, but also to help women-owned small 

12

businesses so that they can compete both in the private marketplace as well as for Federal contracts. 

In 2007, SBA began an initiative to more effectively assist small 

businesses interested in doing business with the Federal Government. We have realigned our field staff. We provided them with additional training so that they are better equipped to help advise, 

train, and counsel small businesses so that they are then, in turn, 

equipped to do the marketing necessary to find procurement opportunities. I think we have made a tremendous amount of progress. 

In 2006, contract dollars going to women-owned small business reached a record level, $11.6 billion. In addition, women-owned 

small businesses experienced the largest growth in history in any 

single year since the goal was established at $1.5 billion. The 

amount of contracting dollars going to women-owned small businesses is more than 2.5 times what it was in 2005 and has grown 

almost 17 percent per annum since that period of time. Subcontracting dollars were over $10 billion and represented about 6 percent of subcontracting dollars. 

We are taking a forward-looking approach. First, our programs 

are all tasked with growing the universe of women-owned businesses and encouraging these businesses to register in the CCR, 

which makes these businesses eligible to contract with the Federal 

Government. In addition, the role of the SBA is to help those businesses become ready, willing, and able to undertake and build a 

successful track record, and we have done a number of things. We 

have provided our entire field organization this past summer with 

a full week of training to help them become more effective in outreach and training. We have rolled out a new technology to help 

other agencies easily find women-owned small businesses to help 

them meet their contracting needs. We have established outreach 

goals for all of our offices throughout the country and we are holding Federal agencies accountable through the scorecard. 

We also have a number of exciting initiatives planned for the 

next year. We expect to participate in over 500 procurement-related 

activities, additional training and matchmaking events in the field, 

additional online courses on Federal procurement, realigning our 

field staff to focus on business development and identifying contracting opportunities, as well as continue to increase accountability for Federal agencies. 

You know, I think our view here is that there is no one single 

approach that is going to expand participation of women-owned 

small businesses but rather a combination of initiatives that take 

into account the individual needs of the businesses and the best approach to provide those opportunities to women-owned small businesses. 

Let me briefly now discuss SBA’s progress on improving lender 

oversight. Obviously, effective lender oversight is foundational to 

the quality of our programs and our responsibility to the taxpayer. 

When I appeared before this committee on November 13 last year, 

I discussed SBA’s efforts in managing credit risk, in monitoring 

lender performance, and in enforcing lender program requirements. 

We are engaging in an ongoing dialog with the IG on the implementation of their recommendations. Where it makes sense, we implement their recommendations or we take actions to address the 

13

issue giving rise to them. Where we don’t concur with the recommendation, we explain those conclusions to the IG. 

There are a number of steps we have taken and are currently 

taking to improve oversight that deserve particular attention. We 

dramatically improved the quality and expanded the scope of our 

onsite and offsite reviews. We provided greater transparency on our 

processes to our lenders and giving them access to data on their 

portfolios and on the portfolio in general. We have issued proposed 

regulations that would clarify the lender oversight process and lend 

a level of clarity to our oversight activities. We have implemented 

training, expanded staffing, and are driving reengineering initiatives at our Herndon processing center that will improve its capacity, responsiveness, and quality in rolling those out to all of our 

other centers. 

We are revamping the SBA Express and Community Express 

procedures, and we have implemented a process for replacing our 

loan account system. The new system will contain more information that lenders can see and that we can leverage for future oversight. 

I think the agency is well, well ahead of where it was just a couple of short years ago. We clearly have more room to go and I 

would be happy to report out on that, as well. 

But thank you for the opportunity to testify today and I look forward to any questions you might have. 

[The prepared statement of Mr. Preston follows:]

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Chairman KERRY. Thank you very much, Mr. Administrator. I 

appreciate it. 

I think for somebody just tuning in, all this code stuff is probably 

pretty confusing and doesn’t have a clue what you have just said, 

but I want to try to follow up on a little bit if we can here. First 

of all, it is accurate, is it not—let me ask Senator Levin, who just 

came in, if he has any opening comment that he wants to make. 

Senator LEVIN. No, I will hold off. Thank you. 

Chairman KERRY. All right. Thanks. 

It is accurate, is it not, that there was an original study done by 

SBA with respect to underrepresentation of women businesses, correct? 

Mr. PRESTON. Yes. 

Chairman KERRY. And that original study that was done by SBA 

was then reviewed by NAS, the National Academy of Sciences? 

Mr. PRESTON. That is correct. 

Chairman KERRY. And the National Academy of Sciences in its 

review essentially found that the study by the SBA was inadequate. 

Mr. PRESTON. Yes, two things. They found that our study was inadequate, and then they laid out a methodology under which a 

study would be adequate. 

Chairman KERRY. And RAND came along in order to fill the void 

and provide the study that hopefully would be adequate, correct? 

Mr. PRESTON. They took the NAS methodology and then they did 

the study, pulled the data and all the analysis. 

Chairman KERRY. And in that methodology, what they did, what 

the RAND folks did was find that anywhere from 87 percent of industries to a range of zero percent, depending on what statistical 

model you used, would be underrepresented. If you used one statistical model, you could have 87 percent underrepresentation, is that 

correct? 

Mr. PRESTON. They looked at a variety of methodologies. That is 

the correct range. They did not in any way imply that those methodologies would all be appropriate for consideration——

Chairman KERRY. I understand that. They did provide a range 

of statistical models——

Mr. PRESTON. Yes. 

Chairman KERRY [continuing]. Which you could then adopt to 

say, wow, this is very reasonable. Let us use this——

Mr. PRESTON. Correct. 

Chairman KERRY [continuing]. Correct? 

Mr. PRESTON. Yes. 

Chairman KERRY. And in May of last year, I wrote you urging 

you to choose the statistical model that would create the broadest 

possible program, correct? 

Mr. PRESTON. Yes. 

Chairman KERRY. And on October 17 of last year, Senator Snowe 

joined me and we wrote a letter to you urging you to implement 

the broadest possible program. You chose the narrowest possible. 

Help us understand that. Why would you not want to at least fall 

mid-way or as close as you could to meeting what we feel was the 

intent of Congress, which is try to broaden this? 

20

Five percent is not a ceiling, it is a floor. It could be much higher. And when you start looking through the range of these codes, 

which I will go into in a minute, it is incomprehensible to me that 

you can find areas—that you can’t find underrepresentation in 

those areas, that you wouldn’t want to say, wow, let us get some 

women-owned firms into more procurement in food manufacturing 

or in—you know, I can run through the list. Why would you not? 

Mr. PRESTON. Well, I think because the approach we took was to 

look at the methodology that we thought was most appropriate 

given the issues we were considering, to advance the policy to fulfill the legislation as well as fulfill constitutional issues that we 

thought may be an issue——

Chairman KERRY. Well, before we get to constitutional issues, 

you will acknowledge it was your discretion as to which statistical 

model you choose, correct? 

Mr. PRESTON. I would acknowledge that it was our discretion to 

determine the statistical method, understanding, however, that we 

wanted to choose the most defensible method, given what we were 

trying to achieve. 

Chairman KERRY. Well, you are here to defend it. We want to 

understand why a broader, or if not the broadest statistical model 

which RAND offered you would not meet the goal of the intent of 

Congress to try to broaden the participation of women-owned businesses Federal procurement, the $6 billion at minimum that could 

be spread out among women-owned businesses. 

Mr. PRESTON. Yes. Let me make a couple of points. First of all, 

let me highlight that we are in a rulemaking process right now and 

we are in the public comment period, so obviously we are looking 

at all the comments and—to ensure that we understand that people concur—dispute with these methodologies and the basis upon 

which that occurs. 

I think there are two fundamental concepts to understand, because to get away from codes and all the confusion, there are two 

fundamental concepts to understand. Number one, do you do an 

analysis based on the dollars going to women-owned small businesses or based on the numbers of contracts? 

Chairman KERRY. Let me just stop you right there for a minute. 

Mr. PRESTON. Okay. 

Chairman KERRY. If you do dollars, you can take a pack of dollars and give it to one person, leaving out a whole bunch of other 

people who could also be procuring, and then you measure dollars 

and you say, wow, aren’t we doing great because we just gave a $3 

million contract here? But you could be giving maybe 10 or 15 or 

20 additional smaller contracts. Do you follow us? 

Mr. PRESTON. I think when you look at the numbers of firms in 

Federal contracting, you are less likely to find that, but——

Chairman KERRY. Sixty-three-thousand. 

Mr. PRESTON. Well, let me draw the other analogy——

Chairman KERRY. There are 63,000, Mr. Administrator. 

Mr. PRESTON. Okay. Let me——

Chairman KERRY. Senator Snowe has pointed out there are only 

about 1,200 that are getting helped here. 

Mr. PRESTON. Okay, but if you use numbers of contracts, I can 

make a couple of analogies, I think, that would be appropriate 

21

here. First of all, if you are looking at a $1 million firm and a $10 

billion firm, they are considered equal, so if the $1 million firm gets 

a $500,000 contract from the Federal Government and the large 

firm gets a $500,000 contract from the Federal Government, they 

are considered at parity now. If the very large firm gets two 

$500,000 contracts with the Federal Government, which is a minuscule percentage of their base, it doesn’t take into consideration 

capacity to perform, Okay, the small firm is considered underrepresented even though 50 percent of their revenues are coming from 

the Federal Government. 

