Background

When disasters such as floods, tornadoes, or earthquakes strike, federal,  state, and local government agencies coordinate to provide assistance to  disaster victims. SBA, through its Disaster Loan Program, is part of this  effort. SBA provides loans to households and businesses without credit  available elsewhere at a maximum rate of 4 percent and up to a 30-year  term. For households or businesses with credit available elsewhere, SBA  provides loans at a maximum rate of 8 percent and, for businesses, up to a  3-year term. Business loans are available up to $1.5 million, loans for  physical damage to homes are available up to $200,000, and loans for the  repair or replacement of personal property are available up to $40,000.
Like other federal programs, SBA’s Disaster Loan Program follows  performance measurement guidelines under the Government Performance  and Results Act (GPRA) of 1993. GPRA requires agencies to set multiyear  strategic goals in their strategic plans and corresponding annual goals in  their performance plans, measure performance toward the achievement of  those goals, and report on their progress in their annual performance  reports. Annual performance plans are sent to Congress soon after the  transmittal of the President’s budget and provide a direct linkage between  an agency’s long-term goals and mission and day-to-day activities. Related  annual performance reports describe the degree to which performance  goals have been met. Guidance from the Office of Management and Budget  (OMB) indicates that performance plans should include measures of  outcomes—intended results—when the outcomes can be achieved during  the fiscal year covered by the plan. Otherwise, the guidance recognizes  that the performance plans will predominantly include measures of  outputs (program activities) rather than outcomes.
In 1999, SBA began a loan asset sales program, at the direction of OMB, to  reduce the amount of debt the agency owned and serviced. OMB is  interested in increasing loan asset sales in order to improve the  management of loan assets and to transfer loan servicing responsibilities  to the private sector. Our review focused on SBA’s first five loan sales  through January 2002 in which 110,000 loans with an outstanding balance  of $4.4 billion were sold. Approximately 85 percent of the dollar volume of  loans SBA sold were disaster assistance loans made directly by SBA, most  of which have below-market borrower interest rates. The remaining 15  percent were mostly defaulted 7(a) loans, made by SBA’s lending partners  (primarily banks).

	SBA Expanded and Changed the Terms of Its Disaster Loan Program in Response to the September 11 Attacks

In the weeks and months following the terrorist attacks, SBA and  Congress faced the challenge of responding to the lingering effects of the  attacks and subsequent federal actions on small businesses throughout the  country.  SBA responded first in Lower Manhattan, then expanded its  response as additional parts of the New York City and Pentagon areas  were designated disaster areas. Ultimately, SBA helped small businesses  around the country with disaster lending. In response to the concerns  expressed by small businesses, SBA and Congress modified the program,  expanding eligibility for economic injury loans to small businesses around  the country, providing translators for applicants, modifying the size  standards for small businesses, expediting the loan approval and  disbursement processes, and providing larger loans.

		SBA’s Response Covered Small Businesses Nationwide

SBA’s response to the terrorist attacks began on September 11, when SBA  officials arrived in Lower Manhattan to begin coordinating the agency’s  efforts. The initial disaster area in New York City and New Jersey  eventually expanded to include additional counties in Connecticut,  Massachusetts, New Jersey, New York, and Pennsylvania. Maryland,  Virginia, and parts of the District of Columbia were also declared disaster  areas for SBA purposes. As the United States began to deploy military  personnel in response to the terrorist attacks, small businesses nationwide  affected by the loss of employees called up as military reservists were  eligible to apply for a disaster loan under the Military Reservist Economic  Injury Disaster Loan (EIDL) program. Small businesses across the nation  that were adversely affected by the lingering effects of the attacks and  subsequent government action, such as airport closings and the  precipitous drop in tourism, were also eligible to receive disaster loans  under SBA’s Expanded EIDL program. In essence, the entire country was  deemed a disaster area.
More than half the loans went to small businesses outside the area of the  attack sites in New York City and at the Pentagon, with businesses in  Florida and California receiving the second and third largest share of loans  (see fig. 1). Loans ranged from $300 to $1.5 million, with $50,000 as the  most frequently disbursed amount (11 percent of all loans). Businesses  outside the immediate sites of the attacks generally received slightly more  than those close by, in part because they did not have access to the  resources available in New York City. The loans were spread among  industries, with no single type of business accounting for most of the  funds (see fig. 2). The manufacturing sector received the most funds,  followed by professional, scientific, and technical services; transportation  and warehousing; wholesale trade; and accommodation and food services.

