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+
+ - FULL COMMITTEE HEARING ON THE SMALL BUSINESS ADMINISTRATION'S RESPONSE TO THE 2005 GULF COAST HURRICANES
+
+[House Hearing, 110 Congress]
+[From the U.S. Government Publishing Office]
+
+
+
+
+ FULL COMMITTEE HEARING ON
+ THE SMALL BUSINESS ADMINISTRATION'S
+ RESPONSE TO THE 2005 GULF COAST HURRICANES
+
+=======================================================================
+
+ COMMITTEE ON SMALL BUSINESS
+ UNITED STATES HOUSE OF REPRESENTATIVES
+
+ ONE HUNDRED TENTH CONGRESS
+
+ FIRST SESSION
+
+ __________
+
+ FEBRUARY 14, 2007
+
+ __________
+
+ Serial Number 110-3
+
+ __________
+
+ Printed for the use of the Committee on Small Business
+
+
+ Available via the World Wide Web: http://www.access.gpo.gov/congress/
+ house
+
+
+ ______
+
+ U.S. GOVERNMENT PRINTING OFFICE
+33-332 WASHINGTON : 2007
+_____________________________________________________________________________
+For Sale by the Superintendent of Documents, U.S. Government Printing Office
+Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
+Fax: (202) 512�092104 Mail: Stop IDCC, Washington, DC 20402�090001
+
+
+ HOUSE COMMITTEE ON SMALL BUSINESS
+
+ NYDIA M. VELAZQUEZ, New York, Chairwoman
+
+
+JUANITA MILLENDER-McDONALD, STEVE CHABOT, Ohio, Ranking Member
+California ROSCOE BARTLETT, Maryland
+WILLIAM JEFFERSON, Louisiana SAM GRAVES, Missouri
+HEATH SHULER, North Carolina TODD AKIN, Missouri
+CHARLIE GONZALEZ, Texas BILL SHUSTER, Pennsylvania
+RICK LARSEN, Washington MARILYN MUSGRAVE, Colorado
+RAUL GRIJALVA, Arizona STEVE KING, Iowa
+MICHAEL MICHAUD, Maine JEFF FORTENBERRY, Nebraska
+MELISSA BEAN, Illinois LYNN WESTMORELAND, Georgia
+HENRY CUELLAR, Texas LOUIE GOHMERT, Texas
+DAN LIPINSKI, Illinois DEAN HELLER, Nevada
+GWEN MOORE, Wisconsin DAVID DAVIS, Tennessee
+JASON ALTMIRE, Pennsylvania MARY FALLIN, Oklahoma
+BRUCE BRALEY, Iowa VERN BUCHANAN, Florida
+YVETTE CLARKE, New York JIM JORDAN, Ohio
+BRAD ELLSWORTH, Indiana
+HANK JOHNSON, Georgia
+JOE SESTAK, Pennsylvania
+
+ Michael Day, Majority Staff Director
+
+ Adam Minehardt, Deputy Staff Director
+
+ Tim Slattery, Chief Counsel
+
+ Kevin Fitzpatrick, Minority Staff Director
+
+ ______
+
+ STANDING SUBCOMMITTEES
+
+ Subcommittee on Finance and Tax
+
+ MELISSA BEAN, Illinois, Chairwoman
+
+
+RAUL GRIJALVA, Arizona DEAN HELLER, Nevada, Ranking
+MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
+BRAD ELLSWORTH, Indiana STEVE KING, Iowa
+HANK JOHNSON, Georgia VERN BUCHANAN, Florida
+JOE SESTAK, Pennsylvania JIM JORDAN, Ohio
+
+ ______
+
+ Subcommittee on Contracting and Technology
+
+ BRUCE BRALEY, IOWA, Chairman
+
+
+WILLIAM JEFFERSON, Louisiana DAVID DAVIS, Tennessee, Ranking
+HENRY CUELLAR, Texas ROSCOE BARTLETT, Maryland
+GWEN MOORE, Wisconsin SAM GRAVES, Missouri
+YVETTE CLARKE, New York TODD AKIN, Missouri
+JOE SESTAK, Pennsylvania MARY FALLIN, Oklahoma
+
+ .........................................................
+
+ (ii)
+
+
+?
+
+ Subcommittee on Regulations, Health Care and Trade
+
+ CHARLES GONZALEZ, Texas, Chairman
+
+
+WILLIAM JEFFERSON, Louisiana LYNN WESTMORELAND, Georgia,
+RICK LARSEN, Washington Ranking
+DAN LIPINSKI, Illinois BILL SHUSTER, Pennsylvania
+MELISSA BEAN, Illinois STEVE KING, Iowa
+GWEN MOORE, Wisconsin MARILYN MUSGRAVE, Colorado
+JASON ALTMIRE, Pennsylvania MARY FALLIN, Oklahoma
+JOE SESTAK, Pennsylvania VERN BUCHANAN, Florida
+ JIM JORDAN, Ohio
+
+ ______
+
+ Subcommittee on Urban and Rural Entrepreneurship
+
+ HEATH SHULER, North Carolina, Chairman
+
+
+RICK LARSEN, Washington JEFF FORTENBERRY, Nebraska,
+MICHAEL MICHAUD, Maine Ranking
+GWEN MOORE, Wisconsin ROSCOE BARTLETT, Maryland
+YVETTE CLARKE, New York MARILYN MUSGRAVE, Colorado
+BRAD ELLSWORTH, Indiana DEAN HELLER, Nevada
+HANK JOHNSON, Georgia DAVID DAVIS, Tennessee
+
+ ______
+
+ Subcommittee on Investigations and Oversight
+
+ JASON ALTMIRE, PENNSYLVANIA, Chairman
+
+
+JUANITA MILLENDER-McDONALD, LOUIE GOHMERT, Texas, Ranking
+California LYNN WESTMORELAND, Georgia
+CHARLIE GONZALEZ, Texas
+RAUL GRIJALVA, Arizona
+
+ (iii)
+
+
+?
+
+ C O N T E N T S
+
+ ----------
+
+ OPENING STATEMENTS
+
+ Page
+
+Velazquez, Hon. Nydia M.......................................... 1
+Chabot, Hon. Steve............................................... 2
+Braley, Hon. Bruce............................................... 3
+Jefferson, Hon. William.......................................... 4
+
+ WITNESSES
+
+
+PANEL I
+Melancon, Hon. Charles........................................... 5
+Baker, Hon. Richard.............................................. 36
+
+PANEL II
+Preston, Hon. Steven C., Administrator, Small Business
+ Administration................................................. 8
+Shear, William, Government Accountability Office................. 10
+
+PANEL III
+Francis, Edward G., On behalf of American Banker's Association... 39
+Colosino, Donna, Small business owner, CRESCENT Power Systems.... 41
+McDonald, Bryan, Governor's Office of Recovery and Renewal, State
+ of Mississippi................................................. 43
+
+ APPENDIX
+
+
+Prepared Statements:
+Velazquez, Hon. Nydia M.......................................... 56
+Chabot, Hon. Steve............................................... 57
+Melancon, Hon. Charles........................................... 59
+Baker, Hon. Richard.............................................. 61
+Braley, Hon. Bruce............................................... 63
+Shuler, Hon. Heath............................................... 65
+Preston, Hon. Steven C., Small Business Administration........... 66
+Shear, William, Government Accountability Office................. 72
+Olivier, Hon. Michael, Secretary of Economic Development, State
+ of Louisiana................................................... 86
+Francis, Edward G., On behalf of American Banker's Association... 92
+McDonald, Bryan, Governor's Office of Recovery and Renewal, State
+ of Mississippi................................................. 105
+Colosino, Donna, Small business owner, CRESCENT Power Systems.... 111
+Smith, Patricia, Small business owner PEMBA Lighting and
+ Automation..................................................... 117
+
+ (v)
+
+
+
+
+FULL COMMITTEE HEARING ON THE SMALL BUSINESS ADMINISTRATION'S RESPONSE
+ TO THE 2005 GULF COAST HURRICANES
+
+ ----------
+
+
+ WEDNESDAY, FEBRUARY 14, 2007
+
+ U.S. House of Representatives,
+ Committee on Small Business,
+ Washington, DC.
+ The Committee met, pursuant to call, at 10:00 a.m., in Room
+2360 Rayburn House Office Building, Hon. Nydia M. Velazquez
+[Chairwoman of the Committee] presiding.
+ Present: Representatives Velazquez, Jefferson, Shuler,
+Gonzalez, Grijalva, Cuellar, Altmire, Braley, Ellsworth,
+Johnson, Sestak, Chabot, Akin, Gohmert, Heller, Davis, Fallin,
+Buchanan, and Jordan.
+
+ OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ
+
+ Chairwoman Velazquez. Well, I call this hearing to order.
+Today we are holding a hearing on the Small Business
+Administration response to the 2005 Gulf Coast hurricanes to
+review various aspects of the SBA response on disaster relief
+programs.
+ The Committee will hear testimony and comments from members
+of the Gulf Coast region, two of our colleagues, the SBA
+administrator, Steven Preston; Mr. William Shear from the
+General Accounting Office; as well as representatives from
+other government agencies and members of the small business
+community from the region.
+ Over a year and a half ago, this nation witnessed one of
+our country largest natural disasters, Hurricane Katrina. The
+impact was enormous. And one thing we all learned is that there
+is nothing more critical than assuring assistance is provided
+immediately and efficiently to all of those in need.
+ Today's hearing will examine the response of the Small
+Business Administration to Katrina, its system to effect the
+small businesses, and the current state of the SBA disaster
+loan program.
+ In the aftermath of the Gulf Coast hurricanes, thousands of
+small businesses turned to the SBA for assistance. Many
+applications were stalled in an agency backlog that took months
+to process. Not only was there a buildup but a disbursement of
+funds was also significantly delayed.
+ Those who were approved for loans often waited months to
+receive any funds. To date, of the 422,558 applications
+approved, only 22 percent, 22 percent, have been fully funded.
+Clearly we have a long way to go to make sure small businesses
+in the Gulf Coast are up and running again.
+ I want to make one thing clear this morning. The agency's
+poor response to Katrina victims was not due to the severity of
+the storm or any unanticipated factors. The SBA failed Gulf
+Coast entrepreneurs due to poor planning, lack of training, and
+improper distribution of resources. This was unacceptable and
+cannot happen again.
+ What I have appreciated about Administrator Preston is that
+he has recognized that changes must be made. Today we will
+review those changes. The goal must be to ensure SBA is
+prepared to provide a system the next time a disaster like
+Katrina occurs.
+ The General Accounting Office report gives insight into
+where the agency is and what modifications have been made. As
+of today, the SBA has not fully implemented key elements of a
+disaster planning program, such as disaster simulation, office
+space requirement, and proper staffing. It is also unclear if
+the backlog problem has been corrected or if it will reoccur in
+future large-scale disasters.
+ Today we will hear from small business owners and state
+officials who have seen firsthand the successes and failures
+under both the old and new systems. They will give their
+insight about the disaster program and what needs to be done so
+it better serves our nation's small businesses.
+ Small businesses are the largest job creators and spur
+economy growth. There is no question that the Gulf region is
+still rebuilding and that entrepreneurs will play a critical
+role in that process.
+ If we want businesses to make a full recovery, then we must
+have a well-equipped disaster loan program. It is crucial that
+the federal government does not fail entrepreneurs the next
+time there is a disaster.
+ I look forward to hearing the testimony of today's
+witnesses. And now I recognize ranking member Chabot for his
+opening statement.
+
+ OPENING STATEMENT OF MR. CHABOT
+
+ Mr. Chabot. Thank you very much, Chairwoman. And I want to
+thank Chairwoman Velazquez for holding this important hearing.
+I also want to thank the witnesses that we will hear from
+shortly and look forward to their testimony as well.
+ As has been well-documented, the unexpected nature and
+level of destruction caused by Hurricane Katrina was
+unprecedented. It is estimated that Hurricanes Katrina, Rita,
+and Wilma claimed 1,400 lives and caused more than $80 billion
+in property damage.
+ The Small Business Administration, the SBA, was tasked with
+the difficult job of providing disaster loans to the affected
+individuals and businesses throughout the Gulf Coast. In
+response to the hurricanes and their devastation, the SBA
+provided more than 148,000 disaster assistance loans, totaling
+more than $9.7 billion in aid to the individuals and businesses
+devastated by these storms.
+ After the storms had passed, it became clear that the SBA
+was processing the disaster loans far too slowly. An average
+loan application took 74 days to process, instead of the
+agency's usual processing goal of about 3 weeks. The SBA
+severely underestimated the number of employees needed for this
+considerable task and failed to provide enough office space for
+its employees on site. Their recruiting and training of
+emergency employees also proved to be a considerable obstacle
+for the SBA. Lastly, the Small Business Administration failed
+to spread the word to the residents and business owners of the
+Gulf Coast that the agency was there to help them.
+ Amid the chaos and devastation caused by the storms and the
+alphabet soup of federal agencies there to help, it was
+critically important for the SBA to vigorously communicate what
+the agency is and how it could help through the services it
+provides.
+ Some homeowners and small business owners did not receive
+the help they could have because they were unaware of the help
+the SBA could have provided. That is just not acceptable.
+ While no one can say that the federal government's response
+to Hurricane Katrina is adequate, it is important to point out
+that the men and women in the SBA and the other agencies who
+went to the Gulf Coast faced an extremely difficult task under
+very challenging circumstances. This was one of the most
+powerful storms ever to hit our nation. And its destruction was
+compounded by the geographical uniqueness of New Orleans, the
+fact that it sits below sea level.
+ The point of this hearing is not to assign blame for the
+inadequate response. That has already been done by others. We
+are here today to look for ways to ensure that in the
+unfortunate event of a future disaster, the SBA will be better
+prepared and equipped to respond to America's need for help.
+ I would like to commend Administrator Preston for the
+efforts he has made to significantly improve disaster loan
+processing. I am sure it isn't lost on anyone here that the
+administrator was not serving in his current capacity during
+the Summer of 2005. That was a year and a half ago. And he has
+been on the job for about seven months.
+ I would also like to thank our witnesses, who have traveled
+all the way from Louisiana and Mississippi, for taking the time
+to join us today. It is important to listen to the stories of
+those who sought help from the SBA in the aftermath of Katrina
+to determine how we may better improve the agency as we move
+forward.
+ Again, I want to thank you, Chairwoman, for holding this
+important hearing. And I yield back the balance of my time.
+ Chairwoman Velazquez. Thank you, Mr. Chabot.
+ And now I would like to recognize Mr. Braley for an opening
+statement.
+
+ STATEMENT OF MR. BRALEY
+
+ Mr. Braley. Thank you, Madam Chairwoman, Ranking Member
+Chabot. And thank you for holding this hearing.
+ It is about time we take a hard, long look at this nation's
+response to the Gulf Coast hurricanes, particularly focused on
+how small businesses have fared since then. We have a lot to
+learn. And hopefully today we will learn some of these things
+that will help us be better prepared next time.
+ Tens of thousands of businesses were destroyed by the Gulf
+Coast hurricanes. And the economic damages have been estimated
+at well over $150 billion. That region's small businesses have
+depended upon the Small Business Administration to help them
+regroup from this catastrophe. More than a year later, however,
+many of them are still dependent upon the Small Business
+Administration. In fact, many of them are still waiting in line
+at the SBA. That line needs to move a little faster.
+ By looking at this country's response to the big disasters,
+we can also gauge how effective we are at responding to the
+disasters of less magnitude. Where I am from in Iowa, we have
+ice storms, something you are a little familiar with today,
+flooding, and tornadoes. Thankfully, they have not reached
+Katrina proportions. However, these disasters are major to the
+people whose lives are impacted by them and the substantive
+impacts on the communities and the small businesses in those
+areas. And I want to make sure this administration is prepared.
+ Today I look forward to hearing that the Small Business
+Administration recognizes its shortfalls from the Gulf Coast
+response, is learning some lessons, and is applying those
+lessons in its disaster response efforts nationwide. This
+country's small businesses need to know that when disaster
+strikes, this administration will not abandon them.
+ Thank you, Madam Chairwoman. And thank you to our speakers
+for enlightening us today. I yield back the balance of my time.
+ Chairwoman Velazquez. Thank you.
+ The Chair asks if there is any other member who wishes to
+be recognized for an opening statement.
+ Mr. Chabot. Madam Chairwoman?
+ Chairwoman Velazquez. Yes?
+ Mr. Chabot. On our side, our members have indicated they
+would withhold any opening statements in order to get to the
+witnesses as soon as possible.
+ Chairwoman Velazquez. Okay. Yes. Without objection, I will
+recognize the gentleman from Louisiana, Mr. Jefferson.
+
+ STATEMENT OF MR. JEFFERSON
+
+ Mr. Jefferson. Thank you, Madam Chair. I will be very brief
+in my remarks.
+ I am very pleased to see my compare in arms here. Mr.
+Melancon is one because we fought a lonely battle down our way
+with the SBA and so many other federal agencies to get help to
+our people. I am sure Mr. Baker will show up here in a minute,
+but our districts adjoin each other. We have impaired in a
+common suffering.
+ I have looked through the testimony, some of the testimony,
+that will be rendered today. And I will get to the questions
+about it a little later. But what has been most important to
+our people in the recovery is you are getting things done
+quickly and not looking at this as a normal set of
+circumstances or a normal disaster. This is one where when the
+SBA sits down and tries to figure out how it gets paid back, in
+looking at it in the normal way, it is awfully tough because
+you can't decide. The customers aren't there. You don't know
+when they are going to return. It is hard to make projections.
+ And, as you have said, Madam Chair, sometimes in this whole
+processing of things, we need to just say, ``Well, it's time to
+think about how we get grants down here to people, as opposed
+to how we make loans in the regular way.`` We look for the
+normal indicia of ability to pay back.
+ It is very tough if you are going to have recovery without
+any people there to get businesses set up so they can start
+working and get themselves back in shape and have the normal
+processes in place.
+ We have been very concerned about the slow process of
+getting loans out. And I know it is going to be talked to you
+about the process of integrating various aspects of agencies'
+work and relying on the private sector and all of that. But I
+think for us, all the rules about how we might make things work
+more efficiently is trumped by the idea of how do we get things
+done so that people can have a chance to recover.
+ And so it is not just a matter of how we bring all the
+resources together and how we better apply them as how we
+actually get a product out, how we get things done, how we get
+people back in shape to come back to work, jobs to come back to
+the--and the other part of it, of course, is how we get our
+small business people as the major part of this recovery to
+make sure that they are the ones who are leading the recovery
+effort who are bringing back the employees who are making this
+thing work.
+ So I look forward to the testimony of all of the witnesses
+today. And I thank you, Madam Chair, for letting me make brief
+remarks.
