Soldiering On to Remake the SBA
Last year was a mixed one for the Small Business Administration. The agency unveiled new services, including a popular loan for the military community, and claimed progress in streamlining its operations. But it also struggled to bounce back after years of starvation budgets that demoralized the work force. And the agency's name has recently surfaced in cases of alleged fraud. In December, I spoke with Administrator Steven Preston to catch up on his efforts to reanimate the agency. Here's what he said.
This is an expanded version of a conversation that appears in the February 2008 print edition of Inc. magazine.
What was your biggest priority in 2007?
The first thing we took on was the disaster loan administration. We totally reengineered the entire process of making a disaster loan and disbursing a disaster loan. At the end of the day, we've ended up with a situation that's dramatically more customer responsive, much faster, and has a much better quality of oversight and fiscal responsibility associated with it. That was a massive effort requiring literally thousands of man-hours. There's over $6 billion in people's hands today rebuilding the Gulf.
In addition to that, on June 1, which is the unofficial beginning of hurricane season, we submitted a comprehensive disaster recovery plan to Congress which showed exactly how this agency would ramp people, facilities, and production capacity to meet catastrophic disasters of varying levels. That has required us at the agency to train hundreds of people who are non-disaster SBA employees, so that they're ready to jump in if it's a major catastrophe. It has required us to expand our non-currently employed reserve force dramatically, so we have thousands of people around the country now that don't work for us currently that are trained to jump in if a massive disaster hits. It significantly improved our coordination with the state, local, and federal government and non-governmental entities alike. And it makes our district offices all around the country active participants in that process. Before, one of the things the agency was criticized for -- and probably rightfully so -- was that our non-disaster district network wasn't coordinated with the disaster operation, even though the district network frequently knew the chamber of commerce, knew all the political people locally, knew all the support providers. It works much more hand-in-glove today.
So, for example, when the San Diego fire hit and the national disaster was declared, we had people on site working with victims, in some cases less than hour after the announcement. We had about a hundred people on the ground when the announcement was made, immediately deployed to help people. I was on the phone with local chambers, helping them understand how we were going to work with them. I think that has been an enormous success for all of us.
How have you applied that to the SBA's main line of work, the credit program that guarantees commercial loans to businesses?
We've done a few things. We're about to a roll out a pilot in the northern Plains states for small community banks to use our loans called Rural Lender Advantage. A lot of rural lenders left our programs when a product called LowDoc was discontinued. [LowDoc catered to less established, often rural, borrowers with smaller loans that required less paperwork. The Bush Administration canceled the program in 2005, claiming high losses.] We think this is going to be run much better from a credit perspective than LowDoc, but also provide those smaller banks a much-simplified process. It's going to be a very short application form, and they'll be able to do it online. We'll turn their applications around in a few days. We're going to put in place a customer service desk to help them if they have questions on eligibility or other stuff. We're hopeful that's going to be an important tool for us to start bringing back the smaller banks into the fold.
And we are rewriting our SOP, our standard operating procedure for the loan program, which is over a decade old. This sounds like the most boring thing in the world, but it's one of the biggest sources of frustration for our lenders because it's hard to understand and it's outdated. It's taken almost a year to get completed. It's going to be available electronically; it's going to be searchable. We are also providing lenders with a greater ability to update their files electronically, rather than work back and forth with faxes and hard documents. We are dramatically decreasing our response times for lenders when they send us loan packages to purchase their loans if we need to make good on a guarantee. That process has taken too long and it's been terribly back-logged. In fact, we are getting much more committed to consistent levels of responsiveness. We're telling people how quickly our turnaround times are going to be, and we're meeting them consistently across the organization.
All of this is to automate the front-end, demystify our processes, and to give banks a much higher level of support so that when they do business with the SBA, it will be a good, responsive experience. Then they'll turn around and use our products to reach more small businesses.
A big part of all of this is getting the employee base to work effectively. We have got three hubs of activity: headquarters, which sets policy; the field network of district offices that actually are sort of the hands and feet of the agency; and several high-volume processing centers for our guaranteed loan and our disaster loan programs. Those three hubs of activity need to understand very clearly what their roles and responsibilities are, how they support each other in the process of delivering service to the customer, and as a result, how to communicate.
Staff morale has been a problem at the SBA. What are you doing to make employees feel good about their jobs?
Over the last several years we've gone through this process of centralization, dramatic downsizing, and changes in people's jobs. But we had not adequately trained people for the new jobs, nor engineered the centralized processes to provide much efficiency or responsiveness. If a customer or a bank or somebody had an issue, the resources weren't engineered in a way that they were as responsive as they needed to be. So many employees felt like they couldn't do their jobs effectively because the organization wasn't coordinating well. They couldn't help the people they wanted to help, because it wasn't their jobs any more. Uncertainty is a terrible thing when you're trying to help a customer and you don't know how to get there.