		SBA and Congress Modified the Disaster Loan Program in Response to Complaints from Small Businesses

In the months after the terrorist attacks, small business owners affected by  the terrorist attacks presented a number of concerns to Congress about  SBA’s Disaster Loan Program. SBA officials regarded these comments as  valuable feedback and worked with Congress to make several  modifications to the program for September 11 victims:    First, in October 2001, SBA issued regulations to make economic injury  disaster loans available to small businesses nationwide, an  unprecedented change to the Disaster Loan Program, according to SBA  officials. SBA’s Expanded EIDL program enabled businesses outside  the declared disaster areas to apply for loans to cover “ordinary and  necessary” operating expenses that could not be met because of the  attacks or related actions of the federal government between  September 11 and October 22, 2001.
Second, SBA printed informational packets in languages such as  Spanish and Chinese; provided multilingual staff at its offices who  could speak Mandarin Chinese, Croatian, Arabic, and Spanish; and was  prepared to send employees with additional language capabilities to  New York City.
Third, in February 2002, SBA modified the size standards for all  September 11 loan applicants, allowing borrowers to take advantage of  recent inflation-based adjustments. In addition, in March 2002, SBA  increased the size threshold for travel agencies adversely affected by  the attacks from $1 million in annual revenues to $3 million.
Fourth, to expedite loan processing, loan officers streamlined their  needs analysis, calculating economic injury loans using the applicant’s  annual sales and gross margin. By the end of fiscal year 2002, SBA was  processing September 11 business loans, on average, in 13 days  compared with 16 days for disaster assistance business loans  processed in fiscal year 2001. To further expedite disbursement to  those in the World Trade Center and Pentagon disaster areas, SBA  decreased the amount of documentation needed to disburse up to  $50,000.
Fifth, in January 2002, Congress approved supplemental appropriations  for SBA of $150 million, raised the maximum loan amount from $1.5  million to $10 million, and deferred payments and interest for 2 years.  Congress also created the Supplemental Terrorist Activity Relief  (STAR) program to provide assistance to small businesses affected by  the terrorist attacks through SBA’s 7(a) loan guaranty program, which  is not part of the Disaster Loan Program. Under the STAR program,  SBA reduced the fee charged to lenders on new 7(a) loans from 0.50  percent of the outstanding balance of the guaranteed portion of the  loan to 0.25 percent. As of the end of fiscal year 2002, SBA had  guaranteed about 4,700 STAR loans for $1.8 billion.
Some small businesses affected by the terrorist attacks maintained that  SBA’s underwriting criteria—for example, collateral requirements—were  too restrictive. They testified that SBA had withdrawn their applications  because they would not use their homes as collateral. They argued that it  was too risky to use their homes as collateral, especially since the survival  of their businesses was uncertain. SBA, however, did not change its  underwriting criteria for September 11 victims. SBA officials said that the  agency makes every effort to approve each application by applying more  lenient credit standards than private lenders. However, the officials said  that they adhered to their credit standards to minimize losses and program  costs.
SBA data indicate that the 52 percent rate for withdrawing and declining  September 11-related loan applications was not out of line when compared  with other disasters or with private lenders. The primary reasons SBA  identified for withdrawing September 11 loan applications was a lack of  Internal Revenue Service (IRS) records to corroborate applicants’ income,  and applicants’ failure to provide additional information SBA had  requested. SBA officials said that the most common reasons for declining  September 11 loan applications were inability to repay the loan and  unsatisfactory credit. According to SBA, these were also the primary  reasons for withdrawing or declining nearly two-thirds of all SBA disaster  loan applications in fiscal year 2001.
SBA officials believed that many of the complaints about the disaster  program resulted from the mismatch between victims’ expectations of  SBA’s disaster program and the nature of the program. SBA officials told  us that they tried to minimize public confusion about the nature of the  assistance available from SBA by working closely with the media and  public officials to provide accurate information about the Disaster Loan  Program.