+ Chairwoman Velazquez. Thank you.
+ And now I will recognize Congressman Melancon from
+Louisiana, who has worked closely with this Committee in
+addressing problems on the disaster assistant program. My
+colleague, you have five minutes for your testimony.
+
+STATEMENT OF THE HONORABLE CHARLIE MELANCON, CONGRESSMAN, U.S.
+ HOUSE OF REPRESENTATIVES
+
+ Mr. Melancon. Good morning. Thank you, Chairwoman
+Velazquez, Right Ranking Member Chabot. I want to thank you for
+the opportunity to speak about the SBA's response to Hurricanes
+Rita and Katrina.
+ My Congressional district spans the destructive path of
+both of these storms. Early in the morning of August 29th,
+2005, Hurricane Katrina made landfall in South Plaquemines
+Parish. Subsequent levee breeches flooded much of Plaquemines
+and St. Bernard Parishes along with the City of New Orleans and
+the communities of Lafitte and Grand Isle. Less than one month
+later, Hurricane Rita made landfall in southwest Louisiana,
+with much of the coastal area already affected by Katrina
+receiving yet another unneeded and damaging blow, and then
+creating storm surges though all the coastal Louisiana parishes
+and into east Texas.
+ Today's hearing focuses on one of many facets of federal
+government failures, both before and after these storms. In the
+weeks and months following the storms, critical small business
+grant and loan assistance was delayed. Our economy continues to
+suffer as a result.
+ We may never be able to pinpoint an exact number of jobs
+lost to the inaction or the lack of assistance. However, I have
+witnessed many instances where small business owners have been
+frustrated to the point of giving up on the SBA. And I hope
+that we can work together to change the negative perception
+that currently exists towards SBA's programs and the entire
+federal response.
+ As time moves on, we are beginning to quantify some of the
+missed opportunities following the 2005 hurricane season. For
+instance, 9 months after Katrina and Rita, in May of 2006, the
+SBA had disbursed only 14 percent of the $9.7 billion in loan
+dollars that were approved for disaster assistance. And even
+today, my numbers show that only 38 percent of the loan
+applications had been approved and funded. After Hurricane
+Andrew, over 60 percent were approved.
+ Immediately following the storms, an understaffed, poorly
+managed, and poorly trained, particularly in customer service,
+administration effectively discouraged small business owners
+from applying for business or home loans.
+ In December 2005, the backlog for loan verification and
+processing on average exceeded one and a half months. In most
+instances, the wait was much longer. Inadequate and inaccurate
+communication from SBA employees kept many customers from
+finishing applications. Many clients lost paper business
+records in the storms, creating an additional hurdle for SBA
+employees that were not able to adjust for these storm-
+inflicted realities.
+ How do we make SBA better? One of the first issues that
+must be addressed is staffing. SBA's unwillingness to
+immediately and effectively delegate responsibility to
+qualified lenders created a critical choke point in loan
+disbursements following the hurricanes.
+ To address this issue, today I am joining with my colleague
+Congressman Richard Baker to introduce the Small Business
+Disaster Response and Loan Improvements Act of 2007. This
+legislation will improve upon the less successful gulf
+opportunity loan pilot program administered by the SBA. It
+would allow for larger maximum loan amounts and a more
+streamlined application process that will be administered by
+the SBA-approved lenders.
+ Before staffing, Congress must take a close look at the
+laws and regulations that currently govern the SBA's disaster
+loan programs. SBA's unwillingness or inability to provide
+maximum flexibility in the administration of disaster loans
+continues to hamper recovery efforts in Louisiana, specifically
+homegrown and family-run businesses, such as those in the
+shrimp industry that we have in south Louisiana. They often do
+not fit the mold of the current SBA loan.
+ And in the resourceful, self-sufficient economy in south
+Louisiana, oftentimes the best and only mechanic or towboat for
+these shrimping vessels are the owners themselves and/or family
+members and fellow shrimpers. However, the SBA would not allow
+payments to family members or fellow shrimpers for the expense
+of removing the vessels from dry land. The SBA would loan the
+money for mechanical repair, hull repair, net repair, and
+acquire the needed fuel and supplies to begin the shrimping
+season, but it doesn't do the owner much good if he or she
+can't get the vessel back into the water. Community express
+loans should be allowed eligibility for commercial fishermen to
+go back to work.
+ In addition, SBA's current physical disaster loan program
+allows for a waiver of the $1.5 million loan limit. This waiver
+is reserved for businesses that are determined to be a major
+source of employment before the disaster. However, in a
+disaster the magnitude of Katrina and Rita, the SBA should
+allow for waivers for businesses that will be a major source of
+employment following the storm.
+ I am aware of instances where existing business owners
+could greatly expanded or refocus existing businesses to meet
+strong post-storm demand. However, because these opportunities
+did not fit the normal SBA disaster rules, they were turned
+away, causing untold hardship on many businesses and subsequent
+reemployment and the new employment losses.
+ A final recommendation for making the current and future
+disaster recoveries better would be to provide more flexibility
+for loan use in conjunction with the Homeowners Assistance
+Grants. Homeowners in south Louisiana who took the initiative
+to apply for SBA loans following the hurricanes are now being
+penalized for this action. If these homeowners qualify for the
+Louisiana road home rebuilding grants, then they must use the
+road home money to pay down the SBA loan first. This leaves
+these storm victims with a larger financial burden that they
+would not have otherwise and no better off, if not worse off,
+than before they applied for the SBA loan.
+ In closing, I want to thank you, Chairwoman Velazquez and
+Ranking Member Chabot and the Committee, for the opportunity to
+testify this morning. I look forward to working with you and
+all of our other colleagues to enact common sense, meaningful
+reform to current SBA disaster loan programs. Thank you.
+ [The prepared statement of Mr. Melancon may be found in the
+Appendix, on page 59.]
+ Chairwoman Velazquez. I want to thank you for your
+testimony, your passion, and I just want for you to make sure
+that we do understand your pain and the human suffering in the
+Gulf Coast region. The intent of this Committee in today's
+hearing is to see where we are, to make sure that this doesn't
+happen again, and if there is a need to fix through legislative
+actions, we will do that. And we will continue to work with you
+to see that we can bring relief to the small business people
+that are suffering still in the Gulf Coast region.
+ With that, I will ask if the members have any questions
+for--
+ Mr. Chabot. Madam Chairwoman?
+ Chairwoman Velazquez. Yes?
+ Mr. Chabot. Just a brief comment. I think apparently Mr.
+Baker was affected by the inclement weather today and is on his
+way here but running late. It is good to see this work in a
+bipartisan manner, especially with those that have been it most
+directly, the folks in the area. So I would commend both of you
+for working together to put together legislation in a
+bipartisan manner that will help to assist the people who have
+suffered this terrible disaster in your area.
+ I yield back.
+ Chairwoman Velazquez. I guess that today is a reminder of
+Mother Nature. And this is why we have to make sure that we are
+ready for the event of any other future disaster.
+ I would like to thank the Congressman. We will now proceed
+with the second panel. I will ask Mr. Steven Preston,
+Administrator of SBA; Mr. William Shear, the Director of
+Financial Markets and Community Investment, to please take your
+seats.
+ And, to the members, please, I want you to know that we
+have a third panel with witnesses who are coming here from the
+Gulf Coast region. And given the weather conditions and
+everything that they have gone through, I will ask for you to
+please stay here. And if you have any other commitments, please
+come back so that we could listen to their stories.
+ Good morning, Mr. Preston and Mr. Shear. I would like to
+welcome the Administrator. And he will be recognized for five
+minutes for your testimony. And I just want for you to know
+that I have noticed the fact that you have been before this
+Committee twice this year. And I think that is the most of any
+other Administrator.
+ Mr. Preston. Thank you very much. Would you like me to
+begin or Mr. Shear? Okay. Great.
+
+ STATEMENT OF STEVEN C. PRESTON, ADMINISTRATOR. U.S. SMALL
+ BUSINESS ADMINISTRATION; ACCOMPANIED BY WILLIAM B. SHEAR,
+ DIRECTOR OF FINANCIAL MARKETS AND COMMUNITY INVESTMENT,
+ GOVERNMENT ACCOUNTING OFFICE
+
+ Mr. Preston. Good morning, Chairwoman Velazquez, Ranking
+Member Chabot, other members of the Committee. Thank you for
+inviting me to discuss the GAO report and what the SBA has done
+to re-engineer our disaster assistance program. I would also
+like to thank Bill Shear and his team at GAO for the time and
+effort they put into this report.
+ My written statement addresses GAO's recommendations. SBA
+concurs with the primary recommendations in the report. We have
+already made some progress in addressing them. This morning I
+would like to talk a bit more about what we have done to re-
+engineer the disaster assistance program since Hurricanes
+Katrina, Rita, and Wilma hit the Gulf Coast.
+ While we concur with the assessment of SBA's past problems,
+I am here to tell you today that since last summer, we have
+made dramatic progress in reforming SBA's disaster program and
+attained truly impressive results.
+ Like so many other Americans, in 2005 I watched the images
+of what was happening in the Gulf. I prayed for the people. I
+sent funds. And I wished I could do more. And, sure enough, I
+got an opportunity to do that when I received the offer to come
+here to the SBA last summer.
+ Since then, I have visited the region many times, meeting
+with disaster employees, business owners, homeowners, as well
+as state and local officials to hear about their experiences
+and understand their issues.
+ Today 98 percent of the approved borrowers have received
+all of their money, some of their money, or chosen not to
+borrow. Of the 7 billion in approved disaster loans that people
+have chosen to take, we have over $5 billion at work rebuilding
+homes and businesses in the Gulf. Approximately 2 billion in
+additional commitments are available to be disbursed to about
+23,000 borrowers, 20,000 of whom have begun receiving
+disbursements. Many of these people, we believe, are
+experiencing a number of outside challenges, resulting in
+delays in their ability to draw down funds.
+ I came to the agency 11 months after Katrina. And in that
+time, the agency had processed over 420,000 loan applications
+and had worked very hard to address the unprecedented nature of
+this disaster by expanding capacity in three areas: information
+systems, people, and facilities. And while the loan approval
+process was largely completed, SBA at that point faced a very
+different challenge: closing loans and distributing funds. Over
+120,000 borrowers were still in the process, representing over
+$7 billion worth of loan commitments. So we quickly dug into
+the issues to understand why.
+ First we listened to our customers. Next we listened to our
+employees to get their perspective. And then we dug deep into
+the operational processes, where we found a number of issues
+leading to high error rates, steep backlogs, and decision-
+making bottlenecks.
+ With this information, we began to re-engineer the program
+to address them. We invested thousands of man-hours and
+launched a new process that was complex to implement but simple
+to conceive. We called over 90,000 borrowers to do 2 things:
+introduce a new process where they would have a single
+relationship manager to help them to complete paperwork
+accurately, eliminate confusion, eliminate rework and
+frustration, and to ensure that we understood their status so
+that we could provide the right kind of support.
+ We also moved 1,300 staff and changed our entire work flow
+from a production line with inadequate coordination between
+different functions to 15-person integrated teams, where each
+function is represented with authority and competency to make
+decisions, ensure accountability, and manage for results.
+ This outreach enabled us to build a database to track the
+issues our customers have and to address them better. One thing
+this database showed us is that our customers were having
+difficulties obtaining records from their local clerks'
+offices. So SBA placed employees in the Records Office in
+Orleans Parish, and we have reached out to other parishes and
+counties across the region, offering the same support.
+ Because we now have regular conversations with our
+customers, we can also informally poll our case managers on
+their issues. Our people have become an advocate for the
+borrowers that they serve. And we are now able to connect a
+loan and a document to a face and a story.
+ One of the major challenges surmounted in this process was
+our loan modification process. This summer we had a backlog of
+50 to 80 thousand loan modifications, with an average age of
+over 70 days. This was a major cause of delays in
+disbursements. Today, with about 4,000 modifications in
+process, the average age of the backlog is 8 days.
+ We are seeing benefit of the new processes in the more
+recent disasters, where we see 98 percent of our loan approvals
+being completed within 14 to 16 days, which I have been seeing
+most recently after my trip last week to Florida taking place
+as well.
+ Do we still have hurdles? Absolutely. We are still
+improving the process. I still hear directly from customers. I
+give my e-mail in public forums all the time. So I know
+directly. But the feedback we're getting from local leaders;
+legislators; employees; and, most importantly, the disaster
+victims we are striving to serve has been very positive.
+ We continue to focus on better training for our employees
+so they can serve better. We continue to improve the IT
+infrastructure. We have put metrics and mechanisms in place to
+identify issues and address them as they arrive. But, most
+importantly, we have put methods in place for greater
+interaction with our customers.
+ In the coming months, our efforts are going to be focused
+on a number of activities: first, ensuring that we are
+responding and providing the states with information to support
+their grant programs; second, completing the process
+reengineering and continuing to improve automation to ensure
+that it is fully in place for future disasters; third,
+finalizing surge plans so that we have clear, well-documented
+road maps and implementation models in place based on the size
+and the nature of the catastrophe; and, finally, exploring ways
+to work with the private sector to provide more efficient and
+effective support in certain circumstances.
+ The 2005 hurricanes overwhelmed disaster response at all
+levels. Certainly we were no exception. Our people worked very
+hard, often around the clock, to try to help the disaster
+victims whose lives were torn apart. But these are not the same
+people who have since fixed the process and are today enabling
+the SBA to play its role in rebuilding the Gulf and improving
+our ability to respond in the future. And I am very thankful
+for their dedication and their resolve.
+ Thank you.
+ [The prepared statement of Mr. Preston may be found in the
+Appendix, on page 66.]
+ Chairwoman Velazquez. Thank you Administrator.
+ And now we will recognize Mr. Shear. He will be presenting
+the report from the General Accounting Office. Mr. Shear is the
+Director of Financial Markets and Community Investment from the
+Government Accountability Office. Welcome.
+
+ STATEMENT OF WILLIAM B. SHEAR, DIRECTOR OF FINANCIAL MARKETS
+ AND COMMUNITY INVESTMENT, GOVERNMENT ACCOUNTING OFFICE
+
+ Mr. Shear. Thank you. Madam Chairwoman, Representative
+Chabot, members of the Committee, it is a pleasure to be here
+this morning to discuss SBA's response to the 2005 Gulf Coast
+hurricanes.
+ My testimony is based on two reports that we issued under
+the Comptroller General's authority. The first report, which
+was release in July 2006, discussed SBA's plan for and
+implementation of the disaster credit management system called
+DCMS, which the agency uses to process disaster loan
+applications.
+ The second report, which is being released today, discusses
+SBA's disaster planning for other logistical areas, such as
+hiring and training a capable workforce and acquiring necessary
+office space.
+ As we all know too well, the Gulf Coast hurricanes were
+truly catastrophic. They resulted in extensive property damage,
+human suffering, and loss of life. SBA's Office of Disaster
+Assistance makes loans to households to repair or replace
+damaged homes and personal property and for businesses to help
+with physical damage and economic losses. SBA faced
+unprecedented demand for its disaster loan services as a result
+of the hurricanes.
+ Today I will discuss first challenges SBA experienced in
+providing victims of the Gulf Coast hurricanes with timely
+assistance; second, factors that contributed to these
+challenges; and, third, steps SBA has taken since the Gulf
+Coast hurricanes to enhance its disaster preparedness.
+ In summary, we identified several system and logistical
+challenges that SBA experienced in responding to the Gulf Coast
+hurricanes that undermine the agency's ability to provide
+timely disaster assistance to victims. For example the limited
+capacity of DCMS restricted the number of staff who could
+access the system at any one time to process disaster loan
+applications.
+ In addition, SBA staff who could access DCMS initially
+encountered multiple system outages and slow response times in
+completing loan processing tasks. As of late May 2006, SBA
+processed disaster loan applications on average in about 74
+days, compared with its goal of within 21 days.
+ While the large volume of disaster loan applications at SBA
+we see clearly affected its capacity to provide timely disaster
+assistance to victims, we found that the absence of a
+comprehensive planning process beforehand limited the agency's
+initial response.
+ For example, in designing the capacity of DCMS, SBA
+primarily relied on historical data, such as the number of loan
+applications that the agency received after the 1994
+Northridge, California earthquake.
+ SBA did not consider disaster scenarios that were more
+severe or used the information available from disaster
+simulations or catastrophe models used by insurance companies
+to estimate disaster losses. SBA also did not adequately
+monitor the performance of a DCMS contractor or completely
+stress test the system prior to its implementation. Moreover,
+SBA did not engage in comprehensive disaster planning prior to
+the Gulf Coast hurricanes for other logistical areas, such as
+workforce planning or space acquisition.
+ As discussed by the SBA administrator, in the aftermath of
+the Gulf Coast hurricanes, SBA has planned or initiated several
+measures that SBA, the administrator, and other SBA officials
+said would enhance the agency's capacity to respond to future
+disasters.
+ For example, SBA has completed an expansion of DCMS' user
+capacity to support a minimum of 8,000 concurrent users as
+compared with just 1,500 for the Gulf Coast hurricanes.
+ We have made recommendations to SBA in both our July 2006
+report and in a report we are issuing today. For example, we
+recommended that SBA, one, reassess DCMS' maximum user capacity
+in light of lessons learned from the Gulf Coast hurricanes,
+information available from catastrophe with modeling firms and
+disaster simulations, and related cost considerations; two,
+strengthen its DCMS contractor oversight and further stress
+test the system; three, analyze the disaster loan process and
+identify ways to more efficiently process loan applications,
+including an evaluation of the feasibility of implementing a
+secure Internet-based application feature for home loan
+applicants; and, four, develop time frames for complete and key
+elements of its disaster management plan.
+ We are encouraged by SBA's agreement with these
+recommendations. We hope that the agency can move forward to
+develop and implement a comprehensive disaster management plan
+that will help SBA respond to future disasters.
+ It is an honor to present our work before this Committee. I
+would be happy to answer any questions from Committee members.
+ [The prepared statement of Mr. Shear may be found in the
+Appendix, on page 72.]
+ Chairwoman Velazquez. Thank you, Mr. Shear.
+ Katrina and Rita, both of them were monumental disasters.
+There is no doubt in our minds. And it netted a monumental
+response from the federal government, particularly the disaster
+loan program.
+ Mr. Shear, given everything that you have reviewed in
+creating your report and in reference to what the SBA has done
+in response to the General Accounting Office recommendations,
+are you comfortable that the SBA is now prepared to meet the
+challenges of another disaster on the scale of the 2005 Gulf
+Coast hurricanes?
