a

GAO

United States Government Accountability Office

Report to the Administrator, Small 

Business Administration

August 2004 SMALL BUSINESS 

ADMINISTRATION

SBA Followed 

Appropriate Policies 

and Procedures for 

September 11 Disaster 

Loan Applications

GAO-04-885
www.gao.gov/cgi-bin/getrpt?GAO-04-885.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Davi M. 

D'Agostino at (202) 512-8678 or 

dagostinod@gao.gov. 

Highlights of GAO-04-885, a report to the 

Administrator, Small Business 

Administration 

August 2004

SMALL BUSINESS ADMINISTRATION

SBA Followed Appropriate Policies and 

Procedures for September 11 Disaster 

Loan Applications 

The Small Business Administration 

(SBA) played a key role in assisting 

small businesses affected by the 

September 11, 2001 terrorist 

attacks by providing over $1 billion 

in disaster loans to businesses that 

sustained physical damage or 

economic injury. Small businesses 

in the immediate areas of the 

attacks and others nationwide that 

suffered related economic injury 

were eligible to apply for disaster 

loans. SBA declined or withdrew 

about half of these loan 

applications. SBA’s disaster loans 

are direct federal government loans 

provided at a subsidized interest 

rate. 

In response to concerns that more 

small businesses impacted by 

September 11 could have benefited 

from SBA’s disaster loans, GAO 

conducted a review of its Disaster 

Loan Program. Specifically, GAO 

addressed the following questions: 

(1) Are the disaster program 

policies consistent with the law 

and the overall mission of SBA’s 

Disaster Loan Program? (2) What 

were SBA’s underwriting policies 

and criteria for September 11 

Economic Injury Disaster Loans 

(EIDL) and how did they compare 

with those applied by nonprofit 

lenders that were active in New 

York City after September 11? (3) 

Did SBA correctly apply its policies 

and procedures in its disposition of 

September 11 EIDLs? 

GAO makes no recommendations 

in this report. 

SBA’s policies and procedures for providing EIDLs are consistent with the 

Small Business Act: applicants must have suffered substantial economic 

injury as a result of a declared disaster, and SBA must determine that they 

are not able to obtain credit elsewhere. The act addresses some loan terms, 

such as length of maturity, but it does not specify underwriting criteria for 

SBA to follow. However, SBA’s regulations contain underwriting criteria 

such as assessing an applicant’s ability to repay the loan and obtaining 

collateral. 

SBA’s underwriting requirements for September 11 EIDLs generally followed 

program guidelines and were similar to those of selected nonprofit 

organizations in New York City. Small businesses that were eligible to apply 

for SBA assistance were expected to meet standard requirements for 

documentation, creditworthiness, repayment ability, collateral, and 

character. These requirements are generally consistent with best practices 

published by lending industry experts and guidance issued by federal 

regulators. Changes made to address the unusual circumstances of the 

September 11 disaster were to eligibility and loan terms and not to loan 

underwriting criteria. The three nonprofit organizations in New York City 

that made September 11 disaster loans had requirements similar to SBA, but 

the nonprofits had some additional flexibility to address the needs of their 

small business constituents. 

GAO found that SBA followed its policies and procedures in making 

decisions for September 11 EIDLs. All of the files in our random, 

representative sample of declined or withdrawn applications contained 

documentation and analysis to support the SBA’s determination. GAO’s 

review of this sample also indicated that SBA followed its procedures for 

processing applications—such as supervisory review and notifying 

applicants of its decision and their right to have the application 

reconsidered. GAO’s review of a small sample of approved loans also 

indicated that SBA followed its policies and procedures. 

SBA’s Disposition of Economic Injury Disaster Loan Applications for September 11 

Source: GAO.