	SBA’s Disaster Program Performance Measures Do Not Capture the Scope of the Agency’s Efforts

The six performance indicators SBA currently uses to measure the  Disaster Loan Program are  field presence within 3 days of a declaration,  loans processed within 21 days,   homes restored to predisaster condition,    businesses restored to predisaster condition, and  initial loan disbursement within 5 days of receiving closing documents.
We identified several problems with these measures. For example, several  are output measures that did not reflect the actual progress being made.  Some are proxies that did not accurately represent what was being  measured. There is a lack of measures for intermediate or end outcomes,  and features in SBA’s description of the Disaster Loan Program in its  performance plans made assessing the program difficult. Several of the  limitations we found had been identified in previous GAO or SBA  Inspector General reports and had not been corrected.

		Three Output Measures Do Not Capture Progress

Officials from SBA’s Disaster Area Offices (DAO) questioned whether the  three output measures—establishing a field presence within 3 days of a  disaster declaration, processing loan applications within 21 days, and  disbursing initial loan amounts within 5 days of receiving the closing  documents—were appropriate indicators of timely service to disaster  victims since they did not, for example, capture recent program  improvements.  SBA has had a 98 percent success rate in meeting the  target for establishing a field presence each fiscal year since 1998. Officials  from the area offices said that improvements in planning, interagency  coordination, and technology enabled them to have staff on site within 1  day of a disaster declaration. According to DAO staff, delays in  establishing a field presence generally occurred because SBA was waiting  for decisions from state officials.
SBA data and comments from DAO officials suggested that the second  output measure—processing loan applications within 21 days of receipt— did not reflect improvements in past performance. For example, SBA  aimed for an 80 percent success rate for fiscal year 2001, but the actual  time required for processing averaged 13 days in fiscal year 2001 and fell  to 12 days in fiscal year 2002. The average time required to process the  September 11 business loans was also about 13 days.  DAO officials  attributed their faster processing times to several agencywide  improvements.
DAO staff also suggested that another measure—the 5-day target for  making initial disbursements once closing documents are received—did  not reflect past performance and was a low threshold. Before 2002, SBA  had an internal goal of ordering disbursements within 3 days of receiving  closing documents. When SBA included this measure in the performance  plan, the disbursement target was increased to 5 days to accommodate  weekends and holidays, because SBA’s system for tracking disaster loan  processing could not distinguish between workdays and other days.  Accustomed to the stricter 3-day standard, staff were able to meet the 5- day standard with ease.
In commenting on a draft of our report, SBA indicated that the output  measures were established based on what was determined to be a  reasonable level of service in an average year, taking into account the  amount of resources required. Because disasters cannot be predicted,  officials did not think it would be feasible to adjust production levels  based on a single year’s performance. Even with some program  improvements, they believed it would be very difficult and costly to  maintain such levels during periods of multiple major disasters. Although  SBA acknowledged that a basis for modifying some output measures might  exist, the officials believed that the modifications should be based on an  average level of projected activity that takes into consideration some  permanent improvements that have been made to the program.