+ Mr. Shear. There are two parts to my answer to your
+question. One would be a matter of as we referred to disaster
+simulations and catastrophe risk modeling, that one of the
+first steps that is needed is an evaluation of the risk
+exposure of the agency in terms of meeting its needs to
+disasters. We are not quite sure how the agency is going to use
+those tools and the lessons from the Gulf Coast hurricanes to
+evaluate its risk exposure.
+ The second part to my answer is that if it is a matter of
+having the capacity to meet another series of Gulf Coast
+hurricanes, we know they have expanded their capacity to DCMS
+and they have initiated some other steps.
+ The answer is a little bit that we don't know yet. It is
+kind of too early for us to know yet as far as whether they
+have stress tested DCMS and taken other actions to ensure that
+they could meet the challenges of another catastrophe of this
+magnitude.
+ Chairwoman Velazquez. Mr. Shear, is your answer a no?
+ Mr. Shear. The answer is that we are not sure. We are not
+sure if there was another hurricane or another disaster of this
+magnitude. And so the answer is we are not sure on that.
+ As I say, the first part is we think a fuller risk kind of
+evaluation of risk exposure is needed.
+ Chairwoman Velazquez. Okay. Thank you.
+ Mr. Shear, again, we have heard how the SBA has implemented
+changes to improve its disaster assistance programs. Some of
+these changes have come as a result of your recommendations
+while others were initiated by SBA. To what extent are these
+changes premised or predicated on a comprehensive assessment of
+the agency's risks, including a disaster?
+ Mr. Shear. Okay. I will add to what I called my first part
+to the first question. It is not clear to us based on our
+interactions with SBA. And they have raised questions a number
+of times, ``How could we use catastrophe risk models? How could
+we use disaster simulations?'' And it has been a constructive
+dialogue, but, nonetheless, we are not quite sure how far along
+the agency is in really evaluating its exposure to its risk.
+ Chairwoman Velazquez. Thank you.
+ Mr. Preston, I would like you to provide me with specific
+time frames for when the SBA will have implemented the
+following elements: formed a comprehensive written disaster
+plan that integrates the agency's needs in a variety of
+disaster situations with the results of disaster simulations
+and catastrophic modeling; completed cross-training agency
+staff to provide backup support for the disaster assistance
+function; completed stress testing to the DCMS system at
+maximum use or capacity. What is your time frame when these key
+elements of a disaster plan will be completed?
+ Mr. Preston. Well, you and I have not discussed this
+previously. So I think we should work together to determine
+those time lines.
+ Now, let me tell you we have had conversations about the
+need for time lines. This agency in certainly the six months,
+seven months I have been here manages extensively with time
+lines. We could have never achieved these results without daily
+time lines on achievables in every aspect of our operation.
+ We are currently--and this is in support of GAO's comment--
+evaluating time lines for putting in place a much broader
+integrated play book. The protocols exist internally. The
+institutional knowledge, especially after the last year and a
+half, exist internally. What we are doing now is going through
+the process of working through getting it documented and having
+something that will serve us in three or four years.
+ Chairwoman Velazquez. Mr. Preston, my concern right now is
+that we are six months into the next hurricane season, summer.
+And based on your answer, then we can conclude that you still
+do not have a written plan, disaster plan, based on the key
+elements that were recommended by the General Accounting
+Office.
+ Mr. Preston. What I would tell you is we have an ability to
+respond to disasters today, whether they be hurricanes or
+earthquakes, like never before. We have a system capacity that
+is about four times what we needed for Hurricane Katrina. And
+indications are that it could expand beyond that.
+ We have facilities in place right now. We have an extremely
+large existing workforce, recently trained workforce, that is
+no longer with us that we could bring back in, and reserve
+corps. We have relationships throughout the federal government
+that are dramatically improved. And our coordination has
+improved.
+ Now, what I don't have is all of that documented in a play
+book for you. If something hit tomorrow--
+ Chairwoman Velazquez. Well, it is not only for us. It is
+just for your agency and for everyone. We saw. And we were
+here. We saw the disarray of the agency, the confusion, not
+only in the Gulf Coast region, where people were suffering and
+lost their properties and didn't know where to go and then the
+disarray that was going on at the agency because DCMS wasn't
+working at capacity because the training of the people was not
+in place because you didn't have the manpower on the ground in
+the region.
+ It is not only a plan for us, the Committee. It is a plan
+for the agency to be effective. And it is the plan that has to
+be predicated on the simulations and the kind of needs based on
+whatever scale of disaster we will be confronted.
+ When you mention now that you are going to have 8,000
+capacity on the DCMS, what do you base that number on?
+ Mr. Preston. Extensive stress testing by IBM, who is the
+contractor. And the stress testing that they did to the system
+went up to the 8,000 level. And it had indicated that there was
+significant additional capacity above that.
+ Chairwoman Velazquez. Mr. Shear, do you really think that
+8,000 will handle a large-scale disaster?
+ Mr. Shear. There is a trade-off between capacity and how
+much we have to worry about could the SBA serve victims of
+another major disaster? The question becomes, well, SBA is in a
+better position now, certainly, with 8,000, than it was before.
+It is relative. Whether it could meet its goal of 21 days to
+process loan applications, it would be hard to say.
+ In terms of the 8,000, I certainly am encouraged if, in
+fact, IBM has done the stress testing to ensure that there are
+8,000 concurrent users. But this has to be a part of a broader
+framework of not only risk evaluation but how do the different
+tools fit together. The reserve corps, office space, and other
+elements of technology really have to fit together to see, you
+know, how that 8,000 would play out in that broader framework.
+ Chairwoman Velazquez. Thank you.
+ Mr. Preston. Can I comment on that just for a second? Madam
+Chair, I am not as concerned about the 8,000. The 8,000 with 2
+shifts would give us 16,000 users. And in that center, we never
+had even 3,000.
+ The issue I think is exactly what Mr. Shear mentioned,
+which is expanding the people, expanding the other issues. And,
+as I have told people, I am pretty comfortable today based on
+the expansive situation that we have in place. We are very
+well-prepared today. My concern is three or four years from
+now.
+ And if the agency shrinks in size, if our facilities shrink
+in size, and then we have to ramp again like we did last year,
+that is what we need to focus on.
+ Chairwoman Velazquez. Well, let me just say--and I am going
+to make this statement and then move to Mr. Chabot--if 8,000 is
+good enough, then why do you still have unprocessed
+applications to this day?
+ Mr. Chabot?
+ Mr. Chabot. Thank you very much, Madam Chairwoman.
+ Mr. Preston, as I mentioned in my opening statement, you
+are in a difficult position obviously because you have only
+been at the SBA now for about seven months. And this happened a
+year and a half ago. So you are essentially trying to fix
+someone else's problem. So it is a difficult situation.
+ But let me ask you first, has the DCMS system been tested
+at its 8,000-user capacity? And is the majority's concern about
+a full-blown test well-founded?
+ Mr. Preston. DCMS has been tested. And I would be confident
+that it can handle that and potentially additional, which is
+significantly beyond Katrina.
+ I would also like to say, just to your opening comment,
+that I know I am coming after the event, but that is one of the
+reasons I am here. And it is my privilege to serve.
+ Mr. Chabot. Thank you.
+ Next, what coordination did the SBA have with other
+agencies, like FEMA or state and local governments?
+ Mr. Preston. Well, the day after Katrina, our district
+director had set up office in the state capitol. We had people
+very quickly. Most of our people had lost their homes coming
+back to work. We were meeting with small businesses very soon
+after that.
+ We have consistently had I think fairly extensive
+coordination with agencies, both federal and local. And where
+we have had problems with that coordination, up front we did
+have some issues in getting the applications from FEMA. There
+were some issues that caused a lot of applications to come to
+us that probably shouldn't have. And we have worked through
+those issues with FEMA so that it won't happen again.
+ Other than that, I think our coordination has been pretty
+extensive and continues to be.
+ Mr. Chabot. Thank you.
+ Ten billion dollars in loans were approved, but how many
+were canceled? And how many loans are actually to be disbursed?
+ Mr. Preston. Okay. 3.7 billion loans have been canceled or
+reduced. These are people who get insurance payments, so they
+no longer need or are allowed to get the loans under the
+federal law; grants; they have access to private resources. And
+that is very much in line with other disasters we have seen.
+ About 5.1 billion has actually been disbursed. That last
+1.9 is what remains to be disbursed. These are people we are
+ready to disburse funds to. And in many cases, these people are
+not ready to move forward. They don't have insurance in some
+cases. They can't get access to records. They have not chosen
+to move back into their neighborhoods in some cases, for
+reasons that all of you are familiar with.
+ So when we look at our backlogs and we look at our time
+lines, we are for the most part being very responsive to those
+people.
+ Mr. Chabot. Can you tell me what the approval rate for the
+four 2004 Florida hurricanes was?
+ Mr. Preston. I don't have that exact percentage for you. It
+was 32 percent. I am sorry. I just got it.
+ Mr. Chabot. Thank you.
+ Mr. Preston. I knew it was significantly lower than the
+current hurricane, than the 2005.
+ Mr. Chabot. Right. And isn't your approval rate largely
+affected by the financial demographics of the area?
+ Mr. Preston. Very much so. This was in line with the
+Northridge earthquake. It is much higher than the 2004. It is
+lower than Hurricane Andrew, for example. It very much has to
+do with demographics.
+ Mr. Chabot. Thank you.
+ Mr. Shear, let me turn to you for a couple of questions.
+Should the SBA consider contracting out disaster loan
+processing to other entities as they supplement to its own
+office? And would the SBA have the capability of providing
+oversight to private loan processing contractors while still
+performing disaster loan processing itself?
+ Mr. Shear. It is really an excellent question. And I will
+answer it based on the work I am testifying on today and other
+work we have done at SBA. In this work, we do not evaluate the
+efficacy of such of including private sector partners, namely
+financial institutions. So we didn't look at that avenue in
+this work.
+ I will just make an observation based on a lot of work we
+have conducted over the last decade dealing with SBA's Office
+of Capital Access if that we had many concerns going back with
+oversight of lenders, loan monitoring, and the tools that SBA
+had when it delegated authority to private sector lenders. And
+SBA has made great improvements over the last decade in that
+arena.
+ And what I would hope is that if SBA is again, as I think
+the agency is planning to do to partner with private sector
+lenders that they will be very cognizant of the oversight
+structure you need when you have private sector lenders that
+are able to basically become a distribution mechanism for
+government guarantees.
+ Mr. Chabot. Thank you. My final question, Mr. Shear, has
+the SBA been at all defensive in dealing with the GAO or have
+they been forthcoming about their inadequacies and willing to
+change to ensure an improved response for the next catastrophic
+disaster?
+ Mr. Shear. It is a difficult question to answer because it
+is kind of like it is all relative as far as different
+agencies. One thing I will say is that the interaction
+currently--and I am glad to be here with Administrator
+Preston--is that it has been a very constructive engagement in
+terms of interaction of us providing information from our
+evaluations that might be helpful in helping SBA get to the
+next level of coming up with a comprehensive plan and
+implementing our recommendations.
+ So I would certainly say that it has been very
+constructive. I know behind me Herb Mitchell, who through this
+whole trying period has been in charge of the Office of
+Disaster Assistance, has already been very cordial, very
+professional, and very constructive in our relationship with
+each other.
+ So it has been positive, what we call constructive
+engagement.
+ Mr. Chabot. Thank you. So what I hear you saying is it is
+improving?
+ Mr. Shear. It has improved. And I think it certainly has
+the elements of what we call constructive engagement.
+ Mr. Chabot. Thank you very much. I yield back.
+ Chairwoman Velazquez. Now the Chair will recognize Mr.
+Jefferson for five minutes.
+ Mr. Jefferson. Thank you, Madam Chair Lady.
+
+ There is so much to talk about here. I thank you for the
+work you have done. And I know it is a big job. Mr. Preston, I
+guess, or either one of you -- I don't know which I should ask
+this. There is a -- we are very concerned about the training
+that people had who came down to make loan decisions.
+
+ We have a very limited staff, as I pointed out last week.
+We went in the last six years from 30 people down to 9 people.
+We don't have a loan director. We don't have information to
+direct and a few other very key people.
+
+ Yet, when the SBA disaster relief people came down, they
+were to be trained by our small office. After that, the office
+had no real interaction with them. They went on their way.
+
+ Have you looked at the impact on the efficacy of this whole
+process by -- this goes back to how folks may be better trained
+and how our office offices may better integrate with the
+dispensation of that work, as opposed to just kind of saying,
+``Hi,`` ``Good-bye,`` a little training, and they go away? How
+do we make this thing get a small business hometown kind of a
+feel to it, as opposed to what we have this time around?
+ Mr. Preston. Yes. This was an issue that came up shortly
+after I came into the agency. We had an off-site with all of
+our leadership. And we are very close to completing a plan to
+have much better integration between the district offices and
+the people that come in from outside the area to help process
+loans.
+
+ The other issue that you address -- and this is something
+that is being driven by people in those district offices based
+on what they think needs to happen. So we are getting that
+feedback from the field.
+
+ The other issue you mentioned, which was a big challenge we
+had, was training. We had to ramp up very quickly. And there
+were challenges on the training side. There are just no two
+ways about it.
+
+ And the way that we are dealing with that is two ways.
+Number one, we are expanding the number of people in our
+reserve corps that are kept up to date in training. They don't
+work for us. They come in several days a year for training. And
+then when they get deployed, they are up to speed.
+
+ The other thing as part of this field engagement plan is we
+are beginning to look at how to train people in the districts
+more effectively because they don't always have the training
+they need to help those people. So we are hitting it from both
+angles.
+ Mr. Jefferson. How many people are in the pipeline now?
+ Mr. Preston. already in the operation today we have about
+2,200, which is still very large. We have a reserve corps of
+another 750, which is these continually trained people. And
+then we probably have close to another 1,000 who are no longer
+with us who have recently been trained.
+ Mr. Jefferson. I know I don't have much time. On the turn-
+down rate, I mean, everything else having been looked at, the
+big issue is, how do folks get loans approved? And folks, 98
+percent of those approved have gotten their money, but how many
+were turned down of the ones who applied? Have you looked at
+how we can improve in this area because that is really where
+the rubber meets the road there.
+ Mr. Preston. Yes. It is a challenge because we are a
+lending institution. Ultimately we want to make sure that we
+work with people to be able to repay.
+
+ The thing I would mention is we have very low interest
+rates, right now under three percent. And we can go out 30
+years, which generally means for a life-sized loan, a borrower
+is going to have 70 to 80 percent lower monthly payments. And
+so we do still look for those people to be able to make that
+level of monthly payments because we don't want them to take on
+debt that they can't repay. So what I would tell you is --
+ Mr. Jefferson. What was the turn-down rate in our storm? Do
+you know --
+ Mr. Preston. The decline rate in your storm was 55 percent.
+The approval rate was 45.
+ Mr. Jefferson. Did it apply with homeowners and businesses
+equally or was it more in one?
+ Mr. Preston. Homeowner was about 44 or 43 percent.
+Businesses, which are many fewer, was a good bit over 50
+percent.
+ Mr. Jefferson. What was the major reason for the turn-downs
+if you can just categorize it in some sort of a way?
+ Mr. Preston. The major reasons for the turn-down would have
+been credit history and ability to repay.
+ Mr. Jefferson. Now, the ability to repay, how did you judge
+that in this storm?
+ Mr. Preston. We look at ability to repay based on where
+they have been historically. If they have been impaired by the
+storm or are going to take a period of time to get back to
+work, we generally do not take that into account. We give
+people leeway for that.
+ Mr. Jefferson. Well, the big complaint has been that people
+are saying that it is going to take a long time to get back on
+their feet, a long time to get folks back home. And the agency
+is saying, ``Well, we don't know if you are going to be able to
+make it.``
+
+ It has nothing to do with credit history and that sort of
+thing. It has to do with the toughness of making a decision
+about how successful the business is going to be going forward
+given the nature of the disaster. And that is something that is
+a problem for us.
+ The last thing is, if I might, Madam Chair Lady, the banks.
+Many banks were clamoring to get involved here to help get
+these loans out. They were local banks. You talk about the idea
+of getting a face with an application and making sure that
+people are treated, you know, with courtesy and with
+understanding. Banks are there ready to do this. Many have
+already been approved by the SBA as banks they work with every
+day. Yet, they couldn't get fully involved.
+ Why don't you look at some way you can meet these concerns
+Mr. Shear expressed about how these banks could be monitored
+better and then put them in the business of helping you get
+these loans out, helping to make approvals?
+ Because years ago, 1,000 years ago, I served on a bank
+board. The questions used to always come up this way. When
+everything else was equal, you would ask somebody around the
+table, ``Do you know this person?`` And that would be the basis
+many times of making the decision.
+ If somebody said, ``Yeah, I know such and such and such,
+know a little bit about what he is doing,`` it would make some
+sense. This thing gets sort of moved from what is happening
+down on the ground until you really don't get decisions out of
+it. And I just want to know if we can't use our banks more
+effectively.
+ Chairwoman Velazquez. Time expired. Now I recognize Mr.
+Buchanan for five minutes.
+ Mr. Buchanan. Thank you, Madam Chair.
+ Let me mention being the only member here on this Committee
+from Florida and also being very much a part of the Gulf Coast.
+And my wife was up at Katrina with our church. So we are very
+sensitive to what is going on there.
+ We had eight hurricanes in two years. And obviously I am
+very concerned about, you know, anything that borders the Gulf
+Coast or any of the coastal communities.
+ Also, my experience last year I was Chairman of the Florida
+Chamber and a board member. We had in our chamber 137,000
+businesses. Ninety percent of those businesses were 50
+employees or less and created 90 percent of the jobs in
+Florida.
+ So I guess my question is really a couple of things, really
+one of capacity. Thank God we didn't have many storms last
+year, but we had this tornado caused about $80 million worth of
+damage just outside of Orlando a few days ago. Normally we
+don't get those that time of the year, but it is capacity.
+ What is the underwriting criteria during SBA normal loans
+somewhere else, in Montana or somewhere, compared to when you
+have a disaster? And then my question is you might get the
+funding. How do you have the capacity to process those loans.
+You know, Florida is 18 million people. I am just looking at it
+from that standpoint. You look at the whole Gulf Coast. So it
+is a capacity issue I would like to know and underwriting
+criteria as well.
+ And then the next thing is you have offices in Jacksonville
+and Miami. I would like to know how those offices are
+functioning and how well are they staffed because, as someone
+mentioned, we are coming back to hurricane season June 1, but
+ideally most of the hurricanes seem to hit in August and
+September.
+ Thank you.
+ Mr. Preston. In terms of capacity, let me just tell you, as
+I mentioned, I was down last week surveying the tornado damage.