Using numbers doesn’t right size the business that they are get- ting to the size of the company. You can have a $5 million company 

that has five $1 million contracts, gets 100 percent of their revenue 

from the Federal Government. You could have GE getting ten $1 

million contracts. It is inconsequential to them. 

Chairman KERRY. I agree with you. I mean, I am not arguing 

about that. You are the one who suggested that the dollar 

amount——

Mr. PRESTON. What I am telling you, those ten contracts going 

to GE and the five contracts going to the small business would result in that small business being considered underrepresented, 

even though 100 percent of their business is coming from the government. So what this methodology does is it says what percentage 

of the revenues are these firms getting from the Federal Government relative to the private sector, and the analysis shows that 

women-owned businesses in most of these categories get a higher 

percentage of their revenue from the Federal Government than 

non-women-owned small businesses. 

Chairman KERRY. Well, that may be, but that is not a measurement of whether or not they are capable of getting the procurement 

level that we set as a target or of even growing into their ability 

to get a larger percentage of the private sector——

Mr. PRESTON. I agree 100 percent. 

Chairman KERRY. This is the whole point. 

Mr. PRESTON. It is a measure of underrepresentation, and the 

legislation, the statute and then bolstered by constitutional precedent, which I unfortunately am not going to be able to wax eloquent on, and I would be happy to follow up with questions for the 

record or bringing other colleagues before you, requires us to show 

underrepresentation as a basis for setting up a preference program, 

and that is the reason that we had to do it that way. 

Now, the dollar value—so the dollar value allows us to look at 

companies based on their capacity to perform. It gives us a measure that is based on something that confers value to them. You 

could have ten $100 contracts or ten $1 million contracts. Those 

would be considered equal if you had a numerical measure. So 

there are a lot of flaws with the numerical measure and that is——

Chairman KERRY. I agree. There are sometimes some flaws, 

which is why the instinct ought to be not to be arbitrary. The instinct ought to be to exercise discretion in a way that tries to meet 

a public policy standard, if you will. I mean, speaking as a lawyer, 

and I know Senator Levin is a lawyer, on the constitutional issue, 

and so the bar you have to get over with respect to the measurement of an underrepresentation to qualify you legitimately for a 

22

preference is pretty hard when you have a range of 87 percent to 

zero, and when you look at just the raw statistics of 1,200 versus 

63,000 to, under any reasonable test standard believe you are arriving at a place that is comfortable. I mean, does your gut tell you 

you are comfortable with that? 

Mr. PRESTON. My gut——

Chairman KERRY. You designed the study. Does your gut say this 

is the right level——

Mr. PRESTON. My gut tells me we should be working to bring 

more women-owned businesses into the contracting registry because once——

Chairman KERRY. Why wouldn’t you create a rule that helps to 

do that when you have a statistical basis given you by RAND on 

which you could do that? 

Mr. PRESTON. Because, Senator, the rule—the statute requires us 

to go out and base our decision on underrepresentation in Federal 

contracting. 

Chairman KERRY. Well, I understand that, but let me—I mean, 

you are running through the list here. I mean, you have got tobacco 

manufacturing; fiber, yarn, and thread mills; fabric mills. I mean, 

you have got subcategories in every single one of these—textile furnishing, cut and sewing apparel manufacturing. I can take you 

down in New Bedford and Fall River and show you some folks who 

are underrepresented in that, not to mention, I am sure, in Portland and in some other places. You have men’s and boys’ cut and 

sew trousers, men’s and boys’ cut and sew work clothing manufacturers, men’s and girls’ dress manufacturing. These are all areas 

where you say they are not underrepresented. I just find that stunning on its face. 

Mr. PRESTON. Well——

Chairman KERRY. I can run through a lot of others. I mean——

Mr. PRESTON. Certainly, we would be happy to have—ask the 

RAND people——

Chairman KERRY. Printing, commercial lithographic printing——

Mr. PRESTON [continuing]. Who did the analysis to come and talk 

with you——

Chairman KERRY [continuing]. Digital printing. I mean, you can 

run down—pharmaceutical, small electrical appliance. I mean, 

wood kitchen cabinets. This is the one area, kitchen cabinetry, you 

found them unrepresented. I——

Mr. PRESTON. Well, let me just make——

Chairman KERRY. How about mattress manufacturing? You got 

a sense of that? 

Mr. PRESTON. I don’t think that one is in there, but——

[Laughter.] 

Chairman KERRY. Well, it is in here. 

Mr. PRESTON. If you would like to follow up on it——

Chairman KERRY. It is a category. 

Mr. PRESTON. If it is a category, then——

Chairman KERRY. It is a category which you found. 

Mr. PRESTON. If it is a category, it has an underrepresentation 

figure based on the mathematical analysis. But I think it is important for us to understand that, you know, and I said in the opening 

we were surprised when we saw the results, too. But I will also say 

23

we didn’t go in there saying, What is the number we want at the 

end of the day? We went in there and said, What is the methodology we need to choose to align it with what the statute is asking 

us to do and to make it consistent with the fact that we are trying 

to help women-owned businesses get contracting dollars? And so it 

was based on trying to get that alignment in place and try to have 

a defensible methodology that will result in a sustainable program. 

Chairman KERRY. Well, here is the problem. We have an awful 

lot of women-owned businesses that we are in touch with who come 

across the transom here who claim underrepresentation and they 

are not getting their fair share. So on its face, you have got a problem here in terms of this rulemaking period for public comment. 

Here is some public comment right here on this committee, part of 

the record, and we will submit it as part of the record, that we 

don’t think that this statistical method chosen adequately addresses the intent of Congress or provides the ability to meet the goal. 

And you do have a number that you were supposed to go in there 

with. It is 5 percent. That is the number. It is statutory. It is the 

law of the land, at 5 percent——

Mr. PRESTON. Five percent is——

Chairman KERRY [continuing]. And you are at 3.41, so you have 

got to go in there and find the statistical analysis, and you were 

given an 87 percent underrepresented capacity——

Mr. PRESTON. Well, you know——

Chairman KERRY [continuing]. Which meant you could have met 

the 5 percent. 

Mr. PRESTON. I just have to say, and I think you all probably understand this better than I do, when you are dealing with issues 

like this, having the right foundation to have a rule that is sustainable, that aligns with what you are trying to achieve——

Chairman KERRY. Let me go back for a minute. Did RAND or did 

RAND not give you a range of 87 percent underrepresentation 

down to zero? 

Mr. PRESTON. RAND gave us a variety of methodologies that——

Chairman KERRY. Did they not give you——

Mr. PRESTON. They did not imply, or they did not support——

Chairman KERRY [continuing]. Which to take, but they gave you 

the range. 

Mr. PRESTON. They also said specifically—but let me just mention something. They said specifically in the study that they did 

not opine on whether or not all these methodologies were appropriate for any type of policy. 

The other thing is, the NAS study, which was really the foundation we needed to use because the NAS is the one that threw out 

the original study that the SBA did, said two things. They strongly 

supported using dollar numbers because that is how value is conveyed and that is what is aligned with the goal, and they strongly 

supported using industry information that was detailed enough to 

look into smaller industry segments. 

Chairman KERRY. The dollar numbers were——

Mr. PRESTON. And those are the two things we——

Chairman KERRY [continuing]. You don’t know how many people 

are available, how many people are in a particular sector, how 

many available companies are there. If there are 63,000 registered, 

24

have you done a break-down of those 63,000? Do you know how 

many fit into which category in those 63,000? If you can’t take——

Mr. PRESTON. Yes. 

Chairman KERRY. You do? 

Mr. PRESTON. We do. It is all part of the study, yes. 

Chairman KERRY. Well, you ought to be able to tell, it seems to 

me, whether or not they are getting, on that basis, a share of a 

combination of sort of numbers of contracts and amounts of money. 

Anyway, let me cede to Senator Snowe. She is going to probably 

follow up on the same thing, I assume. 

Senator SNOWE. Correct assumption. Mr. Administrator, so the 

RAND report made no policy recommendation with respect to the 

methodology. They looked at 28 measurements, 14 in contract dollars, 14 in the number of contracts, correct? 

Mr. PRESTON. Yes. RAND basically took all this stuff, plugged it 

into their models, and didn’t make any value judgments on what 

was right or wrong. 

Senator SNOWE. Okay, but out of the 14 contract dollars that the 

SBA chose to focus on, it eliminated four measurements, as I understand it, that found the highest level of underrepresentation. 

Mr. PRESTON. Yes. Let me——

Senator SNOWE. And those four found that women contracting 

was underrepresented between 27 to 55 percent. So why would you 

have eliminated those four measurements in that category? 

Mr. PRESTON. Okay, so that is the other piece of the puzzle. We 

talked about dollars versus numbers, and we can go back some 

more if you want, but the other piece—there are basically two concepts—the other piece is do you look at all companies in America 

or do you look at companies that are signed up to do contracting 

with the Federal Government, okay? So that is the other piece. 

When you look at the data on companies across the industry, we 

cannot get women-owned small businesses to any degree of detail 

in the industry codes. Women-owned small and large businesses 

are combined. The data is old. And we used that data in our first 

study that was thrown out and the NAS said that it was difficult 

to substantiate that those businesses were ready, willing, and able 

since they weren’t even signed up to do contracting. 

The other piece of data we had is the Federal Contracting Registry, so they clearly qualify as willing and able and we are assuming readiness. We were able to get detailed industry information. 