15%

39%

46%

Withdrawn

Approved

Declined
Page i GAO-04-885 Small Business Administration

Contents

Letter 1

Results in Brief 2

Background 5

The SBA Disaster Loan Program’s Policies and Procedures Are 

Consistent with the Law and the Program’s Overall Mission 9

SBA’s Underwriting Criteria Followed Program Guidelines and Best 

Practices and Were Similar to Those of Nonprofits Offering 

Disaster Loans 12

SBA Followed Its Own Policies and Procedures in Making 

Determinations on September 11 Economic Injury Disaster

Loans 20

Observations 25

Agency Comments 26

Appendixes

Appendix I: Scope and Methodology 27

Appendix II: Comments From Small Business Administration 31

Table Table 1: Disposition of Loan Application Sample By SBA Disaster 

Area Office 28

Figures Figure 1: SBA’s Underwriting Criteria Compared with Those of 

Three Nonprofit Lenders 18

Figure 2: Reasons SBA Declined and Withdrew September 11 Loan 

Applications in Our Sample 22

Figure 3: SBA’s Processing Times for Declined and Withdrawn 

Loan Application Files in Our Sample 24
Contents

Page ii GAO-04-885 Small Business Administration

Abbreviations

EIDL Economic Injury Disaster Loan

FEMA Federal Emergency Management Agency

IRS Internal Revenue Service

SBA Small Business Administration

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United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

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Page 1 GAO-04-885 Small Business Administration

United States Government Accountability Office

Washington, D.C. 20548

A

August 31, 2004 Letr

The Honorable Hector V. Barreto

Administrator

Small Business Administration

Dear Mr. Barreto:

The Small Business Administration (SBA) played a key role in assisting 

small businesses affected by the September 11, 2001 terrorist attacks. SBA 

provided approximately $1.1 billion in disaster loans to businesses that 

were physically damaged or had suffered a substantial economic injury as a 

result of the attacks. Small businesses in the declared disaster areas 

surrounding the World Trade Center and the Pentagon, as well as others 

nationwide that had suffered economic injuries directly related to the 

events of September 11, were eligible to apply for disaster loans. SBA 

required eligible applicants to document the extent of their losses and 

provide enough financial information for SBA to determine repayment 

ability. SBA declined or withdrew those loan applications that its loan 

officers determined did not meet its underwriting criteria. SBA’s disaster 

loans are direct federal government loans provided at a subsidized interest 

rate.

In previous work, we reported that SBA had declined or withdrawn about 

half of approximately 24,000 post-September 11 applications for disaster 

loans nationwide.1

 In response to concerns that more small businesses 

impacted by September 11 could have benefited from these loans, we 

conducted a review of SBA’s Disaster Loan Program. Specifically, we 

addressed the following questions: (1) Are the disaster program policies 

consistent with the law and the overall mission of SBA’s Disaster Loan 

Program? (2) What were SBA’s underwriting policies and criteria for 

September 11 Economic Injury Disaster Loans (EIDL) and how did they 

compare with those applied by nonprofit lenders that were active in New 

York City after September 11? (3) Did SBA correctly apply its policies and 

procedures in its disposition of September 11 EIDLs? 

To determine whether SBA’s program policies are consistent with the law 

and overall mission of SBA’s Disaster Loan Program, we reviewed the law 

1

GAO, Small Business Administration: Response to September 11 Victims and 

Performance Measures for Disaster Lending, GAO-03-385 (Washington D.C.: Jan. 29, 2003).
Page 2 GAO-04-885 Small Business Administration

related to the program as well as SBA’s regulations and operating 

procedures. To determine SBA’s underwriting policies and criteria for 

September 11 EIDLs, we analyzed SBA’s policies and procedures for 

approving, declining, and withdrawing disaster loans, and changes in its 

policies and the law made after September 11. We discussed the provisions 

of the law and SBA’s policies and procedures with SBA officials. We also 

analyzed the underwriting policies and procedures of three selected 

nonprofit lenders that provided loans to small businesses in New York after 

September 11 and discussed the lenders’ policies with officials of the 

respective organizations. In addition, we compared SBA’s underwriting 

requirements with best practices for managing credit risk during the loanmaking process of industry and banking regulators. To determine whether 

SBA correctly applied its policies in the disposition of September 11 EIDL 

applications, we reviewed a representative random sample of declined and 

withdrawn September 11 EIDL application files drawn from all disaster 

area offices,2

 and a small sample of application files for approved 

September 11 loans. The representative sample of declined and withdrawn 

files allowed us to project to the universe of about 12,000 declined and 

withdrawn EIDLs, but the small sample of approved loans did not allow us 

to project to the universe of all approved loans, and we discuss only the 

disposition of the 27 approved loans we reviewed. Appendix I contains a 

detailed description of our scope and methodology. We conducted our 

work between May 2003 and June 2004 in Atlanta, GA; New York, NY; and 

Washington, D.C. in accordance with generally accepted government 

auditing standards. 