		Two “Outcome” Measures Actually Assessed Outputs

SBA officials indicated that three measures—number of homes restored to  predisaster condition, number of businesses restored to predisaster  condition, and customer satisfaction—were used to assess the effect, or  outcomes of lending to disaster victims.  But these “outcome” measures  also had limitations.  First, while the restoration of homes and businesses  was a stated outcome in SBA’s strategic and performance plans, SBA did  not actually measure the number of homes and businesses restored.  Instead, SBA reported on the number of home loans approved as a proxy  measure for the number of homes restored to predisaster condition.  However, these measures assessed what are actually program outputs  (loans approved) rather than stated outcomes (homes and businesses  restored). Such proxy measures, then, were likely to have overestimated  the number of homes and businesses restored because borrowers might  cancel the loan. According to SBA, about 10 percent of the loans approved  for September 11 victims were cancelled by borrowers. Third, these  indicators used annual figures that were affected by factors outside of  SBA’s control, such as the number of disasters that occurred during a  given fiscal year. A more useful indicator would be the percentage of  homes and businesses receiving loans that were restored each year to pre- disaster conditions.
To measure customer satisfaction, SBA used the results of its survey of  successful loan applicants. (SBA also used this survey to evaluate the  impact of the program.)  But the survey methodology had significant  limitations. For example, it measured the satisfaction of only a portion of  the customers that the disaster loan program serves. Every DAO director  we interviewed indicated that all disaster victims were SBA customers and  that a broader population should be surveyed.  In 2001, we and the SBA  Inspector General made the same suggestion to SBA.  As we indicated  then, the survey method SBA had been using was likely to produce  positively skewed responses.  SBA headquarters officials indicated that  they were resistant to surveying those who were denied loans because  they presumed that the applicants’ responses would be negative.

		Some Measures Did Not Assess Intermediate or End Outcomes

Recommendations from SBA’s Inspector General, and guidance from us  and within SBA, have encouraged the use of outcome measures for this  program. But we found that only one of the performance measures SBA  was using—customer satisfaction—had the potential to assess a stated  outcome of the Disaster Loan Program. The other intended outcomes,  which could have been measured annually or biannually, such as jobs  retained or housing restored, were not measured.
In addition, SBA had stopped using intermediate outcome measures it had  used in the past—loan currency and delinquency rates—to assess the  quality of disaster loans. It also had not measured another potential  intermediate outcome from the underwriting process—having appropriate  insurance. As one DAO official suggested, having coverage such as flood  insurance potentially reduces the number of loans required in some  disaster-prone areas. As we have reported previously, such insurance can  reduce disaster assistance costs and could reduce the effect of a disaster  on its victims.
SBA headquarters staff said that while they recognized some of these  shortcomings, they had limited ability to develop and use better outcome  measures. The staff indicated that the very nature of disaster lending was  unpredictable, making it difficult to set performance targets for  intermediate or end outcomes. One SBA official said that the agency is  reluctant to measure and report intermediate or end outcomes that are  outside its control. Other DAO officials indicated that conducting some  end outcome measurement methodologies would be expensive—for  instance, on-site inspections of a sample of homes and businesses to  assess restoration.
We made two recommendations designed to help SBA improve its  performance measures for disaster lending. First, we recommended that  SBA revise the performance measures to include more outcome measures;  assess more significant outputs, such as service to applicants or loan  underwriting; report achievements that can be compared over several  years, such as percentages; and include performance targets that  encourage process improvement rather than maintaining past levels of  performance. Second, we recommended that SBA revise and expand its  current research to improve its measures and evaluate program impact. To  improve its current measures, we suggested that SBA conduct research,  such as surveying DAO staff and reviewing relevant literature to identify  new outcome measures that could be tested. To evaluate its program  impact, SBA needs to ensure that its survey covers all disaster loan  applicants and to employ other methods, such as periodic analyses of  regional statistics, to assess the economic impact of the program on local  communities. SBA generally agreed with our recommendations and said it  is addressing our concerns. As of this month, SBA had distributed a  customer service survey to help evaluate the Disaster Loan Program’s  impact and was developing a broader survey. We will follow up with SBA  regarding the status of their efforts.