Let me pause on that for a second. If you look at the national data, 

it would say all retailers, okay. If you look at the detailed data, you 

could break out auto dealerships, apparel, jewelry stores, grocery 

stores. If you don’t get to that level of specificity in your analysis, 

you are comparing auto dealerships with grocery stores. So you had 

to look at representation in those more detailed categories. Those 

detailed categories were not available in any of the other measures 

that you are citing. 

Senator SNOWE. So we are down to four categories, really only 

three if I understand it, because the national security-international 

affairs has no women-owned business. So really, you are down to 

three categories. 

Mr. PRESTON. Right. 

Senator SNOWE. Is that correct? 

25

Mr. PRESTON. Yes. 

Senator SNOWE. Okay. So we are down to coating and engraving, 

heat treating and allied activities; household institutional furniture; kitchen cabinet manufacturing; and other motor vehicle 

dealers, and that is it. 

Mr. PRESTON. That is right. 

Senator SNOWE. I think you have just gone to the lowest common 

denominator and it is one thing to choose contract dollars, it is 

quite another to break it down into these very narrow subsectors 

of an industry rather than using broader categories. 

Mr. PRESTON. That was——

Senator SNOWE. And you talk about the National Academy of 

Sciences, they cited their sources, the same information. So what 

we are talking about is a de minimis level here——

Mr. PRESTON. Right. 

Senator SNOWE [continuing]. When it comes to helping women 

out. Ninety-nine percent of all women-owned businesses are small. 

Mr. PRESTON. Yes. 

Senator SNOWE. So that is where we are at. So really, when you 

are talking about four categories, we are now down to three because one doesn’t have any private firms—and can’t have any, if 

I understand it, according to the law——

Mr. PRESTON. Yes, I——

Senator SNOWE. National security and international can’t be a 

private sector organization. 

Mr. PRESTON. Right. No, I understand what you are saying, and 

I think when we look at the two pieces, the two factors that we 

considered with getting detailed information, looking at dollar information, I just want to remind you, these were strong recommendations that came to us from the National Academy of 

Sciences. I will also concede——

Senator SNOWE. They didn’t dictate it, though. 

Mr. PRESTON. They didn’t dictate it. 

Senator SNOWE. The SBA chose—you chose these——

Mr. PRESTON. We chose the approach based on the strong recommendations. 

Senator SNOWE. And of the 14 options, you eliminated 4 measurements, is that correct, that had the highest underrepresentation 

of women. It ranged from 27 to 55 percent. So you even eliminated 

measurements under the options of contract dollars of 14 measurements. 

Mr. PRESTON. The contract dollar measurements that you talk 

about are ones that included very, very broad industries, and it 

gets to this issue that I mentioned before where you would be mixing IT contractors with lawyers. It just—it didn’t provide the level 

of specificity for us to understand where representation truly occurs, and it is at that level of specificity that Federal contracts take 

place. 

Senator SNOWE. Well, you dissected it to the lowest common denominator in order to reach the goal. You just cut up the sectors 

in order to achieve that goal. This is what has happened. We have 

been driving this for 7 years. It is ludicrous. I don’t even think the 

public could believe that it would be 7 years trying to have something implemented, and it is especially frustrating to reach this 

26

point and you get a de minimis, the lowest common denominator 

standard, by choosing the lowest possible result that ultimately is 

going to affect women. Women-owned businesses is the fastestgrowing segment of our economy. 

Mr. PRESTON. It is——

Senator SNOWE. Yes. 

Mr. PRESTON. But Senator, I also want to highlight it is the fastest-growing sector of Federal contracting and women-owned small 

businesses are growing faster than any of the set-aside categories. 

Senator SNOWE. Well, given the rate in which we are achieving 

the 5 percent goal, it will take until 2019 to get 5 percent, according to our calculations, at the rate at which we are going. In Fiscal 

Year 2006, the SBA is one of only a few agencies that achieved the 

5 percent goal. Even the Department of Defense with hundreds of 

billions of dollars, over $20 billion did not achieve the goal. We 

have been in the low single digits, only recently achieved 3.4 percent of women-owned businesses accessing Federal contracts. So we 

have a long ways to go and I don’t see this rule galvanizing this 

process to achieve the ultimate 5 percent goal. It should have been 

long ago achieved——

Mr. PRESTON. I can’t argue with that. 

Senator SNOWE. It is going to take 11 years to get to 5 percent 

at this rate. 

Mr. PRESTON. I think we can get there faster than that——

Senator SNOWE. I hope so. 

Mr. PRESTON. I would love to work with you——

Senator SNOWE. We should have been there yesterday, though. 

That was the point. This is 7 years since this law was passed——

Mr. PRESTON. I understand——

Senator SNOWE [continuing]. Anybody—you wouldn’t be that patient in the private sector, would you, for results? Nor should we 

in the public sector. 

Mr. PRESTON. I hope you know I wouldn’t be that patient in the 

public sector, either, given what we are doing, but——

Senator SNOWE. We wouldn’t wait 7 years to achieve a result. We 

have to achieve a bottom line. It is no different in the public sector. 

We all should be aggressively pursuing the bottom line here, because ultimately it means fairness and equity, which is the essence 

of the Small Business Act of 1953, it was to make sure that there 

was a fair proportion——

Mr. PRESTON. Yes——

Senator SNOWE [continuing]. And now it is access to Federal contracts and doing business with the Federal Government. This is not 

equitable and it certainly isn’t fair. 

Mr. PRESTON. Well, we are—I think our outreach efforts, I think 

our education efforts are effective. I think we are driving this number forward without the set-aside. I do totally agree with you that 

this is not going to be a significant measurement of the needle. It 

is not affecting enough industries or businesses. But I think we are 

showing good progress and I think the SBA is leading by example. 

This year, we are going to show 25 percent of our revenue from——

Senator SNOWE. We have all the Federal agencies, and that is 

where the SBA plays a vital role, as you well know. And I realize 

these weren’t all of your problems. You inherited many. But the 

27

question is now, you are in a position to be able to do something 

about it here and now. 

Mr. PRESTON. Let me——

Senator SNOWE. Well, certainly we can start with this rule that 

is 7 years old. There is no reason to pursue the path that you are 

recommending in the rulemaking process. So I just hope that we 

can find a different path in this process and submitting our comments and recommendations to change it so that we can significantly modify this approach to more broadly represent womenowned businesses. It ultimately means jobs and it means fairness. 

Women-owned businesses ought to access Federal contracts. That 

is what it is all about, because we are now down to three categories. That is just astonishing. 

Mr. PRESTON. Right——

Senator SNOWE. That is not fairness. 

Mr. PRESTON. Although I just want to pause for a second, because the language that you are using, I feel compelled to make a 

point, which is I think women-owned small businesses do compete 

effectively today based on the results we saw. This is about giving 

them a preference program, and the reason we have to do all this 

detailed work is when you do have a preference program, you have 

to be able to justify how you determine the underrepresentation 

and look at all sorts of precedents and make sure that it withstands scrutiny, because the last thing you want is for a program 

like this to be overturned. 

Senator SNOWE. I just don’t see why you couldn’t have chosen 

other options using all the 14 measurements. It was highly selective. We have had 50 procuring Federal agencies that failed to 

meet the standards, 50 agencies, including the Department of Defense, that has more than $234 billion of procurement dollars and 

we can’t meet a goal of 5 percent. That is a principle that was enshrined in law, that we wanted a 5-percent standard for womenowned small businesses, and rightfully so, and we have got 50 

agencies that have failed to meet that challenge. It has been 7 

years. 

Mr. PRESTON. Right. 

Senator SNOWE. So you can understand the frustration, and 

there was another path to take that could have withstood constitutional scrutiny and public accountability. So I just hope that we 

can find a way to do it differently in the days ahead. 

Mr. PRESTON. Okay. 

Senator SNOWE. Thank you, Mr. Chairman. 

Chairman KERRY. Thank you very much, Senator Snowe. 

Senator Levin. 

Senator LEVIN. I want to get back to the discretion question. Is 

it clear from your testimony, as I understand it, that you could 

have selected categories that showed underrepresentation in terms 

of dollars, which would have led to a greater number of categories? 

Is that correct? You could have? 

Mr. PRESTON. Not if we followed the advice of the research group 

that laid out the pathway to do the study. 

Senator LEVIN. In other words, the only way that you could 

achieve a larger representation in terms of dollars was to pick 

these narrow categories? The other ways would not have led to a 

28

greater representation in terms of dollars? Is that what you are 

saying? 

Mr. PRESTON. What I am saying is if we had looked at data, 

okay, that looked at all women-owned businesses in the economy, 

looked at very broad industry categories, all retailers, all service 

providers, very broad, data that was 5 years old and data that commingled women-owned small business with women-owned large 

businesses, all of which was against the advice of the NAS, we 

would have found more categories. 

Senator LEVIN. That is not my question. Could you have adopted 

a larger number of categories which still would have shown underrepresentation of women in terms of dollars? 

Mr. PRESTON. No. 

Senator LEVIN. This is it? You are saying there are only three 

categories——

Mr. PRESTON. Right. 

Senator LEVIN [continuing]. That show underrepresentation of 

women in terms of the amount of dollars? 

Mr. PRESTON. That is correct. That is what the study shows. 