Results in Brief The SBA Disaster Loan Program’s policies and procedures are consistent 

with the law and the program’s overall mission of helping businesses, 

among others, recover from disasters.3

 The Small Business Act authorizes 

SBA to make low-interest loans to small businesses that have suffered a 

2

SBA’s four disaster area offices are located in California, Georgia, New York, and Texas, and 

serve the entire continental United States and U.S. territories.

3

SBA’s Office of Disaster Assistance defines its mission as helping people recover from 

disasters and rebuild their lives by providing affordable, timely, and accessible financial 

assistance to homeowners, renters, and businesses. This report addresses only economic 

injury disaster loans SBA provided to businesses, although SBA also provides loans to 

businesses for physical damage from disasters.
Page 3 GAO-04-885 Small Business Administration

substantial economic injury as the result of a disaster.4 The act states that 

no loan for economic injury shall be extended unless SBA finds that the 

applicant is not able to obtain credit elsewhere, but it does not specifically 

address underwriting criteria. For example, the act does not specify that 

EIDLs must be of such sound value or so secured as to provide reasonable 

assurance of repayment, as it does for SBA’s general business loans. 

Additionally, the act does not specifically address the issue of collateral for 

EIDLs, whereas it specifies that SBA not require collateral for physical 

disaster business loans of $10,000 or less. However, SBA’s regulations for 

its Disaster Loan Program do specify underwriting criteria for EIDLs. 

Under its disaster program regulations, SBA generally requires collateral 

for EIDLs over $5,000, but it will not decline a loan if an applicant lacks 

adequate collateral if there is a reasonable assurance that the applicant can 

repay the loan.

SBA’s underwriting policies and criteria for September 11 EIDLs generally 

followed program guidelines, although notable exceptions were made for 

this disaster, and were generally similar to those of the selected nonprofit 

organizations we reviewed. Applicants eligible for SBA’s program were 

expected to meet established requirements for documentation, 

creditworthiness, repayment ability, collateral, and, as determined by SBA, 

appropriate character.5

 These requirements are generally consistent with 

best practices published by lending industry experts and guidance issued 

by federal regulators. With the Defense Appropriations Act of 2002, 

Congress increased the statutory loan limit and the deferral periods for 

repayment and SBA increased business size standards for eligible 

borrowers.6

 The maximum loan amount was increased from $1.5 million to 

$10 million, and SBA’s standard 4-month deferral period was increased to 2 

years for borrowers in the immediate areas of the disaster. Also, SBA took 

action so that businesses nationwide—not just those in the immediate area 

4

Although the Small Business Act does not define substantial economic injury for EIDLs, 

SBA regulations define it as economic harm to a business concern that results in its inability 

to meet its obligations as they mature or pay its ordinary and necessary operating expenses. 

13 C.F.R. §123.300 (a) (1) (2003).

5

By statute, SBA is required to deny assistance to persons convicted during the past year of 

committing a felony during and in connection with a riot or civil disorder. Pub. L. No. 90-448 

§ 1106(e) (1968). According to SBA officials, SBA uses specific program guidelines to make 

a character determination on each loan applicant with a prior arrest or conviction. SBA’s 

procedure is documented in the Standard Operating Procedure 50-30.

6

See Pub. L. No. 107-117 §§ 202, 203, 115 Stat. 2297 (Jan. 10, 2002).
Page 4 GAO-04-885 Small Business Administration

of the disaster—were able to apply for EIDLs if they had suffered economic 

injury as a result of the terrorist attacks and subsequent federal actions, 

such as closing airports.7

 In addition, applicants in the expanded area were 

required to provide a statement linking their economic injury claims to the 

September 11 disaster. The three nonprofit organizations that we selected 

for comparison generally provided financial and technical assistance to 

businesses in New York City that suffered losses as a result of September 

11. All of these organizations had requirements that were similar to SBA’s 

for documentation, creditworthiness, and repayment ability. Unlike SBA, 

all had limited requirements for collateral, and none used character as a 

factor in determining eligibility for assistance.