+Those loans are being approved within a week or two. We have
+gotten very good feedback from the area. Obviously, as
+devastating as that was, it is not a Katrina. Just I wanted to
+mention that.
+ Capacity comes in a number of ways, but it is primarily
+having the systems in place that can handle the volume, having
+the people, and having the facilities, and then having the
+integration with other agencies where you need to kind of
+interact with them. I think the Chairwoman was articulate in
+kind of describing kind of the broader elements of that.
+ On the credit side, when we do typical small business
+loans, we are not actually making the loan. The bank makes the
+loan, and we guarantee it. So the bank issues the credit
+criteria. They can dip deeper into the credit pool with our
+guarantee, which goes anywhere between 50 and 85 percent. So
+they generally do go deeper.
+ In the disaster loan program, I would tell you we go very
+deep. And we look specifically at an ability to repay on a loan
+that is generally going to have a much smaller monthly payment.
+And we are really trying to press, push as hard as we can
+because we are trying to help people get back to work or get
+their homes back or whatever. So you would see us dig deeper in
+that program than we typically would.
+ Now, with respect to your question about Jacksonville and
+Miami, we think those offices are functioning well, but what I
+would tell you is in hurricane season, where we really get the
+most support--and this gets back a little bit to Congressman
+Jefferson's comment--is people coming from outside setting up
+multiple sites--we have five sites right now in the Orlando
+area, some in tents, some retirement centers. That is where
+most of the local horsepower comes to help people.
+ The district offices work with them on media and outreach
+and getting in touch with local chambers and that kind of
+thing, but a lot of the horsepower comes from outside the state
+when a disaster like that happens. I shouldn't say ``outside
+the state'' because we have so many reservists in Florida they
+are generally from inside the state, but they are not in those
+two district offices.
+ Mr. Buchanan. I guess one thing I wanted to understand is
+in a normal loan underwriting by the SBA compared to a disaster
+situation, what is the timing difference normally between those
+two situations?
+ Mr. Preston. The credit criteria or the time to get the
+loan?
+ Mr. Buchanan. Well, time someone comes in and makes the
+request to the time where they get the money.
+ Mr. Preston. Right now 98 percent of our loans are being
+approved within 14 days for homeowners and 16 days for
+businesses. We put out there a goal of 21 days, but internally
+we manage to do a tighter goal. In Florida, many of those are
+happening right now and under a week.
+ Mr. Buchanan. Thank you.
+ Chairwoman Velazquez. Recognize Mr. Shuler for five
+minutes.
+ Mr. Shuler. Thank you, Madam Chairwoman.
+ Mr. Preston, thank you so much again for coming back and
+speaking in front of the panel again. We can look back at all
+of the decisions that were made in the past, if you will, the
+armchair quarterback decisions that we could possibly make of
+the decisions that were both wrong, lack of resources, but,
+going forward, what area of the agency do you feel has the
+largest room for improvement and/or the resources that are
+needed in order to accomplish the next major disaster that we
+could possibly have and looking forward, instead of looking
+back so often, as we do, we can certainly see in front of us by
+looking forward, instead of looking in the rear-view mirror,
+but we can certainly learn from the decisions that were made in
+the past.
+ What areas do you feel that would deserve the most room for
+improvement or the resources or the obstacles to overcome?
+ Mr. Preston. I think what we need to do is--you know, we
+are talking a lot about today. I think what we need to do is
+talk about three or four years from now in addition.
+ And I am concerned about the fact that today we have over
+2,000 people in this operation, expansive facilities. A lot of
+people have been recently trained. But if over the next 3 to 5
+years this operation winnows down to 800 people again or 1,000
+and we have another catastrophe, we will need to look at a
+ramp-up again. Today ramp is less of an issue because we have a
+lot of trained people.
+ And so what we need to do in the coming months is say,
+``What does that ramp look like? How do you get people quickly
+trained? How do you get facilities quickly? And also,'' to Mr.
+Jefferson's comment, ``how do you engage banks potentially to
+come in and help out when our capacity gets maxed out? And what
+as a government should we be doing internally? And what should
+we be doing with the private sector?'' That I think is the
+longer-term issue that we need to address. And it is very
+important for us to work closely with this body in determining
+that. But that is where I see kind of where we still have a
+fair amount of work to do.
+ Chairwoman Velazquez. The Chair will recognize Ms. Fallin
+for five minutes.
+ Ms. Fallin. Thank you, Ms. Chairwoman. I appreciate that
+and Ranking Member.
+ And Administrator Preston, I appreciate you coming today. I
+know you took over during a very difficult time and are trying
+to do your very best to make this agency work to its best
+possible. And I also appreciate the fact that this is my first
+time in Congress and I have seen you twice. So you have been
+pretty bold to come before this Committee two different times.
+ I had the opportunity to serve 12 years as Lieutenant
+Governor of Oklahoma. And we had several different major
+catastrophes in Oklahoma with the Murrah Federal Building
+bombing, in which we had a lot of small businesses that were
+hurt. And, of course, we had some major tornadoes that came
+through Oklahoma. And I will tell you that during my years as
+Lieutenant Governor, the SBA has been very responsive to our
+small business community in the past to step forward.
+ And specifically I would call them the day of the disaster.
+And they would meet with me that day. And we would be out at a
+press conference the next day talking about what Oklahoma would
+do with the SBA to help our small businesses get back on track.
+ You know, sometimes in government, we do things to help
+business. Sometimes we do things to hurt business. My question
+to you today is, do you see anything from your past experience
+in working through a major catastrophe that we do in Congress
+that hampers you in your role at the SBA or processing
+allowances or any room for flexibility waivers? Is there
+anything that we can do? Are there any laws that we have put in
+place that impede you and your agency from serving the public
+to the best of their ability?
+ Mr. Preston. Thank you. I think this body has been pretty
+responsive. And much of that responsiveness preceded me. But
+the nature of disasters is unpredictable. And I know the
+funding of them is kind of episodic. And this body has come
+through with supplemental funding when the agency has needed
+it, which has been very important.
+ Also, I think increasingly this body has been helpful in
+thinking about ways to get that support outside the agency
+through private sector support. And we did reach out to the
+private sector to an extent with some of our operations last
+year. And now I think we will be reaching out to talk to the
+bank sector as well.
+ What I would say is to the extent that we can continue to
+have a constructive dialogue and that we can continue to look
+creatively at how best to handle a disaster that hits with a
+fury in a scale that is just something--you know, it is very
+difficult to have 4,000 people on your staff when you need 800
+or 600 all the time but ultimately if something like that hits
+you need 4,000. So what I would ask for is to have a
+constructive ongoing dialogue to come up with creative
+responses. And that is really all I can ask.
+ Ms. Fallin. Ms. Chairman, if I can just further? I would
+like to encourage you. I know in Oklahoma during our disasters,
+we always turned to the private sector, too, to help us because
+going from 800 to 4,000, as you suggested, is something that is
+quite a challenge. But any way that you could work with the
+private sector, especially the loans, as we have discussed
+earlier in processing things or identifying even private sector
+people that could help in time of a crisis--
+ Mr. Preston. Yes.
+ Ms. Fallin. --to get your work done would be helpful.
+ Mr. Preston. Thank you.
+ Chairwoman Velazquez. Mr. Braley?
+ Mr. Braley. Thank you, Madam Chairwoman.
+ Mr. Preston, thank you for returning and answering
+questions for us here today on these very important subjects.
+When I was talking to Congressman Melancon out in the hallway
+between a new panel taking its seat, one of the concerns he
+brought to my attention was the reverse direction that
+technology moved in as a part of the processing of these loan
+applications.
+ And as someone who in my business depended extensively on
+technology in my daily work to be able to provide services to
+the people that I represented in an efficient manner, one of
+the things that was disturbing to me about his comments was
+that we were going from a system that was designed to allow for
+the fast and orderly processing of loan applications back to a
+paper form of loan application processing, where people were
+filling out applications in pencil.
+ One of the things that impacts that is the agency's ability
+to provide access to technology in the midst of a disaster. And
+I am wondering whether your analysis of some of the failings of
+your predecessor and the administration as a whole during this
+crisis led you to any conclusions about how the Small Business
+Administration can provide greater access to technology in a
+crisis situation to the small business owners who are in
+desperate need of loan processing in a timely fashion.
+ Mr. Preston. Yes. Well, certainly, in fact, it is in our
+early budget, and we are working on it right now. I think over
+time an online application will be very important for us.
+ I will tell you straightforward I reallocated all of our IT
+resources in disaster to focus on a lot of the deeper systems
+issues we had because, as you have heard from Mr. Shear's
+report and other comments, we had a new system that was
+implemented just before this storm. And there are just bugs to
+work out. And we needed to get that thing operational.
+ We are focused on getting an online application in place
+which we think will dramatically simplify people's ability to
+fill it out, our ability to get data input, and our ability to
+be efficient responders. But you are right. It is a very
+important point and one that we are focused on.
+ Mr. Braley. One of the components of the GAO report talking
+about recommended changes, which apparently the agency is
+embracing, is with this new contractor dealing with technical
+support, software changes, and hardware upgrades. I would be
+interested in knowing your thoughts about how your agency
+approaches the concept of hardware.
+ As someone who has never had a desktop computer in my life
+and who when I had the opportunity to purchase my computer for
+my office here in Congress was able to get a notebook computer
+with remote dial-up that can allow me to access the Internet
+anywhere any time with battery power, have you factored that
+into your agency's planning on the types of technology that
+will be more beneficial--
+ Mr. Preston. Yes.
+ Mr. Braley. --in crisis management and response to the type
+of problems we have been talking about here today?
+ Mr. Preston. Yes, absolutely. You know, a great example of
+that is--and let me just say these systems problems had to do
+with major servers. And they were a different kind of system
+than laptops. But on the laptop side this past year, we worked
+very hard to upgrade the infrastructure in our district
+offices.
+ So those district offices now have personal computers that
+would be able to work in most cases remotely if we needed
+somebody, for example, in Oklahoma to help people in New
+Orleans. And so upgrading those components of hardware will be
+important in us going forward and being able to provide a much
+more creative response to large disasters.
+ Mr. Braley. As part of the loan application processing, did
+the SBA provide kiosks or other types of remote access to
+technology in these disaster-stricken areas, where people did
+not have access to their existing technology systems?
+ Mr. Preston. What we did is we had about 120 sites that
+people could come to meet with loan counselors to go through
+all of their documentation to give help filling out all of
+their forms. It was a very extensive effort in the field. And
+we still have a handful of those offices in place where people
+come in to ask questions.
+ Frequently what we find is people very understandably are
+distraught. This is a somewhat complicated process getting
+another home loan. And by having on-site locations where people
+can go to and sit with a counselor is very, very helpful.
+ Mr. Braley. Thank you.
+ Mr. Shear, I am looking specifically at page 8 of your
+remarks dealing with SBA steps that have been taken to prepare
+better for future disasters. So much of the first portion of
+that section of your report deals with the areas of technology
+and contracting, which happens to be the subcommittee I am
+chairing on this Committee.
+ Do you have any suggestions for further oversight that need
+to be done to address some of the concerns that have been
+identified and make sure that the SBA is moving forward in a
+direction of responsive management of those issues so that we
+are not back here in the future discussing them?
+ Mr. Shear. I greatly appreciate that question. One of the
+roles we often play is when we are asked to go back and look at
+what progress has an agency made. And I hope what is clear from
+not only page 8 of the statement but from our testimony, we
+think technology can be a large part of the solution,
+assessment of the risk exposure.
+ But one of the situations here that was very different than
+when you have localized flooding or weather problems is the
+size of the disaster and how do you come up with a scaleable
+plan. And there can be certain efficiencies when you deal with
+very large catastrophes that can be addressed.
+ And even the problems with saying how many loan processing
+people do you need, to what degree do you have to be
+transferring from a paper system into an automated system back
+into a paper system, all the things that occurred over this
+period. If you are really trying to reach with the largest
+disasters, even an Internet-type function, which reduces the
+amount of paperwork, you know, they were scanning in documents,
+things like that, this can be a big part of the solution. And
+it would be something that certainly we would be more than
+pleased to have serve this Committee and your subcommittee if
+you asked us to in terms of following up on these initiatives.
+ Mr. Braley. Thank you. I yield back the balance of my time.
+ Chairwoman Velazquez. Mr. Gohmert?
+ Mr. Gohmert. Thank you, Madam Chairman. And I do appreciate
+you all being here and testifying.
+ I would like to follow up on something that came up
+earlier. And that is with regard to the approval rates for
+applications for assistance from the 2005 Gulf Coast
+hurricanes. You had mentioned, Mr. Preston, that the approval
+rate was around 45 percent. I was wondering since we had
+different states hit, we had, of course, Louisiana, Alabama,
+Mississippi, and then my own state in east Texas, do you know
+what those approval rates were as broken down by states?
+ Mr. Preston. I don't have those breakouts here, but we have
+those internally. And I could provide those to you.
+ Mr. Gohmert. I am just trying to get to what would be a
+major reason for having, say, under Hurricane Andrew a 60
+percent approval rate compared to a 45 percent rate of the 2005
+hurricanes. Do you have any idea why there was such a disparity
+in those rates?
+ Mr. Preston. Well, it would most likely be a different
+ability to repay on the part of the borrower, different
+demographics.
+ Mr. Gohmert. So you feel like there are more deadbeat
+borrowers in these areas needing assistance than perhaps after
+Andrew?
+ Mr. Preston. First of all, I certainly wouldn't use a term
+like that. And the other thing that I think is important to
+understand is many of these people who come to us have to come
+through us before they can get a FEMA grant. Okay? So they have
+to come through our process. Many of them don't even want a
+loan. So I think that is important. Okay?
+ So they come to our process before we send them to FEMA. In
+some cases, if they can't repay, our view is we should not
+saddle somebody with a very large piece of debt that they can't
+repay. Just that is--
+ Mr. Gohmert. That goes without saying, but sure. You are
+not assisting them if you are loaning them money that is just
+going to take them into--
+ Mr. Preston. That is right. And if you are lending them the
+money that is substantially easier to repay, as I said, we will
+go out 30 years. We have very low interest rates. Often this is
+70 to 80 percent below a typical amortization.
+ Mr. Gohmert. Right. But, here again, those are the same
+concerns you would have had, not you personally but the
+indefinite you, speaking of this, with Andrew.
+ Mr. Preston. Also in Andrew, the amounts were much lower.
+They were significantly lower. The loan amounts were
+significantly lower, which generally means people had much more
+insurance or the damage wasn't as much.
+ Mr. Gohmert. Okay. That is helpful.
+ Well, I am also curious. You know, we are aware that so
+much of the damage in Louisiana was caused by the levee
+flooding. And so much of the area adversely affected so
+tragically was actually below floodplain. I didn't know if that
+might have been a factor because I know in east Texas when a
+river floods, we get all of these federal agents running in and
+saying, ``This is now wetlands. You can't build. You can't do
+anything on it.''
+ I didn't hear anybody running into New Orleans and saying,
+``These are all now duct blinds. And you are not going to be
+able to rebuild or improve.'' Did that come into consideration
+at all, areas that may be in flood plains?
+ Mr. Preston. The biggest issue with respect to floodplain
+areas I think really relates to the 23,000 people we still have
+in the process, which is are they ready to rebuild? Have they
+gotten building permits?
+ Generally people have guidance on this, but I know there
+are a couple of areas where people are concerned that the
+elevation requirements may raise, I think in two zip codes
+right now. So there are people that are withholding decisions
+based on some of those issues, but that does not come into the
+credit decision.
+ Mr. Gohmert. When you say there are still 23,000 people in
+the system, are these 23,000 applicants still waiting for
+action?
+ Mr. Preston. These 23,000 applicants, 20,000 of whom have
+already begun receiving disbursements. We are waiting in most
+cases for feedback from them on how they want to proceed.
+ Mr. Gohmert. So 20,000 have gotten letters saying--
+ Mr. Preston. They don't get letters. We talk to them.
+ Mr. Gohmert. Okay.
+ Mr. Preston. They get letters, you know, obviously
+documenting these things.
+ Mr. Gohmert. So according to your files, the ball is in
+their court? You are waiting for them to respond?
+ Mr. Preston. I have a record on every one of those 23,000
+people that shows what we are waiting for or what they are
+waiting for. This is a new process we kicked off five months
+ago so that we know status. I have got data that shows me all
+of that.
+ Generally what is happening is many people are waiting to
+decide what to do. What you have to understand is we provide
+people reconstruction loans. If somebody hasn't started
+reconstructing their home because they can't find a contractor,
+they haven't decided to move back in, or whatever reason, we
+are not providing the money unless they have got a use for that
+money.
+ Mr. Gohmert. All right. Thank you. And I do acknowledge and
+realize you were not in this current position when the
+hurricanes hit. A lot of cars have seat warmers. Apparently
+yours was really hot when you came into it, but we appreciate
+your work.
+ Mr. Preston. Also I do want to highlight, though, that the
+people in this department that were in the seat at that point
+are the same ones who have worked to re-engineer this process
+and take it forward. And they have stuck through it. We have
+people who have been in this operation many years who will help
+take it forward. I think they have learned a lot, and they have
+grown a lot.
+ Mr. Gohmert. Thank you. And thank you, Madam Chair.
+ Chairwoman Velazquez. Mr. Gonzalez?
+ Mr. Gonzalez. Thank you very much, Madam Chairwoman. And
+welcome back, Administrator Preston. We do appreciate the
+effort that you display. Thank you, Mr. Shear, in, of course,
+the fine work that you do.
+ I am just going to have a couple of observations and try to
+figure out what we are really dealing with here today in some
+of the testimony that is anticipated later today.
+ It seems to me Mr. Shear and from your viewpoint that there
+is no agency or department in the federal government that has
+received a passing grade for the manner in which they responded
+to Katrina and Rita. Is that a fair statement? I mean, if you
+look at FEMA. I mean, just go down the list. Do you know of any
+that basically passed the test in adequate response?
+ Mr. Shear. We have devoted a very large effort to looking
+at Hurricane Katrina and the aftermath involving multiple
+agencies. So we at GAO are looking across the board. And
+certainly there are shortcomings in leadership and execution
+involving a number of agencies, including FEMA, including the
+Small Business Administration.
+ We have a report we call a capping report that we kind of
+issued halfway through this work last summer where we do know
+some of the kind of better practices of agencies that were
+well-equipped to adjust to the demands created by Hurricane
+Katrina: The Coast Guard, Social Security to some degree, even
+as federal workers the financial center that issues our
+paycheck, that they were able to make adjustments based on
+really sound strategic planning to respond. So we do have some
+examples, but we certainly have many examples of what didn't
+work well in responding to Hurricane Katrina.