Senator LEVIN. And there is not——

Mr. PRESTON. I want to highlight two things——

Senator LEVIN. That is not the way I read these. I mean, that, 

to me, is the key issue. You are saying there is no other way you 

legally could have done it. On the other hand, when the Chairman 

asked you the question, you said you had discretion. 

Mr. PRESTON. We had discretion. We had the discretion to 

choose. If we had chosen differently, we would——

Senator LEVIN. No, you had the discretion to choose legally. I 

mean, the question isn’t whether you had discretion to do something illegal. The question is whether or not you had discretion to 

do something. Discretion means legally to act in a way which 

would have raised the number of categories which would have 

added dollars in terms of contracts for women. 

Mr. PRESTON. We had the discretion to choose the methodology. 

The methodology we chose was based on factors that were laid out 

by the National Academy of Sciences. 

Senator LEVIN. I understand. Was that the only one you could 

have chosen? 

Mr. PRESTON. Theoretically, we could have done anything, but its 

defensibility is something that would have been up for grabs, potentially. 

Senator LEVIN. Is it a matter that the others that you could have 

chosen would not have been defensible, or would have in your judgment been less defensible? 

Mr. PRESTON. I think the latter. They would have been less defensible. 

Senator LEVIN. So it is not the only ones you could have chosen——

Mr. PRESTON. But——

Senator LEVIN [continuing]. It is the one which, in your judgment, was the most defensible? 

Mr. PRESTON. Right, and I think——

Senator LEVIN. It is not the only one which was defensible. 

Mr. PRESTON. Yes, and I think——

29

Senator LEVIN. Wait, wait, wait. One at a time. Is that correct? 

Mr. PRESTON. That is correct, and I think—and I appreciate the 

distinction you are making because what I do not want anybody to 

think is that we looked at the numbers we got at the end of the 

day and then decide the methodology based on the number. We 

were surprised by the number. But as we vetted this within our 

agency and throughout other people who are experts in this area, 

this is where we landed. 

Senator LEVIN. No, I understand your conclusion. It is now a lot 

clearer in my mind that there are other categories that you could 

have chosen that were——

Mr. PRESTON. Other methodologies. 

Senator LEVIN [continuing]. Other methodologies which would 

have led to defensible—you said less defensible or more defensible. 

They still would have been defensible, but in your judgment, less 

defensible. 

Mr. PRESTON. Defensibility doesn’t imply that at the end of the 

day you win the argument. The defensibility—if we are putting in 

place a law, a program, rather, we want to make sure it withstands 

scrutiny. 

Senator LEVIN. Of course. Look, you can have ten different options, all of which are defensible. Number one is the most defensible, but numbers two through ten are also defensible, but not as 

defensible in someone’s judgment as number one. 

Mr. PRESTON. Right. 

Senator LEVIN. But they are still defensible, but two through ten 

would lead to a much better result in terms of policy. That is where 

it seems to me you have failed——

Mr. PRESTON. Right. 

Senator LEVIN [continuing]. It seems clear to me that those other 

approaches are legally defensible, even though you can argue less 

defensible, they are nonetheless——

Mr. PRESTON. Right. 

Senator LEVIN [continuing]. Defensible legally, but you chose one 

which you thought was the most defensible technically, but from a 

policy perspective doesn’t achieve the results which we clearly intended. That is what troubles me a great deal. 

Mr. PRESTON. Right. There are two things I would mention that 

I am sure you appreciate the degree to which these types of programs have come under attack, legal attack. There has been all 

sorts of—I am sure you all understand this better than I do, since 

you have been in this world much longer than I. 

So Number one, I think we view it as being very important to 

look at those factors and make sure that what we have out there 

does not come under—is not weak in the face of attack. 

Number two, once again, we looked at the strong advice on two 

factors that we got by the research academy that laid the pathway 

for how this should happen and we took those two pieces of advice 

and we followed them. 

Senator LEVIN. Let me just move on to another question. I will 

take two more minutes, because I think I understand what you did 

and I disagree with it. You can have ten different approaches that 

are defensible legally, one of which is the most bulletproof, the next 

one is the second most bulletproof, and so forth. If you take the 

30

fourth or fifth or sixth most bulletproof one—it is not the most, but 

it is the best in terms of policy, and you have a darn good chance 

of defending it legally from a policy perspective, it is worth doing, 

and that is, at least from my one perspective——

Mr. PRESTON. I understand. 

Senator LEVIN [continuing]. The mistake that I think you have 

made. And I have been in that situation many times, by the way, 

as a lawyer, where the goal was we have got to achieve a policy 

and the question was do we do it this way, this way, or this way, 

and the decision would be it is so important that we achieve the 

policy, we will take a 5 percent risk on legality to achieve a 50 percent gain on policy. That is where, from my understanding, you 

have made, I think, a mistake. It may be different from the understanding of others on the Committee, but that is the way I frame 

it in my mind. 

It is much too narrow. It is needlessly so in the quest of gaining 

the most technically, theoretically bulletproof legal approach, but 

you have lost so much in terms of the policy gain that you have 

taken an approach which seems to me to be the wrong one in terms 

of the policy of the law. 

Real quickly on Women’s Business Centers——

Mr. PRESTON. Yes. 

Senator LEVIN. You have now resolved some of the uncertainty 

about the future funding of these business centers. You have replaced a sustainability pilot program with a 3-year renewal grant 

program which is more permanent. I applaud you for that and I 

just would urge that you implement this program as soon as possible and I am wondering if you can tell us what the time table is 

for that. 

Mr. PRESTON. It would be—the submissions for the Women’s 

Business Centers came in, I believe, last week. That was completed. By the end of the month, they will know whether or not 

they are getting grants, and shortly after that, they will begin getting their grant money. 

The other issue which I should report, which you didn’t bring up 

but it is related, is historically these Women’s Business Centers 

have gone through a very difficult and arduous process to get their 

grant money, resulting in delays, and you know these centers, they 

need their money when they need their money. So we have rolled 

out a new program where they will be getting their money very 

quickly upon submitting the grant request and we will be doing—

it is much more responsive, much more sensitive to their needs and 

certainly has been received very happily by the community. 

Senator LEVIN. Thank you. I do very much support that program 

and I applaud you for the steps that you have taken in that area. 

Mr. PRESTON. Thank you. 

Senator LEVIN. Thank you, Mr. Chairman. 

Chairman KERRY. Thank you very much, Senator Levin. Thank 

you for helping to clarify that, as usual, capably, and we appreciate 

it. 

Following up on that just a little bit, Mr. Administrator, and we 

do have some other questions in a couple of areas, but I am reading 

from the RAND study. Here is what it says. We found that the 

measurement of whether women-owned small businesses are 

31

underrepresented in Federal contracting is sensitive to whether 

contract awards are measured in dollars or in number of awards, 

and to whether the population of ready, willing, and able firms 

comprises essentially all employer firms or just those firms that 

have registered as potentially bidders on Federal contracts. So 

right up front, they acknowledge the sort of universe issues here, 

which if you wanted to, I mean, you could say, okay, let us look 

at this in a way that is going to accomplish the public policy goal. 

But let me go further. 

Depending on the measure used, underrepresentation of womenowned small business in government contracting occurs either in 

no industries or in up to 87 percent of industries. Then most importantly, it said, this variation is especially large in the measures 

that use contract dollars rather than number of contracts. The 

most important sentence, this report does not advocate a particular 

measure. 

Mr. PRESTON. No, that report didn’t——

Chairman KERRY. Rather, it highlights industries where the disparities occur. 

Mr. PRESTON. Right. That is exactly right. 

Chairman KERRY. So, you know, again——

Mr. PRESTON. The NAS laid out the recommendations——

Chairman KERRY. No, NAS—but this study was done because 

NAS made a judgment of the original study, but it wasn’t the gospel with respect to how we proceed forward on this. The RAND 

study was the study that was supposed to say, what does the 

underrepresentation look like? 

Mr. PRESTON. The RAND study made no judgments on methodology. They simply——

Chairman KERRY. Correct. 

Mr. PRESTON [continuing]. NAS recommendations. 

Chairman KERRY. That is exactly where I started at the beginning of this hearing——

Mr. PRESTON. Right. 

Chairman KERRY [continuing]. And that is the main point 

here——

Mr. PRESTON. What I——

Chairman KERRY. They did make no recommendation. They left 

to your judgment, to your discretion how you would implement the 

policy that the U.S. Congress had put into law. Now, that is what 

is at stake here. Let me read you—this is fairly simple stuff when 

you really get at it, I think. Other categories—these are other categories—this is under the RAND study. Other categories where 

women are considered underrepresented had SBA used the broader 

numbers in the RAND study, which was your discretion. 

Let me just give you a sense of it: water, sewage and other systems; residential building construction; utility system construction; 

foundation, structure, building exterior; building equipment contractors; building finishing contractors; other specialty trade contractors; other textile product mills; cotton sew apparel manufacturing, which I went through earlier; converted paper product manufacturing; printing and related support activities; other chemical 

products; forging and stamping; architectural and structural metals; oil tanker shipping containers; coding, engraving, and heat 

32

treating; other fabricated metal products; commercial and service 

industry machining; communications equipment manufacturing; 

navigational measurement; electro-medical; manufacturing and reproducing magnetic media; electrical equipment manufacturing. 

I mean, I can go on and on. There are 105 different business 

areas: business support services; facility support services; administrative services; waste treatment and disposal; technical and trade 

schools; educational; beer, wine, distilled alcoholic beverages; 

warehousing and storage; software publishers; data processing. 