		SBA’s Performance Plans Had Limitations

We identified several features of the description of the Disaster Loan  Program in the 2002 and 2003 performance plans that make it difficult to  assess whether SBA is making progress in attaining its strategic goal. First,  between 2002 and 2003, the program’s performance goal changed from an  outcome-oriented goal (helping families recover from disasters) to an  output-oriented goal (streamlining disaster lending) without the required  explanation. GPRA requires agencies to explain why they change  performance goals, and OMB generally recommends that agencies use  goals that are outcome-oriented.
Second, the 2002 and 2003 performance plans do not define the linkages  between each program output and each intermediate or end outcome. The  plans do not explain how the outputs (disaster loans) are related to the  performance indicators (field presence, customer satisfaction, and  application processing time frames). Third, the plans do not explain how  the performance measures or indicators are related to either program  outcomes or outputs. Fourth, performance indicators are added to or  dropped from the plans without explanation, making it difficult to  understand how and if SBA expects to improve or sustain its loan  processing performance.
The performance plans also contain incomplete or inaccurate information  on some performance indicators. For example, despite OMB and SBA  guidance, validation and verification information on field presence and  loan processing measures is omitted, making it difficult to assess the  quality of performance data. In addition, the 2003 performance plan  indicates that data on the number of homes restored to predisaster  condition are based on on-site inspections of homes. However, SBA  officials indicated that they use a proxy measure—the number of original  home loans approved—as the actual source of data for homes restored to  predisaster condition.
We recommended revising the section of the performance plan that covers  the Disaster Loan Program to establish direct linkages between each  output and outcome and the associated performance measure; accurately  describe proxy measures as either outcome or output measures;  accurately describe the validation and verification of performance  measures; and explain additions, deletions, or changes from the previous  year’s goals and measures. SBA also agreed with this recommendation.  SBA informed us this month that it has undertaken a long-term review of  the strategic plan with the aim of revising the performance goals and  measures and linking performance to the new plans and goals. We will  monitor SBA’s progress in implementing this initiative.

	Loan Assets Sales Affect Disaster Loan Borrowers and the Loan Program

A large portion—85 percent in the first 5 sales—of the loans sold are  disaster loans previously serviced by SBA. SBA’s program to sell disaster  loans that it makes directly to borrowers and subsequently services results  in private investors owning and servicing the loans over their remaining  terms. It was difficult for us to determine the reaction of borrowers whose  loans were sold because of incomplete records at SBA. We identified  numerous errors in SBA’s accounting for the loan sales, including  unexplained declines in SBA’s loss allowance account for disaster loans.
Until corrected, these errors mean that SBA’s subsidy estimates and  reestimates for the disaster loan program cannot be relied upon. The  operational benefits from selling loans that SBA has claimed may be  overstated.