+ Mr. Gonzalez. And I appreciate the guidance that you give
+us because many times it does have to come from outside the
+agency or the department, but much of this, of course, is just
+the very scope of Katrina, something that has never been
+experienced or nearly never experienced in the United States.
+And I want to be fair to SBA and everyone else.
+ So we have yesterday, when the disaster struck. We weren't
+prepared. We didn't perform well. And you have today. And I
+would like to focus on somewhat today.
+ We are going to her testimony later. And the way that some
+of this testimony will go, I am sure, are personal experiences
+and the frustration. This testimony is based on careful notes
+that I kept throughout this long and painful process. We are
+talking about the loan process. So I hope that I will be able
+to listen to that testimony and not be called to another
+hearing.
+ But, Mr. Preston, you have brought out a very important
+point. And I think we all should be very sensitive to it,
+whether it is SBA or any other department or agency. And that
+is you are concerned three or four years down the road. We have
+to distinguish and be able to identify that which you need on a
+permanent basis so that you will be able to again, as you say,
+ramp up, enhance, or whatever, to meet the immediate needs of a
+particular disaster.
+ Things can't be as they were in the past. Of course, you
+can't be at the capacity that you presently find yourselves for
+the obvious reasons because we are working through responding
+to this disaster.
+ Once you get that caseload through, obviously you will ramp
+down, but you are pointing out that you as an administrator of
+SBA would like to plan prospectively and figure out what you
+need on a permanent basis that will enable you to ramp up
+easily, quickly, and efficiently. Is that correct?
+ Mr. Preston. That is correct.
+ Mr. Gonzalez. And I want to tell you that I don't think
+there is anyone on this Committee that will not join that
+effort and that we appreciate the sensitivity that you are
+bringing to that.
+ Now, I know many things went wrong and hopefully that we
+will learn from them. Right now it is really not about fixing
+the blame. I think President Clinton would say, ``Let's fix the
+problem first. Then we will fix the blame later. And we will
+have plenty of time for that.''
+ But, again, I just appreciate the efforts that both of you
+have demonstrated. And I would hope that we can work together
+so that when we hear the testimony from the other witnesses
+that were personally touched by this disaster, that we won't
+have a repeat performance in the future.
+ Thank you. And I yield back.
+ Chairwoman Velazquez. Thank you.
+ And Mr. Akin?
+ Mr. Akin. Thank you, Madam Chair.
+ In a separate hearing in a different committee, GAO
+mentioned, among other things, that what they had found was
+that they had identified 22,000 people who had cheated the
+government out of money relative to Katrina. These they said
+were the dumb ones. These are the ones that photocopied their
+driver's license when they sent in the bogus claim. People
+didn't even live in the area.
+ That elevated my blood pressure a little bit. Then when I
+asked them off the record, ``What do you think will happen to
+most of them?'' they said, ``Oh, they will keep the money and
+get away with it.''
+ I guess my question is, in terms of the loans and the
+aspects that we are talking about in this Committee, are we
+putting into place practices so that we are just not wasting
+government money and allowing criminals to take advantage of
+the good-heartedness of Americans trying to take care of people
+who have been hurt? Because if I had anything to do with it, I
+would put every one of those suckers in jail for five years.
+Louie says I am being a little bit soft, but, anyway--
+ [Laughter.]
+ Mr. Preston. Would you like either?
+ Mr. Akin. Either one, both. I have got enough time. You can
+both answer probably.
+ Mr. Preston. I think what I would say is it is probably a
+lot more difficult to engage in fraud in a process like ours
+because we have loss employees going to homes. We do title
+searches on property. We require a significant amount of
+documentation, like you would on any home financing.
+ So I think the challenge we have had historically is a
+different one, which is how do you take a relatively complex
+process, requires a lot of documentation, and simplify it for
+people. So although fraud does exist, it is not nearly as
+prevalent in other processes that wouldn't require as much
+documentation and oversight.
+ Mr. Shear. I would echo that when we do a program
+evaluation, such as the ones that we did here, there are
+certain flags we look for. Do we have to bring in our
+investigators that really look for fraud investigation? And
+those flags then go up in this program. And I think it is the
+nature of the program, as Mr. Preston said, that caused us to
+not worry about it. It is more prevalent with grant programs.
+ And so our resources, including our investigators, who
+really investigate in a different fashion, forensic
+investigators in our program evaluators, have focuses on FEMA
+and other grant programs.
+ Mr. Akin. It would just seem naturally in that people have
+to pay back. The people that are looking for just taking money
+and don't want to have to pay anything back, they are going to
+go to other places probably. So you don't have too much trouble
+in that area, then.
+ Mr. Shear. No.
+ Mr. Akin. Thank you very much. Thank you, Madam Chair.
+ Chairwoman Velazquez. Mr. Altmire?
+ Mr. Altmire. Thank you for being here. Mr. Preston, this is
+the second time I think in a couple of weeks. Thank you for
+coming before us.
+ And we have talked at length--and we are going to with the
+next panel as well--about all the problems. And we know what
+those are. I just want to say that I do have a comfort level
+with Mr. Preston and Mr. Shear that you understand the problems
+that took place and that you want to remedy that and make sure
+that it doesn't happen again.
+ So my first question would be, because this Committee is
+going to continue to take a look at this situation and my
+Subcommittee on Oversight and Investigation is going to
+continue to take a look at it, how can we work together
+productively to: a) take care of everything that has happened
+in the past and resolve those issues but to make sure in the
+future that nothing like this ever happens again?
+ Mr. Shear. Okay. I will go ahead. I hope what becomes
+apparent from the testimony and our two reports is that we are
+very fact-based. We were looking at what happened in response
+to the Gulf Coast hurricanes.
+ But much of our attention, especially in the latter stages,
+even before the July report was issued, is what lessons can be
+learned from this. How can we work going forward? How can we be
+prospective in terms of thinking that we shouldn't let this
+happen again? How can we as an agency better prepare SBA and
+the Congress to serve victims of very major catastrophes, such
+as the one that we posed with? So I think that process is
+occurring and it is a matter of time will tell as far as how
+well that process works.
+ I am encouraged by what has been evolving as of late in
+terms of our interaction with the Small Business
+Administration.
+ Mr. Preston. What I would say is I am encouraged by the
+dialogue. I have full confidence that this Committee under
+Chairwoman Velazquez's leadership will stay heavily engaged
+with us on these issues, which I think is a very good thing.
+And so it really is I think maintaining that dialogue,
+understanding what we are trying to get to here.
+ I think the Committee has already acknowledged kind of
+where we are trying to go. But, you know, I feel very good
+about the support and engagement of this group in getting us to
+the right place.
+ Mr. Altmire. And I do want to say again that I do get the
+sense that you definitely are sincere in that and you do want
+to work with us. And I would just say we return that and we do
+want to work together and hopefully improve this moving
+forward.
+ The one other issue, in the GAO report, it says that the
+SBA had not effectively planned for the space requirements that
+would be warranted by a large-scale disaster and had not
+developed a long-term strategy to help ensure that it could
+acquire necessary and suitable space in the case of an
+emergency, which leads to the question--I am sure you have
+given this some thought--what is the SBA's plan to acquire
+necessary and suitable space in the event that a large-scale
+disaster disables the agency's primary processing facilities in
+Fort Worth?
+ Mr. Preston. Right. We have significant additional space
+right now relative to our requirement. And as we look to reduce
+that space based on the current capacity, we are working
+closely with GSA to institute sort of an expansion capability.
+And those are discussions we are having right now.
+ Chairwoman Velazquez. Mr. Sestak?
+ Mr. Sestak. Thank you very much.
+ Mr. Preston, thanks for your time. I wanted to ask, it
+appears as though the demand that was so overwhelming had a lot
+to do with, as you had brought up, capacity. So my question
+is--and to some degree, I know you have addressed it--the
+difficulty is predicting the capacity that is needed for the
+future. What are the factors that you used or are using in
+order to predict the needed capacity for the future?
+ Mr. Preston. Yes. I think there are a couple of different
+predictive tools that are relevant here. Once a disaster hits,
+we need to be able to very quickly implement a staffing and a
+facilities plan that would enable us to handle an anticipated
+scale.
+ We have internal models that look at that. And generally we
+do a pretty good job of anticipating the volume that comes out
+of that. What I would tell you is underneath that, it is much
+more critical to ensure that you have the underlying processes
+and the systems, etcetera, etcetera, to enable you to meet that
+scale.
+ So one piece is predictive. The second piece is
+implementation. The underlying implementation is critical.
+ Mr. Sestak. The reason I asked is it seems to me that you
+have a different philosophical approach than what GAO has asked
+you to do, I think. They felt that the two primary things that
+needed to be done as you go into the future were good planning
+based on simulation. They also said that you needed time frames
+laid out for producing this.
+ When you read your testimony, it is not that you are
+dismissive of that, but you make a very strong statement, like
+you just did, that while addressing these issues, those two
+overall, planning, predicting for the future, as you just said,
+they help improve SBA's preparedness.
+ And then you turn immediately to the underlying processes
+that when something happens, are we ready? And you do have
+those models that predict that the characteristics of this
+ongoing disaster is this, so we need to do that.
+ It seems to me--and the hardest thing that I ever saw to do
+after 31 years in the military--what really hurts the most is
+that difference in the philosophical approach is you are
+backing away, it appears, from the predictive side. You looked
+into the insurance models, for instance, and seemed to dismiss
+them because they are based on 100-year types of occurrences.
+And, yet, that is what FEMA uses, 100 years and 500 years
+predictive, to come up with what flood plains are. And you
+can't get FEMA's loans unless sometimes you go through Small
+Business first in a disaster.
+ And so philosophically my concern is while you are able to
+go through your testimony and see how much you have improved
+based upon what happened in Katrina, is that what you should be
+planning upon in the future?
+ And so my real concern, sir, is that you have kind of
+nodded at GAO's predictive modeling and said, ``I am going to
+gear up when it happens because I now know I can gear up to
+2,200 employees for disaster of which 750 are my reserve
+disaster core'' and, yet, there is really no predictive
+planning for the future on this.
+ Mr. Preston. Let me address that. I think what GAO came up
+with is a very important set of issues in planning. And I think
+when we talk about surge plan, what we need to be able to do is
+specifically with the kind of models that the GAO report
+suggests is be able to say--you know, Katrina was somewhat over
+400,000 applications--what could happen to bring a million
+people to our doorstep? And we have already begun looking at
+insurance models.
+ We have talked with a number of other outside modeling
+groups to look at their model. We are having discussions with
+FEMA. So I apologize if in any way I seem dismissive of that
+because I think it would be very important for this
+conversation for us all to be able to say, ``What does it mean
+to be able to surge to X? And does that meet the need in any
+kind of eventuality or are we agreeing that it wouldn't?''
+ So I concur with GAO's recommendation there. And we already
+are beginning to investigate those types of external modeling.
+ Mr. Sestak. Have you put money into that modeling? I mean,
+modeling is pretty expensive.
+ Mr. Preston. We haven't--
+ Mr. Sestak. I just know from the ones I have done in the
+military. I mean, I know you are talking. But if this is so
+important and GAO's recommendation is so important, are there
+millions of dollars placed or hundreds of thousands or
+something against, I mean, actually besides talking doing and
+investing in the right models?
+ Mr. Preston. Well, obviously this recommendation is
+relatively recent. And we're already getting out there and
+talking to people. So what I would tell you is no, we have not
+invested money in it.
+ But I think there are many others. As you mentioned before,
+FEMA looks at things. I think we need to understand what is out
+there, what is the cost, should we be leveraging what other
+people in the federal government do.
+ I am not sure that this kind of predictive modeling is the
+kind of thing that changes every month and requires a
+tremendous amount of rework all the time. I think it's the kind
+of thing where when you look at the potential events that could
+happen out there and get your head around that, you get a
+pretty good sense of the operation you are going to have to
+build.
+ Mr. Sestak. You also just mentioned working with others.
+And in your testimony, you have mentioned how you are reaching
+out to locales in other areas. What cities specifically now,
+major U.S. cities, have you sat down with in order to enhance
+your coordination?
+ Mr. Preston. Well, we have 68 district offices that are--
+ Mr. Sestak. Yes, sir. But, I mean, is there a new concerted
+type of effort that has now taken on to enhance the locale
+since that was critiqued pretty harshly in the sense of what
+happened in Katrina?
+ Mr. Preston. Well, my view is we did a good job of that in
+Katrina. So if that was heavily critiqued, I know there were
+some issues. But I think generally the people in our district
+offices are very close to local leaders, local development
+authorities. They have very consistent relationships with them.
+ Now, what has happened--and I think this may have preceded
+your entrance here.
+ Mr. Sestak. I am sorry.
+ Mr. Preston. No, no. I just want to repeat it.
+ --is what we have done--and we are in the final stages of
+working through this--is worked through a model to integrate
+those district offices because they have such good local
+coordination more effectively with our disaster people when
+they get on site. And this is a comment that Mr. Jefferson had
+earlier.
+ So what I would say we have done is because we have that
+good local presence and good connectivity, we need to leverage
+that better when disaster goes into those areas.
+ Mr. Sestak. My last question is, in your business
+intelligence tools, you have mentioned about the expanded use
+of performance metrics. What are they?
+ Mr. Preston. The expanded use of performance metrics have a
+lot to do with looking at what is happening in our operations,
+getting deeper into looking at cycle times so we understand,
+you know, what aspects of the operation are backing up or not
+backing up, having much deeper data on all of the individuals.
+ For example, we would never have known to put people in a
+records office if we hadn't seen data that indicated that
+people we having a hard time getting their records done because
+there was such a backlog.
+ Chairwoman Velazquez. Time is up.
+ Mr. Preston. I am sorry.
+ Chairwoman Velazquez. All right.
+ Mr. Sestak. Thank you.
+ Chairwoman Velazquez. We have other members here. But
+before I proceed in recognizing Mr. Jefferson, Mr. Chabot, if
+they have any other questions, I just would like to ask Mr.
+Shear what is your reaction to Mr. Preston's answer to Mr.
+Sestak regarding the agency investing in disaster simulation
+and disaster modeling?
+ Mr. Shear. It is a very important point. And we are very
+conscious of the cost of investing in that. But part of what we
+observed in our work over the period at SBA was non-attention
+to even what is available in the public domain that could be
+implemented in a pretty practical and straightforward way. But
+part of what we are looking for in a plan is to what degree can
+you leverage those resources? So we have certain ideas about
+how those resources can be leveraged. And it is a question of
+come up with a plan for a comprehensive assessment.
+ I want to make one observation on this because I think it
+is a very important one. I think what is clear is that a lot of
+attention has been paid to a very important issue, which is
+let's try to resolve issues associated with service to the Gulf
+Coast hurricane victims.
+ I mean, our hearts go out for those who have suffered
+through this. And certainly SBA and others should be trying to
+reach those victims. And certain improvements have been
+initiated to improve that. But I hope that there is a real
+emphasis on what do we do over the long haul going forward.
+ I just want to make one more observation. It has to do with
+some of the transformation plans that have been around SBA.
+Many of the transformation plans have a focus on the 7(a) and
+other major business programs that they have where over time,
+due to technology and changes in the marketplace, there has
+been greater centralization of a lot of resources. And the idea
+is that we are trying to get rid of redundancies.
+ But one of the most important things I think to recognize
+for all of us is that disaster planning involves contingencies.
+It involves in some case what you could say, backup facilities.
+They entail a cost. We are not calling for SBA to waste money.
+But at the same token, there has to be a recognition that you
+need to go through some cost to be prepared. And I think that
+so the framework, the thought process for disaster planning and
+for how to run a disaster program I think has to be different
+than SBA's overall operation.
+ Chairwoman Velazquez. In the investigation that you
+conducted based on the budget submission of the administration
+for the SBA, do you consider that the resources are there for
+the long-term disaster preparedness plan?
+ Mr. Shear. Okay. You will get a grin out of me because we
+haven't evaluated the budget submission to see whether we think
+it would be sufficient, but one of the things we are looking
+for is the idea is come up with a plan which is effective. We
+want a cost-effective means, but we want SBA to be able to
+recognize and have resources in place or at least contingencies
+in place that also entail some costs to try to position itself
+for not just the next hurricane season or the next earthquake
+but looking down, as Mr. Preston has referred to, what happens
+if a few years from now the reserve corps decline, as they did
+after 9/11. We are looking for that sort of approach.
+ Chairwoman Velazquez. Thank you.
+ Mr. Chabot?
+ Mr. Chabot. Madam Chair, in the interest of getting to Mr.
+Baker and the witnesses that have come all the way from
+Louisiana and Mississippi, if we have any additional questions,
+we will submit them in writing.
+ Chairwoman Velazquez. Thank you.
+ I will recognize Mr. Jefferson for two minutes.
+ Mr. Jefferson. Yes, ma'am. God knows I don't want to be
+disrespectful to the folks who came from Louisiana nor Mr.
+Baker, but I just want to ask this one thing. It will take a
+half second. The SBA has insinuated in this process because we
+can turn here by recovery, as opposed to the traditional
+lending programs the SBA has. And there are certain things that
+are going on now which are inflexible. I want to just ask you
+about looking at these from the point of view of flexibility
+that will help to facilitate the recovery.
+ One, Mr. Melancon mentioned earlier, the road home program.
+If you get a grant from road home, you automatically must pay
+off the SBA loan. Okay. Not so?
+ Mr. Preston. No.
+ Mr. Jefferson. But the second one is this. On the
+subordination issue, we have had folks down there who had
+equity in their homes before the storm. They go out and get an
+SBA loan.
+ They get the house fixed up using that and insurance, plus
+using other things. Now they get it re-appraised, and they have
+some equity there. They want to borrow money to go reestablish
+a business, let's say. And when they do that, they go back. The
+SBA says, ``You can't subordinate unless you pay off the
+loan.'' That retards the idea of recovery, and it makes it more
+difficult.
+ I just wanted you to think about--
+ Mr. Preston. Thank you.
+ Mr. Jefferson. --these issues of flexibility so that people
+can have a real chance to get back on their feet and get their
+businesses back, stood up, as opposed to just having a hard and
+fast rule that says, ``If you have a refinancing and you take
+cash out, you must pay off the SBA loan, as opposed to being
+able to invest it in your business and get that back, up and
+going.''
+ So those are the issues I am really concerned about, these
+issues of flexibility. That would put a sound decision we made
+to a recovery.
+ Mr. Preston. Thank you. I would love to get with your team,
+Congressman. I meant to take you through the road home
+situation because I think there is a lot more to that. And I
+will also look into this other issue.