Run the list——

Mr. PRESTON. Right. 

Chairman KERRY [continuing]. Where there are, according to the 

study, available discrepancies of underrepresentation of women in 

procurement. You could have embraced these. 

Mr. PRESTON. Okay. I guess the way I think of it, Senator, is the 

NAS was sort of the engineer. They laid out the plan. RAND was 

sort of the assembly line, okay. The NAS, in looking at this, specifically says—I am quoting here—that the two-digit codes appear to 

be too broad to be used as a basis of disparity ratios to inform an 

understanding of the role of women-owned small business in Federal contracting and what kind of preferential treatment may be indicated. Specifically, this was the group that basically threw out 

our old study and said, this is what you need to look at and this 

is why we have relied heavily on their guidance. 

Chairman KERRY. Well, again, I think you are getting a sense 

here, as I wrote to you in the letter, as I have written—you haven’t 

gotten it yet, but——

Mr. PRESTON. No, and I think Senator Levin’s point is very important, which is what is sort of the balance between the policy 

goals——

Chairman KERRY. Right, but let me build on that because there 

is a legal standard here and you are trying to assert that you 

thought it was the most legally justifiable and both of us disagree, 

or all three of us disagree. 

Mr. PRESTON. I think also closest to the heart of the matter, closest to understanding what we are actually——

Chairman KERRY. What you seem to be applying is what in the 

law is called a strict scrutiny level of view to a gender-based program, and the Supreme Court has held in 1976 that gender-based 

programs are subject to intermediate scrutiny standards, meaning 

that to justify the program, the government only needs to prove an 

important governmental interest and that a program is substantially related to the achievement of that purpose. That is the standard. And under that standard, Mr. Preston, you know, it just is incomprehensible that you would go to the sort of most defensible 

standard to the lowest common denominator here, as Senator 

Snowe has called it. 

Mr. PRESTON. Well——

Chairman KERRY. So I think we have made our point. I think 

that if you want to respond, I am happy to have your response——

Mr. PRESTON. My understanding is that the standard that was 

applied was intermediate scrutiny. I know strict scrutiny is referred to in the RAND study, but I believe they are referencing a 

33

racially based program, which is a different standard, and I 

think—so our understand—my understanding——

Chairman KERRY. It does not require the standard of race-based 

programs which is laid out in city of Richmond——

Mr. PRESTON. That is right——

Chairman KERRY. Boren, that is a different standard, and the 

Adarand decisions——

Mr. PRESTON. Exactly——

Chairman KERRY [continuing]. It does not apply here. 

Mr. PRESTON. Right. What I am saying is even though RAND 

mentioned that strict scrutiny, the standard we applied was intermediate scrutiny. I will have to rely upon my legal colleagues to 

get into this in more depth, if you want to at some point. But my 

understanding was that the issues that need to be addressed between strict and intermediate are the same issues. It is a matter 

of degree rather than what needs to be considered. And I think, 

Senator, that deals more with the issue of discrimination rather 

than what we are talking about in the RAND study. 

Chairman KERRY. Well, under either way, Mr. Administrator, it 

seems clear to us that you ought to be able to go back to the drawing board here and broaden this. I mean, there are women sitting 

behind you right here in this audience who are owners of some of 

these kinds of businesses. There is a woman by the name of Norma 

Byron here who is owner of the Ashlawn Group. She is one of the 

only, if not the only woman munitions developer in the country. 

She could be selling. Magdalah Silva is here today. She owns an 

IT company, and she testified before this committee previously on 

the difficulties that she has in the Federal contracting area getting 

a fair share. We have a supply chain consultant here, Jennifer 

Sully, who is fighting for these opportunities, and under your rule, 

they don’t get a shot. 

Mr. PRESTON. Well, I think they have a shot. We are talking 

about a preference program. We are not talking about blocking 

them or not letting them compete on the same basis with other——

Chairman KERRY. Well, when I say shot, I am talking about——

Mr. PRESTON. But you know, the reason that concerns me is 

when you look at the reports in the media, when you look at the 

statements that are coming out of some of your colleagues, it is 

being implied that somehow, we are erecting a barrier that doesn’t 

exist today. I think it is very important for us to understand that 

because it is a preference program, we have standards that we 

have to hit. And I understand——

Chairman KERRY. Erecting a barrier that doesn’t—well, in a 

sense you are——

Mr. PRESTON. We are not——

Chairman KERRY [continuing]. And I will tell you how, because 

you could have chosen a different road. You are erecting your 

standard of interpretation of the law, which is not necessary here. 

So in a sense, you are erecting a barrier. But in another sense, 

what you are also doing is not, giving the opportunity, of taking 

down a barrier——

Mr. PRESTON. I think——

Chairman KERRY [continuing]. And that is the really big difference here. 

34

Mr. PRESTON [continuing]. That if we all believe that there is 

broad-based discrimination that is resulting in barriers, then we 

are in a whole different playing field and that is certainly not 

something that we addressed in our study, but——

Chairman KERRY. Women-based preference is not based solely on 

the discrimination. It is based on the valid government purpose articulated in the law of wanting to broaden, because of the numbers 

of women who own businesses, their participation in fair share. I 

guess the Senator from Maine said it, a fair, equitable share. That 

is a government purpose, defensible under almost any standard. 

And so the whole purpose here is to try to broaden that. 

Mr. PRESTON. And what I would tell you, Senator——

Chairman KERRY. This is such a home run missed kind of deal 

where you guys could just embrace and say, wow, what a productive thing. We are going to be the administration that makes certain that we have opened up more opportunity and we are going 

to get more procurement——

Mr. PRESTON. Well, I think where it comes to expanded outreach, 

where it comes to holding Federal agencies accountable, they all 

have women-owned procurement goals. We have rolled out IT tools 

to help them find women-owned businesses more easily than they 

ever have before. When it comes to this agency putting an effort 

behind reaching out and making connections with people, working 

with our Federal procuring partners to drive this number forward, 

we are doing a tremendous amount. I think when it comes into designing a preference program, we are in a different realm, and that 

is why I think we have some of the challenges we do here. 

Chairman KERRY. Well, let me ask you this so we can wrap this 

part of it up anyway, and I will turn to Senator Snowe and see if 

she has any more questions on that part of it. But are you prepared to engage in a dialog with us and open this up to hopefully 

some kind of more sensible, mutually agreed upon rule that 

might——

Mr. PRESTON. Yes. We are in the middle of a public comment period right now, we will be looking very hard at all the comments 

we get. To the extent that comments address the NAS methodology 

as applied by RAND, I think it will be important for us to understand the substance behind why a different methodology is better. 

To the extent that they address the legality issues or the constitutional issues, which you and the Senator alluded to earlier, it will 

be important for us to understand the precedents that those arguments are based in, but we will be looking at those very carefully 

and open-mindedly. 

Chairman KERRY. Senator Snowe, did you want to pursue that 

further? 

Senator SNOWE. I think we have obviously explored this issue extensively, and certainly Mr. Administrator, you recognize disappointment with the direction the SBA has taken in this regard. 

With no question, when we are trying to open up pathways for 

women-owned small businesses to access Federal contracts and 

there are other ways, and just looking at the list here, in terms of 

the one down here, but there are many other ways in which to accomplish that and using contract dollars with industries that show 

a high percentage of underrepresentation of women ownership. 

35

So I hope we can work together on this. This is something that 

has to be rectified. It has been part of the Small Business Act and 

removing these barriers, these discriminatory barriers, and to only 

achieve a result of 2 percent of all women-owned small businesses 

simply isn’t realistic—it certainly is not fair. There is another way. 

So I am hoping that we can work together to figure this one out, 

because this isn’t where we should be today. 

We should be exploring a pathway that we can make sure that 

women who are participating as small business owners have the 

right to access Federal contracts. We have set a goal. It has not 

been accomplished. The law hasn’t been implemented in 7 years, 

and we have got 50 agencies that have failed to even achieve the 

5 percent, with hundreds and hundreds of billions of dollars worth 

of Federal contracts and women cannot participate. It simply isn’t 

fair and it is not equitable and it could have been done differently. 

So I am hoping that we can work together to forge that relationship. It is going to be essential in the days ahead, and certainly I 

will work with the Chairman in that regard, as well. 

Chairman KERRY. Thank you, Senator Snowe. 

Mr. Administrator, let me run into a couple of other areas, if we 

can. As I had mentioned earlier, I think people are excited about 

the progress on the Women’s Business Centers Program. Can you 

just share with us, though, on the contracted out grants disbursement process to the Department of Health and Human Services, 

which I know was geared to try to prevent some of the problems 

that had existed, can you just share with us the thinking behind 

the outsourcing on that? 

Mr. PRESTON. Yes. A lot of other agencies outsource to HHS. 

They have a very sophisticated, very responsive operation in place. 

They, Senator, will primarily be doing the processing of the requests for dollars. So we will continue to do the paperwork behind 

that. The difference is, historically, these Women’s Business Centers had to provide us with all their paperwork ahead of time. We 

would review it, we would go back and forth, and they would have 

to go through the entire process before they got any money. We——

Chairman KERRY. How are the Women’s Business Centers going 

to get paid under this process? 

Mr. PRESTON. They get paid—once they are eligible for a grant, 

once they know, they will be able to submit the request to HHS. 