So we've done a lot of work this year to lay out who's job it is to do what, and why. We have trained hundreds of people in the field in how to work with banks on the procedures our processing centers use. They all went through almost a full week of training -- we called it SBA University. We got over 90 percent positive responses from the employees who went through these training sessions. This is exactly what we did in the disaster operation, and we are getting an incredible lift by training people and empowering them to do their jobs.
Another aspect about morale is people really wanted to understand where the agency was going and how they fit it in it. And we have spent a tremendous amount of time in getting out there consistently conveying the messages of what we're trying to accomplish, how we're getting there, what people's accountabilities in getting there are, and how everybody fits into the process. Now they're beginning to feel like the wind is at their back. We did an employee survey for 2007, and I'm pretty confident that we're going to show good results. We have a motivated team. I think this agency has got a smile on its face, and confidence that has been lacking for a long time.
So how's the loan business been?
Loan numbers are good. At the end of '07, we saw an up-tick in the number of loans, we saw an up-tick in the dollars of loans, and we saw a big up-tick in the total outstanding dollar volume. We had almost $67 billion in loans outstanding in the portfolio. Ultimately, though, we don't make any of those loans, the banks do, and with increasing confusion in the credit markets, it's a little hard to call 2008.
If we see a credit crunch that extends beyond the mortgage market, do you have a plan B?
We obviously want to continue to have the proper level of fiscal policy in place, so that we don't see a dramatic increase in losses, but if the banks are moving up higher in the credit tier and saying no to a lot more small business borrowers, there's a good chance we should be picking up some of those loans. Since our programs are designed to break even -- the fees cover the delinquencies -- we need to work with the banks to make sure it works from our credit perspectives, but generally we should be in that band of credit that's right below what a bank would be doing on its own, but strong enough that we think it's going to repay.
The SBA unveiled a new loan programs this year for veterans, the Patriot Express Program. What results have you seen so far from that?
It's really very exciting. It's actually not just for veterans. It's for veterans, national reservists, national guardsmen, and their spouses, so it's got a very broad level of participation within the military community -- probably the broadest of any program in the federal government. We had a very significant level of adoption. Lenders that represent about half of our volume are now participating in this program. It has the same level of guarantee as our highest guarantee levels, it's got the interest rate caps that are the most favorable among our programs. It allows people to use the fastest approval form available so more banks will want to do it. It's probably our best product out there.
Investigators have uncovered fraudulent loans -- so far totaling $76 million -- at a leading SBA Express lender. Does this case call into question the Express program, in which lenders can approve loans instantly, or even the whole notion of delegating to banks the authority to approve government-backed loans?
There has been an enormous amount of misinformation about that. First of all, most of this fraudulent activity occurred a number of years ago, and the oversight that this agency provides has been significantly enhanced since then. And we continue to enhance that. For instance, we're increasing the amount of on-site reviews we do for delegated lenders. This is a terrible situation, but for an agency that has almost $70 billion in loans out there, it's also exceedingly unusual. And in any case, when a lender has been negligent in issuing loans, we don't honor those guarantees. The bank gets stuck with them. So it's unlikely we're going to lose any money.
John Kerry and Olympia Snowe, the Democratic and Republican leaders of the Senate Small Business Committee, continue to criticize the SBA. They've even announced they plan to hold what they called an "accountability hearing" . How would you characterize your relationship with Congress?
I think the relationships are good. We're trying to be much, much more responsive to people on the Hill. I've been up there for 12 hearings this past year. I could say no to those hearings, but I've gone up there almost every time they've asked me to. Our staffs are working very well together, and I personally sign every single piece of congressional correspondence that comes out of this agency.
I think many times the statements made in these oversight hearings are not indicative of the reality of the situation. There are political realities in play here, and anybody who doesn't understand that doesn't understand Washington. Senator Kerry has been very gracious to me.
What would you like to accomplish in your last year at the SBA?
We do a tremendous amount reaching communities with high poverty, high unemployment. I'm excited about doing more for that. We've goaled all of our district offices to get capital to underserved markets, both urban and rural lending. Rural Lender Advantage will help us there. And we'll continue to drive forward the operational changes. We can still automate a lot more of our interactions with banks, making the guts of the organization a lot more streamlined. This agency has had many, many challenges. And I think we have made, I will say, absolutely remarkable progress in the last 17 months. I think we have come a tremendously long way. But we've got a ways to go yet.