		Information on How Selling Disaster Loans Affects Borrowers Is Incomplete

SBA built in some safeguards to protect borrowers when their loans are  sold. But, because SBA’s process for documenting and tracking borrower  inquiries and complaints has weaknesses, we could not determine how  many borrowers had actually contacted SBA with complaints or concerns  about the loan sales.
Borrowers have little control over what happens to their loans if SBA  decides to sell them. However, SBA has some policies intended to protect  the integrity of the programs that provided the loans. SBA’s programs,  including servicing disaster loans after they are made, are designed to help  the borrower recover from a disaster. To protect this public policy goal,  SBA’s loan sales agreements with purchasers require certification that the  investors are qualified to purchase and service the loans and will follow  prudent loan servicing practices. The loan sales agreement also prevents  purchasers from unilaterally changing the terms and conditions of the  loans. In addition, SBA does not sell some disaster loans, including those  issued to borrowers currently residing in a federally declared disaster area  and those that are less than 2 years old. According to SBA, more servicing  is typically required in the first 2 years of a disaster loan—such as changes  due to revised physical damage estimates.
Nevertheless, we were not able to validate the way in which borrowers  reacted to the loan sales because SBA could not provide a reliable  estimate or information on the number of borrowers who had contacted  them about their sold loans. Complete and reliable information on  borrower complaints is important because SBA officials told us that when  a borrower complained about a servicing action they contacted purchasers  to collect additional information and determine whether a purchaser was  breaching the borrower protections. One reason why SBA’s tracking  system is ineffective is that borrowers with questions or complaints can  call or write to several different SBA offices, or to a representative of  Congress. Some SBA field office officials told us that SBA does not  provide them with clear guidance on how to respond to or document such  complaints. Officials from seven district offices, three servicing centers,  and two disaster area offices told us that they had received calls and  letters from borrowers who had concerns about loans that had been sold.  But the methods for documenting inquiries and complaints varied across  offices, except for congressional letters, which were consistently  forwarded to SBA headquarters. In August 2001, SBA began providing a  toll-free number for borrowers to call with questions or complaints about  loan sales. Borrowers were informed about the toll-free number in a letter  telling them how to contact the new owner of their loan. However, field  office staff did not receive any guidance regarding the purpose and use of  the toll-free number.
Though we were unable to determine how many borrowers have  contacted SBA about their sold loans, we reviewed 133 of the 155 written  inquiries and complaints documented at headquarters, along with SBA’s  written responses, to identify the types of questions and problems  borrowers may have when their loans are sold. Our analysis showed that  almost half (65) were inquiries and concerns about their loans being sold,  requests to buy their own loans, or pleas not to have their loans sold.  However, 47 of the borrowers complained about a purchaser’s servicing  action. For example, some letters involved disagreements or frustration  with servicing decisions, such as refusing to subordinate or release  collateral, or imposing a fee to complete a servicing action such as  subordination. Another 18 letters were from borrowers who wanted to  defer payments or change the amount of their monthly payments because  of financial problems, and felt they were not getting appropriate treatment  from the purchasers of their loans.
To address these weaknesses in the loan sales program, we recommended  that SBA develop procedures for documenting and processing inquiries  and complaints from borrowers, and then provide guidance to the field  offices about implementing them. SBA reported to Congress in March 2003  that it would soon issue a procedural notice to its field offices providing a  uniform process for handling borrower inquiries and complaints. SBA  stated that it also intends to establish an e-mail account for use by all  employees to record and forward borrower comments to the asset sales  team at headquarters, establish a database to track borrower comments,  and enhance a tracking system used for residential borrower inquiries at a  servicing center. We will follow up with SBA to monitor its  implementation of our recommendations.

		SBA’s Accounting for Loan Sales and the Remaining Portfolio Was Flawed

During our review, we found errors that we believe could have  significantly affected the reported results in the budget and financial  statements for fiscal years 2000 and 2001. Because of errors we identified,  SBA’s auditor withdrew its clean audit opinions for those years and issued  disclaimers of opinion. Moreover, because of these and other financial  management issues, the auditor has disclaimed an opinion on SBA’s  financial statements for 2002. Although this roundtable is not intended to  explore the intricacies of accounting, I will briefly comment on our  findings, which are fully discussed in the report and testimony cited  previously.
SBA incorrectly calculated the accounting losses on the loan sales and  lacked reliable financial data to determine the overall financial impact of  the sales. Further, because SBA did not analyze the effect of loan sales on  its remaining portfolio, its reestimates of loan program costs for the  budget and financial statements cannot be relied upon. In addition, SBA  could not explain significant declines in its loss allowance account for  disaster loans. Until SBA corrects these errors and determines the cause of  the precipitous decline in the loss allowance account, the subsidy  estimates and reestimates for the disaster loan program cannot be relied  on. These errors and the lack of key analyses also mean that congressional  decision makers are not receiving accurate financial data to make  informed decisions about SBA’s budget and the level of appropriations the  agency should receive.
We recommended that, before doing more loan asset sales, SBA correct  the accounting and budgeting errors and misstatements. And that SBA’s  Inspector General, with SBA’s independent auditors, should assess the  impact of the identified errors and determine if the prior audit opinions  need to be revised. SBA is working to respond to these recommendations  and, as we noted above, the auditor has withdrawn the previously issued  clean audit opinions because they could not be relied upon. We will be  monitoring SBA’s continuing efforts to resolve these issues.