+ Chairwoman Velazquez. Okay. I recognize that there are
+witnesses who came all the way from the Gulf Coast, but it is
+not every day that we have the administrator here. And we need
+to ask the questions that needed to be asked so that we prevent
+or avoid another situation where we will have to have not one
+more hearing but two or three or four. I wish that the
+situation that we witnessed in the Gulf Coast region doesn't
+occur again. And that is why we need to take the time to ask
+the questions.
+ And some of the witnesses that were coming from the Gulf
+Coast region because of the weather didn't make it. And so I am
+going to be asking a question based on some of the written
+testimony. And that will be my last question. But also, Mr.
+Preston, I will be submitting written questions to you.
+ One of the primary benefits, Mr. Preston, that you
+described for the improved disaster program is increased
+accountability. And, despite these efforts, we have heard from
+disaster victims who are here today that these benefits haven't
+materialized under the case management model. What will you do
+to address this problem and improve accountability?
+ Mr. Preston. Okay. Well, I, as I do in all of these cases,
+try to understand what the underlying issue is. But
+accountability I think has been increased dramatically. And I
+don't think we could have ever achieved the results that we did
+without much greater accountability.
+ Now, with dealing with these numbers of people, obviously
+it is a new process. As I mentioned in my testimony, we're not
+perfect yet. And I give out my e-mails. I get those e-mails
+from people directly. I follow up on every one of them. And I
+see what those problems are. So we continue to have them. But
+accountability in this program is dramatically higher. And I
+don't think we could have ever shown these results without
+that.
+ Chairwoman Velazquez. Mr. Shear, any reaction to the case
+management model that they have?
+ Mr. Shear. I am sorry. We haven't evaluated it.
+ Chairwoman Velazquez. Well, we are going to hear from some
+other witnesses that they are still being passed from one case
+manger to the next, the documents still have been lost, that
+they have been submitting and resubmitting those documentation.
+And, yet, they do not get an answer.
+ Mr. Preston. Let me address something. I have held public
+forums in the Gulf. I was with 70 borrowers from the New
+Orleans area a couple of months ago, public forum, open mike.
+Come and tell me exactly everything you are doing wrong.
+ Believe me, I talk with people on the phone. I correspond
+with them. There are still going to be issues. And there is no
+doubt within 23,000 people you will find people that aren't
+happy that we have not dealt with appropriately because
+somebody wasn't trained well or we didn't have somebody on the
+phone that was effective.
+ The other thing that we are going to find is we have begun
+shrinking our operations because we have handled so much of the
+demand. So some of these case managers are leaving and we are
+handing them over to new case managers. And there are cases
+where that hand-off isn't as effective as it should be.
+ So I have no doubt you will be able to find people, but I
+will tell you by the meetings I have had--I have talked to many
+local leaders--we are getting an overwhelmingly positive
+response from people and people that we wouldn't necessarily
+expect to get those responses from.
+ Chairwoman Velazquez. Well, I want to thank both gentlemen.
+And I will ask Mr. Preston that some of you will stay here so
+that they could listen to the witnesses' testimony. And now I
+just want to welcome our colleague Congressman Richard Baker.
+
+ STATEMENT OF THE HONORABLE RICHARD BAKER, CONGRESSMAN, U.S.
+ HOUSE OF REPRESENTATIVES
+
+ Mr. Baker. Thank you, Madam Chair. I appreciate the
+Committee's courtesy in allowing me to be able to make brief
+remarks. I know Mr. Melancon appeared here earlier in the day.
+ Just a quick infomercial about Katrina's response and
+community rebirth in light of comments I have heard from
+members. If you were to imagine every person in this room
+represented a household and that the morning after the storm
+you were to come into this room and everything is gone, not
+just a question of the house, it is a question of the car, you
+know, the pets, the grocery store, the school, the policemen,
+the firemen.
+ In Mr. Melancon's district, there was a community of 67,000
+people that 6 months after the storm had 212 operating utility
+meters, 67,000 people gone. So the magnitude of this is really
+beyond anyone's comprehension.
+ And I don't personally fault government entities for their
+failure to respond in the most efficient manner possible, but
+it does present this Committee and this Congress with
+opportunities to do the thorough examination that you are
+engaged in. And for that, I am very appreciative.
+ I would like to point out that in the case of rebuilding,
+the road home that has been made reference to this morning is a
+very troubled road home. I am now calling it home alone. The
+reason is that as of last week, there were 501 closings for a
+disbursement of $31 million or an average payout of $62,000 for
+a program that is funded by this Congress at the level of $7.5
+billion.
+ We now have an almost $2 billion additionally for hazard
+mitigation funding, which is to take property out of commerce
+and to preclude rebuilding on those sites forever. Not a dime
+has been spent.
+ We have a total of $9.5 billion, of which 31 million has
+been put into the hands of individuals. If you are wondering
+why nothing is happening, that is a good place to start.
+ But even, Madam Chair, if you had the money and you lived
+in your neighborhood and Mr. Chabot and Mr. Jefferson were your
+neighbors and you did not know what their plan was to return,
+would you actually spend your disposable income on that house
+in that desolated neighborhood not knowing what the future
+economic value would ultimately be? Many people are simply not
+choosing to come back.
+ As the administrator indicated, there are 23,000 people
+looking to decide what to do on their SBA loan for which they
+may have been approved. They can't come back until there is a
+systemic resolution to this problem.
+ Today the funding is made available to individuals. And
+individuals make decisions about whether they should come back
+to a community for which they do not know if there will be a
+school for their child or a policeman to respond. That is a
+recovery which is, at best, on very weak legs.
+ I come this morning to join with Mr. Melancon on a bill
+that has been introduced in the Senate that I think would
+greatly aid the resolution of SBA lending assistance. There
+exists now a preferred lender program with qualified banks,
+which I am sure the Committee is aware of, where we hand off as
+an SBA to the banker the right to make expedited loan decisions
+and the bank has the right to extend the government guarantee
+without the government formally being involved in the process
+prior to closure. That is based on a relationship the bank has
+built successfully with the SBA.
+ The bill we are proposing models after that program very
+similarly in that it allows the SBA to pre-clear approved banks
+to be able to make loans to disaster victims without the
+necessity of having to go through a burdensome or lengthy SBA
+pre-approval process. I think it would make great sense. It
+would avert the problem that many of my colleagues have about
+ratcheting up employee levels to an unwarranted amount and not
+having a concurrent disaster that justifies the presence of
+those employees.
+ Where will the next disaster fall? We don't know. Does it
+make sense to have a lot of people in the Gulf and, yet, we are
+worried about an earthquake in California? How do we deploy?
+That is one thing, unfortunately, nobody has the ability to
+predict.
+ However, what we do know, in the State of Louisiana, 90
+percent of the businesses employ less than 30 people. Louisiana
+is a tourism, arts, crafts, personal services type of employing
+entity. And those people all have relationships with some form
+of the bank customer. And so by deploying the banker to be able
+to be the emergency responder subject to oversight and
+supervision of the SBA seems to make a lot of strategic sense
+to me. And in most cases, the banker has a better understanding
+of that ability to repay than a newly trained SBA employee, who
+may not have been on the job 30 days prior to arrival in the
+city to respond to the emergency.
+ Getting people, as Mr. Jefferson said, who know each other
+to make judgments about creditworthiness is a far superior
+methodology than to a government-imposed, very expensive, often
+inefficient, and certainly very lengthy process that doesn't
+give us the response that we would all like to see.
+ So I strongly recommend the approach. Certainly there are
+areas where the Committee may choose to modify slightly. We
+were back and forth on whether or not the fees should be
+artificially set. We know on the home loan bank side, where
+lending occurs through that system, that there is a capped
+amount of fees the bank can make. A strong argument has been
+made by the banking community that it should be a negotiated
+item depending on the terms of the event in which you are
+engaged.
+ Don't forget that in the midst of our devastation, we lost
+the banks, too. And the only way that we had the capacity to
+engage in financial services was through automatic teller
+machines or via the Internet through remote locations. And so
+institutions which were entirely domiciled within the region of
+the disaster were without service, period. That created
+enormous problems for people in rural communities who only had
+that banking relationship.
+ We strongly recommend the Committee's consideration of the
+approach. And I would be happy to answer any questions the
+Committee may have.
+ [The prepared statement of Mr. Baker may be found in the
+Appendix, on page 61.]
+ Chairwoman Velazquez. Mr. Chabot?
+ Mr. Chabot. Thank you, Madam Chair.
+ I would just like to commend the gentleman and his
+colleague who testified earlier because we are seeing two
+gentlemen who are from the area who have seen this firsthand
+and they have come up with a bipartisan solution. It doesn't
+mean it is a perfect plan, but this Committee will look at it.
+And I want to commend you for bringing this forward.
+ Mr. Baker. Thank you, sir.
+ Mr. Chabot. Thank you for testifying.
+ Chairwoman Velazquez. Do you have any more?
+ Mr. Jefferson. I just want to commend Mr. Baker, too, for
+the efforts that he has made going back to the last session,
+when we had the Baker bill here that had the idea of bringing
+back communities as you brought housing because people can't
+live in places without communities. And I appreciate his
+observations, and I appreciate the efforts he is making to
+extend his work. Thank you.
+ Chairwoman Velazquez. Mr. Gonzalez?
+ Mr. Gonzalez. Just briefly. Again, thank you for your
+patience. And, of course, for those who may not be aware,
+Congressman Baker is a highly regarded and esteemed member of
+Financial Services. And he knows what he is talking about.
+ Just as a member to member, when things go wrong and a
+federal agency or department is not responding, we get those
+calls. What has been your experience from individuals in the
+area that have expressed their concerns, complaints with SBA,
+if any?
+ Mr. Baker. A very high level of frustration. And I can
+honestly say, though, in defense of the SBA, it is not a
+singular complaint about a particular agency. People are mad
+about everything. It is not Democrat/Republican. It is not
+federal, state, or local. If you say, ``I am from the
+government,'' you don't get any further before they give you an
+earful.
+ And they have every right to be feeling that way. When you
+go back to the numbers that I outlined at the beginning aimed
+at housing and how small, infinitesimally small, percentage of
+dollars have actually been put into the hands of people, you
+can understand if you are sitting there with debris still on
+your lot living in a trailer, which, by the way, that is
+another whole chapter of our lives, it is certainly a very
+depressing outlook for people who are trapped in a seven or
+eight hundred-person trailer park with no prospect of going
+back to a job which used to exist with no alternative training
+to get education or skills to go off in another direction.
+ And this is true whether you would be fairly well to do or
+whether you are poor. I had a distinguished senior member of an
+architectural partnership sitting in my Baton Rouge office just
+weeks ago. He is now living in a rental property north of the
+City of New Orleans in a very rural community. All of his
+receivables for work that was in process are not being paid
+because you can't go out and sue somebody because their
+business is gone, their plans to rebuild are over. All of his
+employees have disbursed.
+ It is truly an amazing set of circumstances to think that
+almost two years after the effect of landfall in this country,
+we still view significant ruins. I don't know if there will be
+historic ruins or something that will be turned about in a
+short period of time, but this goes to the core of questioning
+how this government works. And certainly what we pay or what
+the people who lived and worked in Orleans and the surrounding
+areas paid in the way of taxes, what were they waiting to rely
+on when devastation occurred? And there is great room for
+improvement at all levels.
+ I don't make this comment specific to SBA. I just think
+there has got to be a better way to handle the extraordinary
+amount of money you have made available with the best of
+intentions to help people recover and seeing what we now have
+in front of us.
+ Chairwoman Velazquez. Thank you.
+ Mr. Gonzalez. Thank you very much. And thank you for your
+service. Thank you, sir.
+ Chairwoman Velazquez. I want to thank you and commend you
+for all your efforts, your passion, and your concern. This is
+just not about the Gulf Coast region. This is how can we best
+be prepared to assist small businesses when a natural disaster
+strikes again.
+ We will be looking at legislation. One of the concerns that
+I have is how affordable those types of loans will be for
+victims who have lost everything.
+ Mr. Baker. Madam Chairman, I appreciate your attention and
+interest. My grave concern is that going forward we simply
+cannot let this happen in another community and have a similar
+outcome. Any way I may be of service I certainly want to be.
+Thank you.
+ Chairwoman Velazquez. Thank you.
+ And now I would ask the third panel to please take your
+seat: Mr. Edward Francis; Donna Colosino; and Mr. Bryan
+McDonald. Good afternoon to all of you. Welcome. And thank you
+for your patience.
+ I will introduce Mr. Edward Francis. He is the Chief
+Operating Officer of the Hancock Holding Company in Gulfport,
+Mississippi. Hancock Holding Company, established in 1899, is a
+certified SBA lender that was itself impacted by Hurricane
+Katrina with the loss of its headquarters and several other
+businesses that were impacted through its lending programs. Mr.
+Francis is here today on behalf of the American Bankers
+Association.
+ Then we have with us Ms. Donna Colosino, who along with her
+husband owns CRESCENT Power Systems. They sell electrical power
+generation equipment to large industrial clients in three
+states. The Colosinos' business property and documentation were
+destroyed after the 17 street levees in New Orleans broke. They
+are trying to secure an SBA loan to repair their facilities.
+They, too, have been in the process with SBA for a year and a
+half and will share their experience with the Committee.
+ And now I will recognize Mr. Chabot, who will introduce his
+witness, Mr. Bryan McDonald.
+ Mr. Chabot. Thank you, Mr. McDonald. My understanding is
+that you are the Director of the governor, Governor Barbour's,
+Office of Development. We appreciate your testimony here this
+morning and look forward to hearing it. Thank you.
+ Chairwoman Velazquez. Mr. Francis, you may proceed.
+
+STATEMENT OF EDWARD FRANCIS, CHIEF COMMERCIAL OFFICER, HANCOCK
+HOLDING COMPANY, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION;
+ ACCOMPANIED BY DONNA COLOSINO, CO-OWNER, CRESCENT POWER
+ SYSTEMS; AND BRYAN McDONALD, DIRECTOR, MISSISSIPPI OFFICE OF
+ DEVELOPMENT
+
+ Mr. Francis. Madam Chair and members of the Committee--
+ Chairwoman Velazquez. I am sorry, but let me just state
+that every witness will have five minutes to make your
+presentation. And then you can enter your whole presentation
+for the congressional record.
+ Mr. Francis. Thank you.
+ My name is Edward Francis. And I am the Chief Commercial
+Officer of Hancock Holding Company. Hancock is a $6 billion
+institution that is headquartered in Gulfport, Mississippi. It
+has been in existence since 1899. We operate over 100 branches
+in Louisiana, Mississippi, Alabama, and Florida. I am pleased
+to be here today to represent the American Bankers Association.
+ When Hurricane Katrina struck the Gulf Coast in 2005,
+Hancock's headquarters building and numerous branch offices
+along the Gulf Coast were wiped out. Our entire computer
+operations center, loan operation, and deposit operations shops
+were lost. Despite the devastation, we were able to open some
+branches the very next day to service our customers.
+ It took weeks before we learned the fate of our associates,
+but one by one they were all accounted for and were willing to
+do whatever it took to ensure that our customers were taken
+care of.
+ When a disaster like the Gulf Coast hurricane strikes, the
+most immediate need that small businesses face is money, money
+to pay for cleanup, money for building repair and supplies,
+money to pay their staff, and money to keep their businesses
+and the local economy moving. However, several problems
+inherent in the SBA's disaster lending program prevented the
+agency from meeting this need in a timely and efficient manner.
+Many of these problems still exist today.
+ The hurricanes were followed by an extraordinarily high
+volume of SBA disaster loan applications, more than 2 million
+by last May. To handle the large volume, the SBA was forced to
+hire and train temporary staffers that had no prior loan
+experience or familiarity with the SBA's policies.
+ This required precious time. It was largely responsible for
+the long delays in application processing. Disaster victims had
+to wait an average of 74 days for the SBA to process their loan
+applications, a far cry from the SBA's stated goal of 21 days.
+ The ABA believes that a practical solution is for banks to
+be more directly involved in SBA disaster lending process, much
+like Mr. Jefferson and Mr. Baker had mentioned.
+ Banks are well-suited for this purpose. Banks, many banks,
+are certified SBA lenders and are familiar with the SBA
+procedures, placing them in a good position to help the agency
+and disaster victims.
+ Integrating banks directly in disaster lending will allow
+the SBA to take advantage of the licenses that banks already
+have with individuals and businesses in the communities. It
+will also allow the SBA to rely on the existing expertise of
+our bank loan officers and will avoid problems associated with
+hiring temporary staff.
+ Capitalizing on these existing assets is the most
+effective way to get disaster lending into the greatest number
+of victims' hands in the shortest time possible.
+ The SBA's disaster lending program should be modeled after
+the agency's 7(a) lending program. Because of the nature of
+disaster loans, some of the elements will have to be different.
+ We recommend that the SBA offer a higher loan guarantee,
+waive some collateral requirements for smaller loan amounts,
+and allow longer repayment terms for disaster loans. This will
+prevent the cash flow problems the victims face immediately
+after a disaster. Giving them adequate time to rebuild would
+create a stronger incentive for banks to get involved in
+disaster lending.
+ Madam Chair, at Hancock Bank, we had a longstanding culture
+that we would be the first to open and the last to close after
+any hurricane. Immediately after the Gulf Coast hurricanes, we
+created an outreach program so that we could thoroughly assess
+the needs of our business clients. These efforts helped ensure
+that the relationships we have built over the many years would
+not be simply swept away with the tides of the disaster.
+ We are proud of our accomplishments and know that other
+banks are just as committed to the long-term economic stability
+of their communities. Improving the SBA disaster loan program
+will help us rebuild our communities quickly and efficiently in
+the wake of disasters. We look forward to working with the
+Committee toward that goal.
+ [The prepared statement of Mr. Francis may be found in the
+Appendix, on page 92.]
+ Chairwoman Velazquez. Ms. Colosino, you will be recognized
+for five minutes.
+
+ STATEMENT OF DONNA COLOSINO, CO-OWNER, CRESCENT POWER SYSTEMS
+
+ Ms. Colosino. I want to express my thanks, Madam Chairman,
+and to all the members of the Committee for holding this
+hearing, first, and for allowing small business also to give a
+face and a voice to our experience.
+ Can I ask a question? Is there anyone from SBA in the room?
+I am part of an organization called Second Wind. Second Wind is
+a grass roots organization that was formed post-Katrina in the
+New Orleans area. It is small business people helping small
+business people. So I am proud to be here as a member of Second
+Wind.
+ You heard a little bit about our business. We have been in
+business for 13 years. Our 2006 sales were about $7.7 million.
+We are basically a manufacturer's representative business. Our
+clients are Exxon and Chevron and General Hospital and LSU
+Medical Center. So when we responded to the hurricane, we
+responded to their issues promptly.