HHS will pay them quickly and then on the back end we will do 

a reconciliation of the paperwork. So they won’t have to get——

Chairman KERRY. Is there an interruption at all in that process——

Mr. PRESTON. No——

Chairman KERRY [continuing]. Before they take it over——

Mr. PRESTON [continuing]. No, that is going to be—no, in fact, 

right after——

Chairman KERRY. That will be a seamless transition? 

Mr. PRESTON. Yes. Right after they find out they are going to get 

their grants, in the weeks after that, we will be going through 

training with all the Women’s Business Centers to take them 

through how to apply for those grants on the HHS system, but it 

will be much more responsive and it is a pretty straightforward 

process. 

36

Chairman KERRY. Great. And one of the things we learned at the 

September hearing was that the Women’s Business Centers are not 

being clearly told what their criteria are for evaluation, why they 

get the score that they do, and I understand the funding level is 

based on that, so it is important for them to do. Can you share 

with us what SBA is doing to deal with that or what it has done? 

Mr. PRESTON. Well, certainly what we try to do is make the 

standards clear——

Chairman KERRY. You sort of communicate to them and have a 

transparency to that process? 

Mr. PRESTON. Right. We are pulling that whole process into the 

Women’s Business Centers Group. Historically, the granting process was in a grant administration group that didn’t work directly 

with the Office of Women’s Business Ownership. We are pulling 

that into Entrepreneurial Development. It is going to be done in 

the same way that we do Small Business Centers right now, which 

is a very responsive process. So I am hoping that those issues will 

be resolved, but as a follow-up, I will make sure to see where this 

issue is coming from—to make sure we don’t drop the ball on that. 

Chairman KERRY. That would be helpful. And also, when Mr. 

Prakash was here and testified, there was discussion—the IG report had recommended putting the training handbook and program 

online, the changes, and also allowing Women’s Business Centers 

to provide missing or incomplete sections of the application without 

submitting the whole new application. Do you know if those——

Mr. PRESTON. I know the training for the grant process will be 

online in March. They are going to find out at the end of February, 

and then the second week or first week of March, that is going to 

be online. I don’t know about the process of partial submissions, 

but I will check on that as well. 

Chairman KERRY. That would be great. That would be helpful to 

them. I know they were particularly concerned about that and I 

think he took that as something——

Mr. PRESTON. Yes, and what I would tell you is we have had very 

good, very, I think, rich dialogs with the representatives of the 

Women’s Business Centers, so all the changes we are making are 

really based on direct feedback that we have gotten from them and 

it has been very helpful, because this is an area where we do want 

to be responsive to them. 

Chairman KERRY. Well, we really have heard and we welcome 

the fact that the Business Centers are singing the praises of that 

increased cooperative effort, so we certainly want to make sure people are aware that there are those good things happening. 

On the lender oversight reforms, who is the head of the Office 

of Risk Management charged with lender oversight? 

Mr. PRESTON. Well, the head of all Capital Access is a new Associate Administrator that we hired a couple of months ago named 

Eric Zarnikow, who has got a very deep background in credit. He 

is a career-long financial person, and when we brought him in, we 

specifically charged him as his top responsibility to ensure that we 

continue to make progress in improving expanding the lender oversight process. Underneath him, he has got a deputy named Janet 

Tasker, and then a gentleman named Bryan Hooper specifically 

runs that segment of the——

37

Chairman KERRY. Is that office going to be independent from the 

Office of Capital Access? 

Mr. PRESTON. It is independent of that office today, but they both 

are part of the broader Capital Access organization. But they are 

headed by two different individuals——

Chairman KERRY. Is there a conflict there? Will they be making 

independent decisions? 

Mr. PRESTON. I think they make independent decisions today. 

Now, what I will say is, and I think you are probably referring to 

an IG recommendation that Lender Oversight be totally pulled out 

of the Capital Access area. What I would tell you is any financial 

institution in our country has got oversight practices and outreach 

practices in the same institution. At some point, they come up into 

the same individual. But in terms of those separate groups, they 

are run completely separately at the working level and they don’t 

come together until we get to the top of the Capital Access Office, 

which is the Deputy and the Associate Administrator. 

Chairman KERRY. We also at the last hearing discussed the BLX 

fraud issue and whether or not it might have raised a red flag, and 

particularly I asked the question whether or not repurchases of $28 

million, or whatever it was, from one officer, and one branch might 

have raised a red flag or whether it was sort of a normal process. 

You acknowledged then that you weren’t aware of whether or not 

that was, in fact, so. Have you since considered enhancing diagnostic tools to track loans by lending officer and branch. Can you 

sort of share with us where we are in that? 

Mr. PRESTON. Well, I think one of the important things to understand is most of the BLX fraud was perpetrated in sort of the 

2002–2004 time line. I don’t have the exact loans and the dates 

here with me and I would be happy to provide that with you. 

Most of the enhancements in lender oversight have been in the 

2004 to 2008 timeframe, we have dramatically expanded our onsite 

reviews. We have dramatically expanded the analytical work we 

do. We are in the process of significantly improving the loan purchasing process and the reviews we do there. And in the process 

of managing the BLX issues, we are working with a third-party 

vendor. One of my teams is working with them to come back and 

give us any lessons learned from their perspective of a third party, 

looking at how these loans were made, why they were made, and 

how we might have been able to see that. 

I do want to remind the Committee, and I know this isn’t a perfect answer, but we don’t expect the taxpayer to lose any money 

based on this. When something like this happens because of the 

lender negligence, they keep the risk. Obviously, it reflects badly 

on everybody. 

So I think our lender oversight processes, purchase reviews and 

the whole gamut have dramatically improved since those frauds 

were perpetrated and they will continue to improve——

Chairman KERRY. Well, one area of concern where I am not sure 

that there has been any motion yet is the Sacramento 504 center. 

We heard three recommendations that were made here during the 

hearing regarding that center, and as of last Friday, I am not sure 

they had been implemented. Have they reinstituted lender oversight at the Sacramento office? 

38

Mr. PRESTON. The Sacramento——

Chairman KERRY. That is the Abridged Submission Method audits, what is known as ASM? 

Mr. PRESTON. Well, they still have the ASM method, and I think 

the issue that the 504 industry is concerned about in Sacramento 

was some of the backlog issues that we had out there in terms of 

turning around decisions quickly so that they could then close their 

loans in a timely basis. I am not familiar with specific oversight 

issues that you are referring to, but I would be happy to follow up 

on them for the record. 

Chairman KERRY. Well, on employee retention, there were pay 

issues. There was an issue about additional staff for processing 

loan approvals, et cetera——

Mr. PRESTON. Yes. 

Chairman KERRY. There was an issue about the lender oversight, 

expanding ASM audits to loans of the premier certified lenders. 

Mr. PRESTON. Yes. Let me——

Chairman KERRY. If you would like, I mean, I have got a number 

of questions. We don’t have time, obviously, to do them all. I would 

like to leave the record open——

Mr. PRESTON. Great. 

Chairman KERRY [continuing]. And we will probably submit 

some in writing, if we can, and——

Mr. PRESTON. Let me take 1 minute to comment broadly. One of 

the things we have found, and you all have obviously digested it 

in chunks in a number of our different programs, but very broadly 

speaking, I think many of our processing centers in disaster, in 

7(a), in 504, and in our 8(a) programs have suffered from processes 

that aren’t terribly efficient, technologies that aren’t very supportive, and backlogs. 

And so as you look at what we are trying to do at this agency 

much more broadly, is to bring in management practices where we 

go in and say, ‘who are we serving at the end of the day, how does 

this process need to get to them quickly and efficiently, how do we 

need to provide technology so that we can communicate with them 

well, make good decisions,’ and it is hitting across all of our processing centers and Sacramento is no exception. 

Now, the other thing we have, Senator, which frankly we didn’t 

have even a year ago was good data on these centers to really understand where these problems were. 

So the reason I give you that broader context is this is a part 

of a much broader thing. I would be happy to brief the Committee’s 

staff on where we are going with all these matters—— 

Chairman KERRY. I think that would be really helpful, because 

one of the questions I wanted to ask, and maybe you just want to 

comment on it, you mentioned disaster. Are the IG recommendations with respect to that being implemented? 

Mr. PRESTON. Oh, yes. There are any number of IG recommendations, but what I would tell you is the work that we are doing in 

disaster goes far beyond any of the IG recommendations in terms 

of preparedness. So I think the IG recommendations tended to look 

at specific processes or problems. They are sort of being encompassed in a much broader program to improve the——

39

Chairman KERRY. Well, I think it would be great to have staff 

follow up on that and get that briefing in full so we can——

Mr. PRESTON. Yes, and frankly, we would be happy to take you 

all down to Fort Worth to look at that processing center and see 

what we have done down there. We think it is a great example of 

what can be done. 

Chairman KERRY. Thank you very much. That is a good idea. 

Senator Snowe? 

Senator SNOWE. Yes, thank you, Mr. Chairman. 

Just to follow up on that, some of the issues that were raised by 

a former employee of the SBA as well as the Inspector General regarding the Office of Disaster Assistance, and you mentioned that 

you were going to convene a meeting of the leaders in that office——

Mr. PRESTON. Yes. 

Senator SNOWE. Has that happened, and what——

Mr. PRESTON. Let me tell you what we did——

Senator SNOWE [continuing]. To rectify some of those issues? 