		Loan Sales Have Reduced SBA’s Loan Servicing Volume, but Other Operational Benefits May Be Overstated

SBA reported that loan asset sales had benefited the agency’s operations  by reducing loan servicing, and that this reduction in loan servicing  volume should help allocate resources to other areas necessary to  achieving SBA’s mission and help the agency to manage its loan portfolio  more effectively. Though we found that loan servicing volume had  declined for SBA disaster home loan centers, the effect on regular  business loans was less clear. Furthermore, despite these reductions in  loan servicing volumes, SBA had not yet redeployed staff to more mission- critical activities, such as lender oversight and business outreach. We  found that loan sales have mostly reduced the servicing workloads for  disaster assistance loans. They have had less impact on servicing  workloads for 7(a) business loans, because lenders did not always consent  to sell these loans. Because the reduction in loan servicing has involved  disaster assistance loans, it was unclear to what extent loan sales would  help the agency realign its workforce in the district offices that primarily  serve small businesses.
SBA has also reported that the loan sales have prompted borrowers to pay  their loans in full, revealed inconsistencies in the application of the  agency’s servicing procedures, and highlighted weaknesses in its  information system. We found some support to show that the loan sales  had produced portfolio management efficiencies. But we also found that  some of the benefits SBA had reported began before the loan sales  program, or could have been caused by other factors. For example,  borrowers of disaster loans who refinanced their homes while lower  interest rates were available often paid off their disaster loans, even  though their disaster loans had low interest rates.
To provide Congress and SBA with a better understanding of the impact of  loan sales on SBA’s operations, we recommended that SBA conduct a  more comprehensive evaluation of the loan sales’ impact on the agency  and the cost savings from the sales. SBA recently stated that it will  conduct such an evaluation. We will follow up with SBA as it addresses  our recommendation.
Madam Chair, Members of the Committee, this concludes my prepared  statement. I would be happy to answer any questions at this time.

Summary:
Why GAO Did This Study

This testimony discusses the role of the Small Business Administration's (SBA) Disaster Loan Program in responding to the September 11, 2001, terrorist attacks, general performance measures for the program, and the effects of SBA's program to sell loans to private investors on disaster loans and their borrowers. In reviewing SBA's loan sales program, which includes disaster loans, we identified three areas needing improvement: tracking borrower inquiries and complaints; sales budgeting and accounting which affect the reliability of SBA financial statements and budget information; and reporting on the operational benefits of the loans sales. This testimony focuses on SBA's (1) response to the September 11 terrorist attacks; (2) performance plans and measures for its Disaster Loan program; and (3) loan assets sales program, which involves selling disaster and other loans.

What GAO Found

The nature of the September 11 attacks and subsequent government actions presented SBA's Disaster Loan Program with new and difficult challenges. Specifically, small businesses in both the declared disaster areas and around the nation suffered economic injury. SBA sought to respond to the concerns of small businesses in the months following September 11by extending eligibility for economic injury loans nationwide--a marked change from earlier disasters that affected primarily businesses in one geographic location. In addition, SBA modified both the terms and lending practices of its Disaster Loan Program. We found that SBA had adapted its Disaster Loan Program to respond to the needs of September 11 victims but that SBA's performance measures did not provide congressional decisions makers with an accurate description of the program's performance. In addition, some output measures had not kept up with SBA's actual progress in assisting disaster victims. Further we identified features in SBA's description of its Disaster Loan Program in the 2002 and 2003 performance plans that made assessing the agency's progress in attaining its strategic goals difficult. Our review of SBA's five loan sales from August 1999 to January 2002 revealed that 85 percent of the $4.4 billion in loans sold were disaster assistance home and business loans. SBA established some policies to protect borrowers whose loans were sold. In trying to determine how borrowers reacted to having their loans sold, we found that SBA relied on borrower inquiries and complaints to determine whether purchasers of the loans were using prudent loan servicing practices. However, information o n borrowers' reaactions was incomplete because SBA did not have a comprehensive process to capture the inquiries and complaints it recieves. Moreover, we found serious issues in SBA's budgeting and accounting for the loans sold, as well as the remainder of the portfolio. In addition, there were significant unexplained declines in the subsidy allowance for the disaster program. SBA is continuing to work on resolving its accounting and financial reporting problems. Finally, our analysis of the operational benefits from loan sales suggested that some benefits that SBA reported, such as reductions in servicing and workload volume, either had not yet materialized or were overstated.