+ Our property was located in Lakeview, which is a now famous
+community, about a mile from the 17th Street Canal. We
+sustained no damage in the hurricane. Basically we were able to
+call into the building, get our phone messages. So we were like
+``Good. We lived through this.''
+ However, when the levee failed, the building was swamped
+with about 12 feet of water for several weeks. So we lost
+everything. We lost our inventory. We lost all parts of our
+business, including all business documentation that we had for
+13 years.
+ I am going to summarize our experience for SBA loan number
+906149, which was supposed to help us address our catastrophic
+business losses. This testimony is based on the notes I kept in
+that process.
+ As a small business attempting to recovery from disaster,
+several themes emerged in our experience with the SBA. One,
+there is no accountability at SBA, not today, not a month ago,
+not two months ago, not a year ago.
+ Two, there is no continuity and virtually no follow-
+through. I have been passed off to more than 20 different
+owners, however you label them, of my file.
+ Three, the process is grossly redundant and obviously
+excruciatingly slow. We were asked to provide the SBA with the
+same materials again and again at least a dozen times, at least
+a dozen times.
+ Number four, while usually outwardly nice enough,--and some
+vary and some not so--SBA representatives were typically
+clueless about our application, I mean like ``Who are you?''
+clueless, ``What do you want?'' clueless. We were given off-
+the-cuff advice by different representatives that contradicted,
+you know, what other people had told us over and over again.
+ In addition to taking forever after all, we still have not
+received the loan, for which we were approved. Working with SBA
+after a disaster is like having a second job. It takes a toll
+on your time, your resources, and your well-being.
+ Our application was filed the 13th of October, 2005. Early
+January of 2006, there was a site visit at our location. And
+January 25th of 2006, we were approved for a loan for $250,000.
+In that time frame, while it was tense and hard for us, okay.
+So a year ago, more than a year ago, we were approved for a
+loan for $250,000.
+ I want to make a point that Mr. Preston said that the loan
+amount was under three percent. That is only for homeowners.
+Small business owners pay four percent, which is, as you know,
+about two percent above market.
+ Nina, Amy, Mike, Chad, John, on and on, the representatives
+that we spoke with, all the way through about May. Again, every
+time I speak to someone from SBA, without fail, they don't know
+who I am. They don't understand anything about my claim.
+ Did we have outside challenges, as Mr. Preston said? Yes,
+we did. We were responding to our clients' very urgent needs.
+ Let's be clear on another point, very clear. The federal
+government, which is extending me a loan for $250,000 and I am
+willing to pay 4 percent on that loan, not asking for help that
+I'm not willing to pay for--okay.
+ Let's move to May 17th of 2006. And we received an initial
+disbursement of $10,000. This is a very important point. At
+that point, SBA sort of chucked us off the list. And our loan
+has been serviced. I am continuing to ask for the fulfillment
+of that loan, but that $10,000 moved us from one box to
+another. So somehow I am included in that 98 percent that has
+been serviced. And I have clearly not been serviced.
+ And, worse yet, the clock starts to tick on your one-year
+grace period at that point. Okay? So you have one year to
+repay. Well, now our clock is ticking from May of 200. And you
+say, ``Well, surely you want to repay that $10,000.''
+ And I would say, ``Absolutely. Absolutely.'' And I will
+start repaying that. But my loan is coming due in full in May
+of 2007.
+ I am not alone. Do not think they pulled me out of a pile
+of great experiences from SBA and stuck me up here because I
+have the one bad story. My loan will come due May of 2007 for
+$250,000, and I have received $10,000. I have the bill right
+here telling me when it is going to start to be repaid, just so
+you know.
+ Okay. Fall of 2006, the reengineering process that I heard
+so eloquently spoken of has now been kicked into place for
+about three months. Okay? So I get a call. I call in again,
+just to check, as I have routinely, repeatedly. And I speak to
+Mr. Jeff Hardway, who asked me to resend all documentation
+again. This is three months after the team process has been in
+place.
+ I resend it. I resend it to him, call again, ask to speak
+to Mr. Jeff Hardway. There is no Jeff Hardway. ``We don't know
+anybody by that name. Can we help you?'' This is our next loan
+officer, which is loan officer number 18. This was in October
+of this year, Appalonia Arayza. He says, ``I'm sorry. I don't
+have any information. Can you tell me what happened? And can
+you resend all the documentation?'' Okay.
+ So we worked through that process. Finally in January of
+2007, we send our notarized loan documents into SBA. Okay? A
+full year after we were approved for this loan, we send in the
+loan documents. They are notarized. Everything is as we have
+been told it should be.
+ I called back in another three weeks, two and a half weeks.
+No Appalonia Arayza. I have a new loan manager. Does he know
+anything? His words to me were--and I am quoting--``Who are
+you? And what do you want?''
+ I'm thinking, ``Okay.'' Your gut reaction is to cry or
+yell, but no. I think maybe this is the one. Okay? Maybe this
+is the person at SBA that will listen, that will hear, and that
+will do something for us.
+ If there are 23,000 people whose loans have not been
+disbursed, you are looking at someone who is in the area of SBA
+loans that have been disbursed. I have heard so many MBA terms
+here. One of the MBA terms that came to my mind was, ``GI,
+GO.'' And that means garbage in, garbage out. My loan has not
+been disbursed. I am not in that number. I want you to
+understand that.
+ Another thing I need you to understand is that now I am
+being told by my newest loan officer that I have to provide
+receipts, receipts on amounts up to $250,000 in order for me to
+receive it. So what that is saying is I have to spend my loan
+to receive it. That is not exactly facilitating the process of
+renewal in a community that is hurting.
+ So I heard a little bit, too, about demographics. And maybe
+the demographics of the area has a reason for us not
+recovering. But I would say to you that if you have been told
+and if you believe that this SBA has been re-engineered and if
+you have been told and if you believe that all of those loans
+had been processed appropriately because my loan is on the
+checkmark side of being done, you are getting bad information.
+And please don't allow yourself to be given bad information.
+ I would not even tell this story at a New Orleans cocktail
+party because I'm telling you it wouldn't raise an eyelash, an
+eyebrow. Everybody has this story.
+ I swear to you on my father's grave this is the story. I am
+not an anomaly. I would never have taken the time to do this.
+My husband wouldn't have taken time away from our business to
+do this had we thought we were an anomaly. We are not. I
+promise you we are not.
+ [The prepared statement of Ms. Colosino may be found in the
+Appendix, on page 111.]
+ Chairwoman Velazquez. Thank you, Ms. Colosino.
+ Mr. McDonald?
+
+ STATEMENT OF BRYAN McDONALD, DIRECTOR, MISSISSIPPI OFFICE OF
+ DEVELOPMENT
+
+ Mr. McDonald. Good morning. I would like to thank the
+members of the Committee for allowing us to share with you
+about the state of small business recovery that is occurring in
+Mississippi. I want to thank you very much, Madam Chairwoman
+and Ranking Member and distinguished members of the Committee
+for giving me the opportunity to visit with you here today.
+Also, as one who rarely gets to see snow, I want to thank you
+for making that happen.
+ On August the 29th, 2005, Hurricane Katrina struck
+Mississippi with a terrible blow. Although the eye of the storm
+landed at the Mississippi-Louisiana line, that eye was more
+than 30 miles wide. And Katrina completely devastated our
+entire coastline of some 80 miles. The miles upon miles of
+utter destruction are somewhat unimaginable except to those of
+you who may have had a chance to witness it with their own
+eyes.
+ This hurricane wasn't just a calamity for the Mississippi
+Gulf Coast. Its impact reached far inland, all the way into our
+state. We recorded hurricane-force winds more than 200 miles
+from the Mississippi coast.
+ Damage along our Gulf Coast was widespread. And damage
+estimates totaled more than $125 billion. FEMA has reported
+that over 65,000 homes in south Mississippi were damaged or
+destroyed. Electricity was lost for some 80 percent of the
+state's 3 million residents. More than 45 million cubic yards
+of debris were left in the hurricane's wake in south
+Mississippi. So Hurricane Katrina's effects on Mississippi
+alone would rank her as the largest natural disaster ever to
+strike the United States.
+ Small business women and men across our state found
+themselves having to scramble. They had to adjust and innovate
+just to make do. And it was the spirit of those people, people
+of our small business community, that helped pull us through.
+Our people are strong and resilient and self-reliant. And from
+day one after the storm, they got to work and did what had to
+be done. They helped themselves, and they helped their
+neighbors, often when they didn't have. Their spirit has been
+an inspiration to all of us. And the spirit remains the key to
+our recovery and rebuilding and renewal effort.
+ SBA has been a strong partner with Mississippi. And SBA's
+business and economic injury loan programs have aided thousands
+of Mississippi businesses. With more than $500 million in
+loans, the SBA has also offered, as you know, physical disaster
+business loans of up to $1.5 million to repair or replace
+businesses that are located in the declared disaster.
+ Additionally, SBA's economic injury loans for small
+businesses provide financial assistance to small businesses
+that suffered substantial economic injury. Our small businesses
+in some 67 Mississippi counties affected by Hurricane Katrina
+have also taken advantage of the SBA-backed loans of up to
+$150,000. Those loans, known as go loans, have been delivered
+through local banks and have been handled under an expedited
+process that in some cases have delivered a response on a loan
+in 24 hours or less.
+ SBA has also served as a very good partner for Mississippi
+through our homeowner assistant grant program. Prior to
+disbursing HUD-funded homeowner assistant grants, the state
+must share the information with the SBA to ensure no
+duplication of benefits exists.
+ We would like to thank the SBA publicly here for their
+efforts to ensure that timely payments to homeowners are made.
+That information, the search for duplication of benefit, is
+currently being provided on a 48-hour turnaround basis. We
+certainly appreciate that.
+ SBA's assistance along with the hard work of our state and
+our citizens has helped spur a tremendous economic recovery in
+our state. With employment levels now above pre-Katrina levels,
+Mississippi's economy recovery is in full swing. Ongoing
+recovery efforts will require continued investment, innovative
+partnerships, economic incentives, and workforce training.
+ While much has been achieved in the months since Hurricane
+Katrina, our work to recover, rebuild, and renew is a marathon
+effort that we know will take years. Much opportunity lies
+ahead. Hurricane Katrina with all its destruction gave birth to
+a renaissance in Mississippi that will result in rebuilding our
+state bigger and better than before. Small businesses will be
+at the heart of that renaissance.
+ Small business women and men of our state have been a model
+of the spirit and character of our people. They remain strong
+and resilient and self-reliant, though they have endured
+terrible hardships. They bore the worst of Katrina. And many
+are still living in conditions that amount to deprivation, but
+they persevere.
+ Our state's small business community is rebuilding one day
+at a time. And we ask for your continued assistance in helping
+them move forward. Through your efforts and the efforts of the
+people of our great state, we will rebuild. And it will be a
+Mississippi that exceeds anything we have ever known before.
+ Thank you, Madam Chairwoman.
+ [The prepared statement of Mr. McDonald may be found in the
+Appendix, on page 105.]
+ Chairwoman Velazquez. Thank you. I want to thank all of you
+for your presentations and especially Mrs. Colosino, your
+powerful presentation on your experience with the SBA disaster
+loan program.
+ Mr. McDonald, I just can't help myself but ask why is it
+that experience in Mississippi with the SBA has been so
+dramatically different than the one in Louisiana?
+ Mr. McDonald. Madam Chairwoman, I will share a couple of
+observations on that point. It is very difficult to use the
+term ``blessed'' when you speak of what happened at Katrina. So
+I will use the term ``fortunate.''
+ We experienced a hurricane. We did not experience a flood.
+Therefore, arguably, we had a 90-day head start in that respect
+with the SBA because we didn't have to wait for water to
+recede. I also want to share with you that we have been very
+focused and very deliberate about taking steps to remove any
+barriers to communication.
+ Administrator Preston has facilitated that process and met
+with us on many times. And, much in the spirit that is offered
+here, we know it is not a perfect world. We recognize, this
+Committee clearly recognizes that more needs to be done sooner.
+We have been fortunate in our communications with SBA to engage
+them on a level in which they respond in the same manner. They
+have been eager to work with us and remove those barriers.
+ Chairwoman Velazquez. Did you have any experience with
+victims, especially small businesses, in your area regarding
+the relationship in assessing the service from the Small
+Business Administration disaster loans? Were there any
+backlogs? Were there any loss documentation, runaround, any of
+the things that we have been hearing from the other part of the
+region?
+ Mr. McDonald. Yes, Madam Chairwoman. And I certainly didn't
+want to paint a picture of a perfect world. We experienced some
+of the same, many of the same, instances, again, I believe on a
+somewhat smaller scale because of the size of our affected
+community. And what we found is as we elevated those issues and
+sought expedited attention from the SBA, that we were in most
+cases able to receive that.
+ Madam Chairwoman, much like in parts of our brother or
+sister state, you know, in Mississippi, in the 80 miles of
+coast that were affected, small businesses are more than just
+the economy that provided the paycheck for my father that
+allowed me to go to college. Small businesses are the fabric.
+They are the corner store where life happens.
+ Chairwoman Velazquez. Thank you.
+ Mr. McDonald. And so we really saw a pointed response from
+the community.
+ Chairwoman Velazquez. Thank you.
+ Ms. Colosino, I understand that your loan file has moved
+among different loan processing teams and case managers since
+the agency implemented its new case manager system. Have you
+seen this as an improvement over their earlier system?
+ Ms. Colosino. No, clearly not. We have not seen an
+improvement. In fact, I didn't even know there was a new system
+implemented. That was news to me. So it has been the same
+experience. My testimony has the language in it, I guess, that
+reflects that change. I just didn't know. But we have
+continually been passed off again and again and again. So in
+any organization, that would never work, doesn't work here.
+ Chairwoman Velazquez. You mentioned a dozen times where you
+have to resend your documentation. Do you know if this happened
+after the new case management system was implemented?
+ Ms. Colosino. Well, I have sent it--I don't know--probably
+half a dozen times since then, since the new case management
+system.
+ Chairwoman Velazquez. The new case management system was
+implemented in the summer. Have you had to resubmit
+documentation ever since?
+ Ms. Colosino. Yes, ma'am. I have had to resubmit at least
+half a dozen times and as late as November.
+ Chairwoman Velazquez. We have heard many small businesses
+to say that time is of the essence following a disaster
+situation. In your experience, what is the appropriate time
+frame for receiving financial assistance?
+ Ms. Colosino. Well, the 74 days that apparently is the
+average probably is too long. You know, for us we liquidated
+our own savings. We had to sell our house eventually. Had we
+been able to receive our loan in a more timely manner, we
+wouldn't have had to do that.
+ You know, 74 days to me sounds great. I am at 380-something
+days. So I would say, you know, wouldn't it be great if you
+could do it in 60, awesome if you could do it in 45? A regular
+loan takes, you know, five weeks. Anything is better than 380.
+ Chairwoman Velazquez. Would you like to comment, Mr.
+Francis?
+ Mr. Francis. Yes, ma'am. Thank you.
+ Having serviced hundred of thousands of small business, we
+saw the need arise immediately. We saw businesses that wanted
+to take advantage of the cleanup that needed to buy new
+equipment. A big pressing need was the worry about where their
+employees were, the fact that they needed to make payroll to
+keep those employees so that when they returned, they could
+return to work.
+ Those needs are immediate. They are the day after the
+storm. It is not 60 days. It is not 90 days. It is immediately.
+And I can't stress that enough, that it is waiting on the SBA.
+Even if it is 74 days, it is too long. We need to be a in a
+position that we can react to those businesses and help them
+immediately.
+ Chairwoman Velazquez. The system that they need to get
+their feet back on track and keep their businesses open or just
+close the businesses out altogether.
+ Mr. Francis. I am sorry? Repeat that.
+ Chairwoman Velazquez. What I am saying is that time is of
+the essence. And if they don't get in a timely manner the cash
+assistance that was promised to them and they keep waiting and
+waiting, they will lose their businesses altogether or, like in
+some many instances, people will decide not to move back into
+the area.
+ Mr. Francis. Exactly. That is exactly what has happened. We
+have many businesses that were not borrowing money that had
+checking accounts with us that didn't go apply for loans, that
+just basically closed shop and left.
+ Chairwoman Velazquez. In your testimony, you describe how
+an increased deferment period will significantly benefit small
+business borrowers. What length of deferment do you believe is
+appropriate?
+ Mr. Francis. Well, a lot of that depends on the type of
+business. If you have to rebuild your whole building to set up
+your manufacturing shop, that is a lot longer. If it a
+restaurant that needs to buy new equipment and new tables and
+chairs to put in place, it is a shorter process. And so it all
+depends on the business.
+ I think that is where the bankers really come into play is
+because we know these people. We know the businesses. We know
+how those cash flows work. We know the character of those
+individuals. And so we can deal much quicker, much more
+directly with those folks. And we understand those different
+types of businesses because of the experience that we have.
+ Chairwoman Velazquez. You heard Mr. Baker, Congressman
+Baker, talking about including private lenders in the disaster
+lending process. Would it be necessary for the SBA to make a
+100 percent guarantee or would an 85 percent guarantee be
+sufficient to ensure the private sector coming in?
+ Mr. Francis. No, ma'am. We would not like to have 100
+percent guarantee. Eighty-five percent guarantee is sufficient.
+That is, we share in the risk of that. It is not the
+government's money going out. It is private capital money going
+out through the banks.
+ Eighty-five percent guarantee in a situation that is a
+little less, I guess, rigid in documentation because of the
+immediate need would be more than enough to get monies in the
+hands of small businesses.
+ Chairwoman Velazquez. So under the proposal that you were
+making, how would banks ensure that interest rates are kept low
+for disaster loans?
+ Mr. Francis. Well, that is a very good question. And that
+is the one thing that really drives the demand for small
+business disaster loans, is the interest rate. If those
+interest rates were the same as a mortgage loan or a regular
+business loan, nobody would go through that rigmarole to get a
+loan except the ones that are the least creditworthy.
+ So I think that the government has to think about a way to
+subsidize the interest rates, not for the banks' benefit but
+for the benefit of the borrowers, so that we could pass on
+those savings to the customers. That would be a very effective
+tool to get low cost of capital in the hands of individuals and
+the borrowers and small businesses.
+ Chairwoman Velazquez. Thank you, Mr. Francis.
+ And now I recognize Mr. Chabot.
+ Mr. Chabot. Thank you, Madam Chairwoman.
+ Mr. Francis, since most disaster loans are those for
+physical damage suffered by homeowners, would it make sense to
+have banks process homeowner disaster loans and allow the SBA
+to focus on disaster loans for businesses?