Mr. PRESTON. Right, and you and I talked about it after the last 

hearing, as well. Yes. Let me tell you what we did. We wanted to 

go about this systematically, so we did a couple of things. First of 

all, we decided to do a broad-based employee survey down there, 

similar to the employee survey we did for the rest of the agency, 

and then we worked with the IG to expand that survey to include 

questions specifically that they wanted to see to understand the environment down there. 

Right now, we are in the process of hiring a third party to come 

in, review that survey, and then spend time down there to make 

sure that any issues that came out in that survey are being addressed. So we are trying to do it in sort of a methodical way in 

conjunction with the IG on the survey and then bring a third party 

in to do the analysis. 

What I would tell you is, and I know some of you may have seen 

a press release on this, when we did our 2007 employee survey 

compared to 2006, neither of which included the disaster operation, 

we saw dramatic improvements in employee morale, employees 

saying that they could do their jobs effectively. When we surveyed 

the disaster business separately, their scores dramatically exceed 

the rest of the agency now. So the very part of the agency that was 

suffering so badly is now in terms of employees saying that they 

can operate effectively, employees saying that they respect leadership, is now sort of the gold standard in the agency. 

And so we are not only trying to understand whether or not we 

have kind of addressed those issues, we are trying to understand 

how we can make sure to apply those standards to the rest of the 

agency because the feedback we are getting is so good. 

But we are on a pathway. We are hiring a third party. The input 

is going to be independent. The IG will be part of it——

Senator SNOWE. That is outstanding. I think that is important 

and I applaud you for your efforts in that regard. I know that the 

employee morale prior to your tenure was remarkably low, and 

so——

Mr. PRESTON. We still have a ways to go. 

Senator SNOWE. You have a ways to go, but——

40

Mr. PRESTON. We still have a ways to go. 

Senator SNOWE [continuing]. You are moving—that you are on 

the ascent is very important in that regard, the right direction. I 

applaud you and——

Mr. PRESTON. I appreciate that——

Senator SNOWE.—I hope you will continue those efforts, because 

I think it means a great difference to the employees and their families within that agency, so thank you for doing that. 

Mr. PRESTON. You know, the thing, I think, that is—one of the 

things that is most heartening about the results we have is we are 

seeing specific improvements in areas like employees saying that 

they have the skills to do their jobs, they have the training, they 

have the development capability. So it is not just ‘‘I feel good about 

being here’’. It is, ‘‘I feel like I can do my job effectively and serve 

effectively’’, and those are really the outcomes that we are hoping 

to see. 

Senator SNOWE. That is critical. That is very good. 

Mr. Administrator, the American Banker reported that at your 

State of the Agency speech last Tuesday, you indicated that the 

SBA loan volume has dropped by roughly 3,000 loans compared to 

the previous September–December quarter——

Mr. PRESTON. Hmm——

Senator SNOWE [continuing]. Because the banks now have automated systems and it is hard to work with the outdated, non-automated system at SBA. Is that true? 

Mr. PRESTON. I don’t think I cited a number, but I would be 

happy to give you those numbers. I don’t have them at the top of 

my head. What we are seeing in loan volume is the following. We 

are seeing a decline in SBA Express. As you know, SBA Express 

is sort of a very simple process. A lot of them, especially the larger 

banks, had programs set up that were heavily credit scored, and 

as they began to experience some of the issues in their broader 

portfolios, what they began to do was require higher credit scores 

for SBA Express. So in the smaller high-volume Express loans were 

seeing a fall-off. 

On the PLP loans, which are typically larger loans, they are 

more integrated, I think, into sort of the broader relationship management side of the bank, we are seeing much more stability in the 

volume. So as a result, we are seeing a higher decline in numbers 

of loans than dollars because the little ones are the ones that are 

falling off. 

When I look at that, the concern I have is, and this is something 

we are dissecting from every angle. The concern I have is the potential that those smaller loans often go to startup businesses, and 

what we found in the Urban Institute study on all of our programs 

is that we have a dramatically higher penetration as a percentage 

of our portfolio in startup businesses than the conventional lending 

sector. So we want to make sure we are doing everything we can 

to reach those businesses. 

Now, in the last couple of weeks, we have rolled out relationship 

plans throughout our national network so that our district offices 

are looking at their top 15 banks, putting in place calling programs, reaching out to them to make sure we understand what we 

can be doing to expand our relationship with them. My team has 

41

come to me with a personal outreach plan for me, for my deputy, 

and for the head of Capital Access to reach out to senior levels at 

the major lending institutions around the country. We are having 

a lender roundtable in a couple of weeks with senior lenders coming in and I have personally had meetings with any number of 

them, even in the last couple of months. So we are working very 

hard to make sure that we are coordinated with them and doing 

everything we can to expand the usage of our products where it 

makes sense. 

Senator SNOWE. Is it a direct result of organizational issues——

Mr. PRESTON. Yes. 

Senator SNOWE [continuing]. Or is it a result of the economy? 

Mr. PRESTON. You know, I think that the organizational issues 

are being led by other challenges that some of these banks have 

in their portfolios. Some of the banks, I think, that have reported 

the largest credit challenges have been ones that are making the 

most immediate decisions to pull back. 

What I would also tell you is that we are not seeing a tremendous amount of continuity across banks in terms of what decisions 

they are making. Some of them are actually expanding. Some of 

them are contracting heavily. The one piece of common information, I think, across the banks is that the Express products are seeing some decline. 

Senator SNOWE. And the American Banker also indicated that 

over the last 2 years, 368 lenders have dropped out of the SBA’s 

lending program——

Mr. PRESTON. Yes, that——

Senator SNOWE [continuing]. Is that true? 

Mr. PRESTON. Yes——

Senator SNOWE. And how does that exacerbate matters in terms 

of delivering these products——

Mr. PRESTON. It does exacerbate matters, it absolutely does, and 

this is why we are rolling out Rural Lender Express. We have an 

outreach effort right now with a new loan process to bring community banks back into the program. Because what the community 

banks have told us is our processes are too difficult, they have to 

go up a learning curve. So what we are doing right now——

Chairman KERRY. Is that why most of them are dropping out? 

Mr. PRESTON. The anecdotal feedback we get from our field is 

yes, that if I am doing three loans a year, it doesn’t make any 

sense for me to try to learn now to do an SBA loan. So what we 

are doing is we are rolling out something that is a two- or threepage application. They can do it online. It is relatively simple. We 

are promising them turnaround time on the loan in a few days. 

And if they have questions, we have set up a help desk for them 

so they can get real-time support. We are piloting it right now in 

eight States and as soon as we find out—as soon as we feel like 

we have got the product where it needs to be in terms of ease of 

use and the support in Sacramento to handle it, we are going to 

begin adding regions. 

But, you know, I think, Senator, you have been on this issue a 

long time, which is are you doing the right kind of outreach to community banks. I think this product will be a big solution for us. It 

42

will take us a number of months to get this out across the country, 

but it is going to be very important for us. 

Senator SNOWE. Also, one other area is lender oversight fees and 

the impact it has on lender participation. I understand that the 

SBA is now going to increase lender oversight fees in April, is that 

true, for three quarters——

Mr. PRESTON. Yes, the lender oversight—— 

Senator SNOWE. What impact is that going to have on lender participation and the overall health of the lending programs? 

Mr. PRESTON. Yes. The cost of the lender oversight fee relative 

to the size of the portfolio, the banks that are getting hit by the 

fees, in most cases is relatively small. The offset fee is $73 per million, I think, so it is a fraction of a basis point. In addition, the 

larger lenders, $10 million and above, require an onsite exam every 

2 years and we charge them for the cost of that exam. It is generally—I think it is $26,000. The IG recommended that we perform 

onsite exams for loans with portfolios as small as $4 million. We 

felt that that was too small. We did portfolios as small as $10 million. 

So generally, I think 350 of our 5,000 lenders will have onsite 

exams. Most of them are not affected by it. It is really the larger 

ones. I have some concern that when you look at the smaller lenders that have the onsite exams, it may be a bit of a challenge. I 

think it will be ten or 11 basis points on their portfolio. So one of 

the things we are looking at right now is whether or not that bottom part of the tier, right when they come in, whether or not we 

can be doing something there. 

But broadly speaking, I don’t think it is going to have a significant impact. I think there is a——

Senator SNOWE. Well, it dovetails with the decline in the economy, too, so I wonder if the timing of that, raising those fees in the 

midst of a declining economy won’t have——

Mr. PRESTON. Yes——

Senator SNOWE [continuing]. An adverse impact on the overall 

participation in the program, or losing more lenders, for that matter. I don’t know. 

Mr. PRESTON. Yes. 

Senator SNOWE. I think this is obviously something you have to 

gauge——

Mr. PRESTON. It is an issue I have been discussing with my staff, 

but by the same token, that is allowing us to go from 50 lenders 

a year to about 250 lenders a year in terms of doing good onsite 

reviews, so we are significantly expanding our oversight based on 

those fees. 

Senator SNOWE. No, I understand because I think it is important 

to enhance accountability and also certainly in conducting oversight. That is one of the other issues that emerged in one of the 

hearings with Inspector General Thorson and with the Preferred 

Lenders Program, as well, making sure that the SBA exacts accountability. 