+ Mr. Francis. Well, I tell you what. I think that the SBA in
+my opinion does a better job of processing the individual loans
+than they do the business loans. And the reason why is because
+they are less complex. The business loans are the ones where we
+have the relationship.
+ We understand these businesses. We have worked with them
+for many years. That is where the SBA has trouble. When you
+have got documentation destroyed, lease agreements destroyed,
+and you can't reproduce them, that is where things get stuck.
+ Mr. Chabot. Well, let me reverse my question, then. Would
+it be better to have them concentrate on the other and have the
+private sector?
+ Mr. Francis. I think it would be best to have the banks and
+other financial institutions concentrate on disaster loans.
+These are our customers. They are our mortgage customers. We
+create mortgages for them. We create small business loans for
+them. We know these folks. We can talk to them the day after
+the storm or try to talk to them the day after the storm. We
+don't have to mobilize people. We are already there in
+existence. We have got branch networks in existence. We don't
+have to go find space for them to work. We don't have to go
+find workers. We have them in place. So I would recommend that
+we look at having the banks work in conjunction with the SBA on
+individual loans and small business loans.
+ Mr. Chabot. Okay. Have your bank customers expressed any
+difference to your employees about the speed with which the SBA
+is currently processing disaster loans today than in the first
+year after Hurricane Katrina?
+ Mr. Francis. To be honest with you, we have not heard a
+whole lot of it lately. In the beginning, there was a lot of
+frustration, but most of the businesses have just said,
+``Forget it. We will come to you for the loans.''
+ Our loan demand is way, way up. And they are just coming
+straight to do bank loans. Now, the disadvantage is that they
+don't get to borrow at a low interest rate that the direct SBA
+loans offer. But the businesses need the case more than they
+need the low cost of capital to survive.
+ Mr. Chabot. Thank you very much. Let's see. Ms. Colosino,
+first of all, thank you for coming here and telling us how this
+affected you. Obviously it has been an awful experience all the
+way around.
+ And, you know, your testimony is very disturbing because we
+heard testimony earlier obviously that things are improving.
+And, according to you, things haven't gotten any better. And a
+thing that is particularly disturbing is you indicated you are
+pretty reflective of a lot of other folks in your community.
+ Do you want to expound upon that at all as to how you are
+aware that other people are going through the same thing that
+you are?
+ Ms. Colosino. Well, just from being part of Second Wind,
+first of all. Second Wind started with ten businesses, small
+businesses. And now it's 1,200 small businesses. So that is one
+way.
+ And then, you know, we are a member of our community. I am
+a native New Orleanian. My husband and I both went to college
+there. You know, that is our home. So we know many, many people
+that have done precisely what you said, which is say, ``Oh''
+and go to a regular bank.
+ We also have secured three different loans from banks to
+buy property and things that we need for our business in the
+interim. Okay? So three times I have gone commercially.
+ And it is just part of the fabric of New Orleans that SBA
+doesn't work for us. It is so--
+ Mr. Chabot. Let me make sure I understood something that
+you said earlier, too. Just to clarify, you had mentioned when
+you got the initial $10,000, you said that within a year--you
+sort of left the impression that the entire loan was due at
+that time. My understanding is that for a year, that is when
+the payments actually start on the additional up to $250,000.
+Is that correct?
+ Ms. Colosino. Well, to clarify, we received a disbursement
+in May of 2006 of $10,000. And I have received pre-bills, I
+guess you could call them, for the entire loan amount, which
+says, ``Starting in May 2007, you will have payments due on
+$250,000,'' not on the 10.
+ Mr. Chabot. Right. But not on the entire amount, just
+payments every month. I assume they are monthly payments that
+are due?
+ Ms. Colosino. Yes, sir. They are monthly payments
+calculated not on 10,000, which I received, but on 250, which I
+have not.
+ Mr. Chabot. Right. Thank you.
+ And the other thing that was particularly disturbing is
+when I know how much trouble you have to go through to get all
+of the forms filled out and get all of the copies and
+everything and get them in and then to have to do it all over
+again. We have had that periodically over time but not a dozen
+times like that. That has to be extremely frustrating. And we
+absolutely have to do a better job than that.
+ Mr. McDonald, let me turn to you in my final questions here
+if I can locate them. In your professional opinion, what
+lessons should be learned by the state and the federal
+government from Katrina? And given your state's experience with
+Katrina, what suggestions do you have to give the federal
+government in improving its responses to such catastrophic
+disasters?
+ Mr. McDonald. Well, Congressman, I would respond to that by
+saying that I think some of the information the Committee has
+received here today--and I have to choose my words carefully in
+saying ``information'' but the plans, as I appreciate them,
+that are underway. They focus on identifying the lessons that
+have been learned through Katrina but, more importantly,
+planning to make sure that those are not repeated in other
+disasters are central to what I believe is in the best interest
+of the process, more specifically communication.
+ Those communication lines, which allow us to facilitate
+interaction to identify expediters, to respond in a meaningful
+way the tenor of testimony, which I think is very accurate,
+which indicates the frustration felt working not only with
+various caseworkers but through various agencies and
+departments of government, in this event are somewhat unique
+because of the regional nature of the disaster.
+ The great news is after the disaster, Congress responded
+with a lot of help. And that is great. Each of those individual
+programs have appropriate checks and balances. And there was
+struggle. And there continues to be struggle and disconnect in
+making sure, as was discussed with the homeowner program, that
+there is not a duplication of benefit, that at the end of the
+day, it makes a bad situation worse in requiring an individual
+to return money or be asked to repay money.
+ So I would suggest to you that the efforts that have been
+undertaken here, certainly that of review and ensuring that
+communication, those lessons are really learned, the changes
+are made and that the changes are not just discussed but are
+real, that would be a top priority to us.
+ Mr. Chabot. Thank you very much. I yield back.
+ Chairwoman Velazquez. Mr. Jefferson?
+ Mr. Jefferson. Thank you, Madam Chair Lady.
+ Mr. Francis, let me ask you this. Other banks offer their
+services to the SBA. Louisiana Bankers, the American Bankers
+have all made them aware that they are there to be helpful.
+What has been the reason for the resistance that has been
+explained to you as to why the SBA hasn't taken you up of the
+offer to be of assistance to them?
+ Mr. Francis. That is a good question, Mr. Jefferson. We
+worked with the LBA right after the storm, many banks meeting
+with the SBA, head of the SBA, to try to get them to understand
+and let the banks be more directly involved.
+ That is when the SBA came out with the go loan program,
+which was okay, but $150,000 from any business is not enough
+money. And it was a drop in the bucket. And it got some
+momentum, but I really think that the SBA didn't understand and
+didn't trust that the banks could do as good a job as they
+could do.
+ I really think it was as control thing from the SBA's
+standpoint that can the banks do disaster lending as good as
+the government can do it? And I think at the end of the day,
+that's why it did not get enacted.
+ I think we had momentum at that time to get some changes
+done legislatively and they just did not take the opportunity
+to do that.
+ Mr. Jefferson. How do you think the experience of a small
+business owner like the lady sitting next to you and others she
+has described would have been different if banks had been
+permitted to get involved in this process?
+ Mr. Francis. She would have had her money weeks after the
+storm. And I will tell you my parents own a small business. And
+their experience is exactly like hers. The only thing they did
+differently is they said, ``Forget it. We are not doing it. It
+is too much.'' After the third time resubmitting paperwork, it
+is just they said, ``No way. We are not going to go through
+this.''
+ And the banks would have gotten money in the hands of
+businesses. And I think the recovery would have happened
+quicker. And it would be a lot further along today if we had
+been more directly--
+ Mr. Jefferson. One of the witnesses from the SBA said they
+were concerned about monitoring and accountability from banks.
+Does that make any sense to you?
+ Mr. Francis. It absolutely makes sense. And as a certified
+lender, we have to adhere to the rules and regulations of the
+SBA. And we understand those. The banks understand rules and
+regulations. Let me tell you, the FDIC, the Comptroller of the
+Currency, we understand what rules and regulations are.
+ Mr. Jefferson. That is not a legitimate concern on the part
+of the SBA that banks couldn't be able to live up to that
+requirement?
+ Mr. Francis. Banks make mistakes, but for the most part, I
+will bet you we are 99.9 percent accurate.
+ Mr. Jefferson. Thank you.
+ Mr. Francis. We have to be.
+ Mr. Jefferson. Ms. Colosino, welcome to the Committee. I am
+glad you made it through the weather all the way to get here. I
+am sorry Ms. Olivier and others from Louisiana couldn't make
+it, but I am glad to see you here.
+ Ms. Colosino. Thank you.
+ Mr. Jefferson. I heard one of the predicates of your
+testimony, predicate statements, was that the storm came and
+everything seemed to be in good shape. You called folks and
+said, ``Hey, we are still here, and we are ready to go back to
+work.'' And then the levee breached.
+ Now, the Corps of Engineers has said that it is responsible
+for that. It has admitted that its negligence in the
+construction, the design of the levee was the reason why the
+levees broke.
+ And here you are now a year later or whatever, years later
+now, almost a year, 18 months, whatever it is, still trying to
+get something fixed, taking on new loan responsibility and all
+the rest, because of something that a federal agency failed to
+do.
+ In the early questioning I asked whether the SBA should not
+be involved more, as our Chair Lady said, in grant programs in
+these instances, not so much to give people money for the heck
+of it, but here the government actually caused this problem,
+number one.
+ But, number two, to get back to Mr. Francis, it could be
+used not for the whole amount but to provide equity amounts
+that would permit the lending to take place more easily that
+could give them more latitude in getting money out and getting
+loans out.
+ So even if they just did a small part of it, 15-20 percent
+of it, particularly where there would have been no disaster,
+you have an experience had it not been for the levee breech,
+you would have been in business now. You wouldn't be talking to
+us. You wouldn't have had this experience.
+ So do you think that it is fair for the government to have
+more responsibility here with respect to making monies
+available to people who are just going about their business
+except the levees broke and due to the admitted fault of the
+government--it is not we have to speculate about this. The
+Corps have stood up there and said, ``We did this. It is our
+fault.'' Then they just kind of did a reverse pivot and walked
+behind the curtains, and they are gone.
+ Ms. Colosino. I am not sure how to answer that, but I will
+say that what would I wish for SBA to do? And that would be to
+really advocate for small business insurance issues. I mean,
+certainly banking issues and funding issues, but, you know, can
+we not talk about the other issues that small business people
+fight every day? So we were pitifully under-repaid by
+insurance, criminally so.
+ So yes, I wish SBA could actually effect their disaster
+mission if that is what it is. If it is an entity that responds
+to small business in disaster, then I would say do so, but if
+that is the vision statement today, that is not how it walks
+and talks in the community of disaster.
+ Mr. Jefferson. One of the problems here is that it seems
+like the SBA is undertaking its normal lending responsibility
+that it is assigned by statute, as opposed to its
+responsibility to help folks in a disaster to recover, treat
+them as if it is exactly the same thing. I hope they are. It
+seems like this is worse than the other one. But they treat
+them similarly, as opposed to treatment of the issue of
+recovery, helping people recover, which is an emergency issue.
+They don't seem to be up to the task.
+ Of the 1,200 people you associated with, are you saying
+most of these people had the same experience you had or similar
+experiences or have some of them had more satisfactory
+experience with the SBA?
+ Ms. Colosino. What Second Wind did is about three weeks ago
+send out an e-mail to their constituents and said, ``If you
+have an SBA story, tell it.'' And I believe that you all are
+going to be provided with that.
+ We have the stories, which they are bound. And I assumed
+when I wrote mine up that mine would just be bound in a
+document and sent on. So it wasn't written to be delivered
+here. It was written to be part of the story. So did that
+answer your question? I'm sorry.
+ Mr. Jefferson. The last thing I want to ask you is the
+people whose names you have talked about, I don't remember them
+all, but you had individual names you mentioned. Where were
+these people from? Were these folks the SBA brought in from
+someplace to train them as lending officers and they went away
+and they kept giving you a new person because these folks went
+back to wherever they were from? Is that what happened? Do you
+know?
+ Ms. Colosino. I don't know because I could never get any
+information on the last person. You know, the last person
+disappeared off the face of the Earth.
+ So okay. Here we start over. And you start all the way
+literally, literally from square one every single time, every
+time. Okay?
+ Thank you.
+ Chairwoman Velazquez. Now I recognize Mr. Gonzalez.
+ Mr. Gonzalez. Thank you very much, Madam Chairwoman.
+ Mrs. Colosino, would you give us permission to look into
+your specific case? In other words, it is your information. And
+if we request SBA to make an inquiry and report back to the
+Committee, obviously those are your records. And we need your
+permission, at least in my estimation. I am just asking to make
+sure because I would like as of today to articulate a specific
+request of SBA because we do have representatives from SBA
+present.
+ Ms. Colosino. Okay. I would answer that in two ways. Don't
+assume by any chance that I am here to get my $250,000. That is
+good, and that would be wonderful. But there are thousands of
+people standing behind me that just have a different name and
+the same face and the same song. Okay?
+ So yes, you have my permission to do that. Yes, you do. You
+have our permission, my husband's and mine.
+ Mr. Gonzalez. And I would ask, Madam Chairwoman Velazquez
+and Ranking Member Chabot, to see if they would join me in this
+request. We have SBA personnel here. I think this information
+could be gathered and reported back to us within two weeks. We
+won't be here next week, so two weeks from today, first how
+Mrs. Colosino's loan application is listed. Is it listed as a
+completed transaction in that percentage when, in fact, you
+have received 10,000 of the 250,000? And suddenly we have got
+figures out there that are truly misrepresentative, as you have
+pointed out to us.
+ Secondly, you have indicated that in order to receive
+further funding from the $250,000 approved loan, you have only
+received $10,000 as of last summer. You have to produce
+receipts. Is that correct?
+ Ms. Colosino. Yes, sir, that is correct. And I made him
+repeat it. And I put the phone on speaker. And I said, ``Are
+you telling me right now that I have to produce for you
+receipts to the total loan amount?''
+
+ And he said, ``Yes, you have to produce receipts to the
+total loan amount.''
+
+ I said, ``I can't, you know, like go down and give you an
+accounting of what we bought or still need to buy.''
+
+ ``No, no. You have to have spent the money.''
+ Mr. Gonzalez. The second question to SBA, then, is it
+required that someone who is receiving loan proceeds first has
+to somehow provide written receipts for expenditures before
+further amounts of money are provided to the borrower?
+ The next question is,--and this is kind of confusing--it
+appears that you qualify for a quarter of a million dollars.
+You received the $10,000. And the clock starts ticking, as you
+accurately described. From the time you received the $10,000 a
+year and payments are then expected, predicated on an amount of
+250,000--and I want that clarified.
+ I definitely want SBA to please explain to me Earth's time
+line. Is she supposed to start paying back $10,000 at the end
+of the year? If she receives another $50,000 today, is it a
+year from today that she starts paying back? She hasn't had use
+of this money. I mean, none of this really makes much sense.
+ I am hoping that all of this will be clarified and it sort
+of will make sense. And that is going to be my personal
+request. And, of course, I would ask other members of the
+Committee, the Chairwoman, and the Ranking Member to join in
+that. And I would request that the information be made
+available to us.
+ Chairwoman Velazquez. I will be joining the gentleman. Mr.
+Chabot?
+ Mr. Chabot. I would be happy to join the gentleman in that
+request.
+ Chairwoman Velazquez. Thank you.
+ Mr. Gonzalez. And I appreciate it.
+ And you are right. It isn't all just about you because this
+could be very, very representative of what is going on out
+there because we want to give people the benefit of the doubt
+and we want to work together. And I am taking more time than I
+anticipated.
+ Mr. Francis, has the American Bankers Association made a
+formal proposal, been proactive in taking the initiative to
+approach SBA and say, ``Hey, look, the way you are structuring
+this disaster alone is not going to work?''
+ You know, in this go alone or whatever it is, maybe the
+problem with that is that the borrower is paying a higher rate
+of interest and so on. So it is really not the best answer out
+there but how you in the private sector can come in with a
+proposal to streamline this procedure and pointing out all
+about what fees should be charged and it should be different
+from 7(a) and so on in your written statement that I went over.
+Have you all made a formal proposal? And I don't know if that
+is too much to ask of any association or private sector.
+ Mr. Francis. ABA has and we have as a bank, other banks.
+The LBA has. Yes, that has happened.
+ Mr. Gonzalez. I would ask that you please let us know when
+you made it and what response you have received. I do
+appreciate the effort, believe me, because I think the answers
+are out there.
+ And then, lastly, Mr. McDonald, I really don't have a
+question, but it's good that we remember that, of course,
+nothing to the dimension and scope of Katrina but that
+Mississippi was also hit and is in the rebuilding phase. You
+know, we have a reminder of that every day with one of our
+beloved colleagues, Gene Taylor. I also wish to remind other
+people that we had Rita in Texas.
+ And that's also been neglected. But thanks to all three of
+you for your presentation today.
+ Chairwoman Velazquez. Before I move to recognize Mr.
+Johnson, Mr. Francis, I would like for you to explain to me,
+how do you disburse disaster loans? Would you ask for receipts
+before you provide the money?
+ Mr. Francis. No, ma'am, we would not ask for receipts. What
+we would do is we would verify if it was a real estate
+construction loan. What we would do is we would--normally in a
+real estate process, the contractor will go and perform work
+and submit a draw request to us that we would go out and
+inspect. And then we would fund the contractor.
+ And in equipment purchase, the purchase order would be
+submitted. We would then submit the payment to the vendor for
+that equipment, but we would not ask the borrower in those
+cases to pay for it and then submit the receipts to us.
+ Chairwoman Velazquez. Yes. Let me state for the record,
+that is part of the statute that you have to provide receipts
+before you get your money. But it doesn't make sense to us or
+to me when we are dealing with people, victims who lost
+everything.
+ Mr. Francis. That is not the normal procedure in the
+banking industry.
+ Chairwoman Velazquez. Thank you.
+ And now I recognize Mr. Davis. No questions? Then we'll go
+to Mr. Johnson. No questions? Well, let again thank all of you.
+We will continue to monitor the situation with the disaster
+loan program and the disaster readiness of SBA. And we will
+continue to monitor the situation, the response from SBA. Ms.
+Colosino, maybe before you leave we could have a conversation
+with members of the staff of SBA. And I want to ask unanimous
+consent to enter into the record testimonies that were provided
+by witnesses who were not able to make it.
+ [The prepared statements of the Hon. Michael Olivier and
+Ms. Patricia Smith may be found in the Appendix.]
+ Chairwoman Velazquez. Without objection, this hearing
+adjourns. The Committee adjourns. And I want to again thank you
+all for being here today.
+ [Whereupon, at 1:09 p.m., the foregoing matter was
+concluded.]
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