Mr. PRESTON. Yes. Now, we have seen a decline in our delinquencies until very recently, and I think when you look at when 

we began instituting heavier lender oversight, we actually began to 

see the portfolio quality improve over time. I have to say, though, 

43

given what is happening in the economy today, these banks are reporting higher delinquencies and we are starting to see some pressure there——

Senator SNOWE. I would hope that you would submit to the Committee the delinquency rate and what is happening there. That is 

something that obviously we should be privy to——

Mr. PRESTON. We will come over and brief your staff——

Senator SNOWE. Definitely——

Mr. PRESTON [continuing]. We will show them the graphs and 

tell them what is happening and why we think it is happening. We 

have looked at regions and industries and to really get a handle 

on this data. 

Senator SNOWE. Definitely. And finally, on the SBA energy clearinghouse, is that operational yet? 

Mr. PRESTON. Right now, we are working to make sure that we 

are complying with the 2007 law as well as the one enacted in 

2005. I think in some places it modified it, and I know I spoke with 

my Chief of Staff this morning. She feels good about the progress 

we are making. She is meeting with the Energy Star people tomorrow. But if you would like us to come back with any detailed outline of what we are doing for the record, we would be happy to do 

that. 

Senator SNOWE. We would definitely like that. It is obviously an 

area—Mr. PRESTON. Yes. 

Senator SNOWE [continuing]. Where small businesses are looking——

Mr. PRESTON. Especially considering energy costs today, sure. 

Senator SNOWE. Exactly, and only 43 percent are participating in 

that regard, so clearly we have to do more, so if we can get it up 

and operational and working to satisfy the interests of those who 

are wanting to engage in energy programs and adopt energy efficient programs in their industry, they ought to have the ability to 

have that information. 

Mr. PRESTON. Okay. 

Senator SNOWE. Okay. Thank you, Mr. Administrator. 

Mr. PRESTON. Thank you. 

Chairman KERRY. Just a final couple of questions, if I can. 

Thank you, Senator Snowe. 

I want to follow up on Senator Snowe’s question on the lender 

oversight fees. I think, Mr. Administrator, I mean, I hope you can 

hear this. I think it is a huge mistake to move down that road, especially in light of what you have just said about what the sort of 

pull-back of many people in this economy already troubled from the 

lending. SBA got out of the business of direct lending because it decided it didn’t want to carry that expense of doing it. We would let 

the private sector do it. And the one thing the SBA would do is 

oversight, be responsible for guaranteeing the safety and security 

of the process. 

In addition to the other fees which we have been trying to lower 

which have been raised, to now charge those folks for their own 

oversight is sort of to send a message to them, in my judgment, you 

know, we just don’t care that much about this and you guys carry 

the cost. If you want to participate, terrific. 

44

I think you have got to make it—you know, it is a relationship 

and I think you are at risk in those fees of driving more people 

away and of actually having a counter-impact on the marketplace 

from what you want to have right now, particularly at this moment. 

Mr. PRESTON. Right. We are doing a number of things, actually, 

to bring down the cost for banks through all sorts of automation 

initiatives, initiatives to simplify our interactions with them, initiatives to reduce their paperwork. All that resonates very strongly 

with the banks because they are going in that direction. If they go 

in that direction with us, it brings down their costs. 

Chairman KERRY [continuing]. Oversight—shouldn’t that be in 

the SBA’s budget? 

Mr. PRESTON. It is no—well, I don’t see it any different than——

Chairman KERRY. It is government protection and function, the 

oversight. We are asking to make a government-backed loan. 

Mr. PRESTON. Well——

Chairman KERRY. We need to be the ones——

Mr. PRESTON [continuing]. First of all——

Chairman KERRY [continuing]. To know what is going on. It is 

our responsibility. And that is the part of the relationship that sort 

of encourages them to do it, I think. 

Mr. PRESTON. Well, I am not sure that I would look at it——

Chairman KERRY. All the lenders are against it, aren’t they? 

Mr. PRESTON. Uh——

Chairman KERRY. The lenders clearly——

Mr. PRESTON. I think any time—sir, any time you ask them if 

they want to pay a fee or not, they are going to, you know——

Chairman KERRY. But——

Mr. PRESTON. The larger lenders have come back—— 

Chairman KERRY [continuing]. If you were in that seat and somebody said, okay, here is an extra fee on you, would it not conceivably be the tipping point where they would say, okay, to hell with 

this. We don’t need to do this. 

Mr. PRESTON. It could be for certain lenders, but I would counter 

with——

Chairman KERRY. Why take the risk? 

Mr. PRESTON.—I think we are making and taking any number of 

actions which go far beyond the challenge with this fee to make it 

easier for them to do business with us, do better outreach, simplify 

our process, and be an easier institution to do business with. 

Chairman KERRY. Well, I would love to see the quantifiable net 

sheet on that. 

Mr. PRESTON. Great. The other thing I would say is——

Chairman KERRY. I am asking you to provide that to the Committee. 

Mr. PRESTON. Okay. 

Chairman KERRY. I would like to see the quantifiable net-net of 

how this leaves them plus in terms of their expenditures. 

Mr. PRESTON. Well, I don’t think this fee leaves them plus, but 

I don’t think——

Chairman KERRY. Well, then——

Mr. PRESTON [continuing]. An FDIC fee—— 

45

Chairman KERRY [continuing]. Why press the tipping point here? 

Why send them the message that you have got to pay for your own 

oversight and——

Mr. PRESTON. We are paying to do oversight for the benefit of 

the—I mean, this whole issue we are talking about with all these 

things, this enables us to do sufficient oversight because it gives us 

the funding to do that. And so, you know, we are dramatically expanding the number of institutions we can get to because of that. 

And so the other thing I would mention is it pales in comparison 

to the fees that most of these banks are paying to other regulators. 

It is a small fraction of what they are going to pay to somebody 

else. This specifically doesn’t——

Chairman KERRY. This is the first time I have heard the government make an argument that the private sector ought to pay more 

because they are already paying more to the government. 

Mr. PRESTON. But the government pays about $150 million that 

isn’t covered by these fees to run our Capital Access Programs. I 

mean, we run——

Chairman KERRY. We get something for this. We get them to do 

the lending, to make loans they might not otherwise make. 

Mr. PRESTON. I agree with you on the value of our programs. 

What I am telling you is I do think that we have a very rich investment that we don’t charge them for—— 

Chairman KERRY. That sounds like we are getting into a private 

sector competitive analysis, which is not what this is about. 

Mr. PRESTON. You know, I think if you look at the cost, this is 

a relatively small number, and I do concede that there is a group 

of banks on whom it may have an impact. But in the broad scheme 

of things, I don’t think that these fees are significant compared 

with the profitability they are getting in these programs, the fee 

they would expect to pay to a regulator, or our overall cost of doing 

this business——

Chairman KERRY. Well, as I said, I would really like to see that 

comparative sheet——

Mr. PRESTON. Okay. 

Chairman KERRY. I would like to ask for it as part of the record 

here. 

I have only one other question and that is on the Military Reservist Economic Injury Disaster Loans. 

Mr. PRESTON. Okay. 

Chairman KERRY. How are we doing on that? 

Mr. PRESTON. Umm——

Chairman KERRY. Have we issued more loans since the last hearing when we were at about 260-some or whatever it is? 

Mr. PRESTON. I would have to get back to you on that. 

Chairman KERRY. Would you find out for me? 

Mr. PRESTON. I don’t know——

Chairman KERRY. Do you know what the demand has been 

like——

Mr. PRESTON. This is a program that is—you know, we continue 

to do outreach on it. Frankly, Senator, I think it is one of the best 

programs we have and probably the most underutilized, so we 

would love to work with you to get the word out there, but certainly every time I am in front of a veterans’ group, every time I 

46

am talking to my counterparts in other agencies, I am talking 

about this program, trying to encourage usage and get the information out. It is a great program, but whatever number we give you, 

it is not enough because I don’t think we are as effective as we 

need to be in getting the word out. 

Chairman KERRY. Well, we would like to know. If you can find 

out and submit that also as part of the record, I would like to see 

where we are in that now. I would like to get a sense of the demand on it, too, and what the outreach—what the affirmative outreach effort is——

Mr. PRESTON. Sure. 

Chairman KERRY [continuing]. Of the agency itself beyond your 

own speeches to the veterans’ community because I think it is 

going to be particularly important in this economy. 

Well, I think we really appreciate your taking the time to be here 

with us today. I know it is time you would probably love to spend 

somewhere else, I am sure. But on the other hand, I think it is an 

important part of the process and we appreciate it. 

Let me say for myself, and I think Senator Snowe shares this, 

that it is very clear how immersed you are in a lot of the details 

and it is clear also you are providing leadership. Sometimes we 

may disagree with the direction and what you are doing, but I 

think you are engaged and providing some badly needed leadership 

at the agency and we appreciate that very, very much. I think you 

have spoken today with a command of detail and certainly expressing your point of view about things that has been absent from some 

of these hearings in the past and I want to pay my respect to that. 

I think you have been very articulate, even though obviously, I 

think on occasion you have been wrong, but——

[Laughter.] 

Chairman KERRY. But that said, we certainly appreciate your 

time. 

Mr. PRESTON. Thank you. 

Chairman KERRY. Senator Snowe, do you want to add anything? 

Senator SNOWE. No. 

Chairman KERRY. So thank you for this. We will see you very 

shortly. The budget will be coming up. We will have the budget 

hearing, will be the next time we see you, and I hope obviously 

your budget is one that reflects the administration’s commitment 

to these reforms and efforts and we look forward to that discussion. 

We stand adjourned. Thank you. 

[Whereupon, at 11:55 a.m., the committee was adjourned.]

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