Our review of a representative sample of declined and withdrawn 

September 11 EIDLs and a small sample of approved loans indicated that 

SBA followed its own policies and procedures in making determinations on 

these loan applications. We reviewed a sample of 99 declined and 

withdrawn loan application files to determine whether SBA made its 

determinations correctly. For all of the 99 files, SBA’s policies and 

procedures justified its decisions to decline or withdraw the applications. 

SBA’s primary reason for declining September 11 loan applications overall 

was its determination that the applicant lacked repayment ability. In 

making such determinations, SBA looked at whether the applicants had the 

cash flow to make payments on the loan based on their pre-disaster 

financial performance. The primary reason SBA withdrew loan 

applications was the applicant’s failure to file and pay federal income tax 

for 1 or more years. Outside the designated September 11 disaster area, the 

primary reason SBA declined applications was the applicants’ failure to 

establish a direct link between the events of September 11 or related 

federal actions and the applicants’ business downturn. In all of the 99 files, 

we found that SBA had notified the applicants in writing of its reasons for 

declining or withdrawing loan applications, problems with the applications 

and the means of correcting any deficiencies, and each applicant’s right to 

have the loan application reconsidered by SBA. Our review of a small 

sample of 27 approved loan application files indicated that SBA also 

followed its policies and procedures in approving these loans. SBA had 

denied or withdrawn 8 of these 27 applications prior to approving them. 

7

The Small Business Administration promulgated regulations dealing specifically with 

EIDLs relating to the September 11, 2001, terrorist attacks. See 13 C.F.R. Part 123, Subpart G 

(2003).
Page 5 GAO-04-885 Small Business Administration

For these eight approved loans, the applicants addressed deficiencies 

identified by SBA, such as failure to file for federal income taxes.

We provided a draft of this report to SBA and received written comments 

from the Associate Administrator For Disaster Assistance. SBA’s letter is 

reprinted in appendix II. SBA agreed with the findings in this report. 

Background When a disaster occurs, staff from SBA’s Disaster Loan Program, the 

Federal Emergency Management Agency (FEMA), and other government 

agencies work together to assess the damage to the affected area and aid 

household and business disaster victims. Either the President or the SBA 

Administrator may issue a disaster declaration. When the President issues 

a disaster declaration, FEMA specifies the immediate disaster area and 

SBA determines which contiguous counties are eligible for federal 

assistance.8

 When SBA issues a disaster declaration, it specifies the 

immediate disaster area and any contiguous counties that are eligible for 

assistance. Unlike FEMA, which can provide some grants to residents in 

the area of a disaster, SBA provides loans to households and businesses 

affected by disasters. Once a disaster is declared, officials from one of 

SBA’s four Disaster Area Offices—located in California, Georgia, New York, 

and Texas—arrive at the disaster site and begin assisting victims. These 

officials provide information about the disaster loan process, distribute 

loan applications, and assist victims, if requested, in completing 

applications. In response to the September 11 terrorist attacks, SBA 

disaster program officials from around the country provided assistance to 

the New York Disaster Area Office, which was the office primarily 

responsible for providing assistance. 

Depending on the nature of the disaster, SBA can provide businesses hurt 

by a disaster with fixed-rate, low-interest loans to address physical 

8

According to SBA officials, most requests for disaster declarations come from the governor 

of the affected state, who can ask for a presidential disaster declaration or an SBA 

administrative declaration, depending on the severity of the disaster. A presidential 

declaration makes many federal programs available, including SBA loans; an SBA 

declaration makes only SBA loans available. 
Page 6 GAO-04-885 Small Business Administration

property damage and economic injuries.9 These low-interest loans are 

subsidized by taxpayers through federal appropriations, and if the loans are 

not repaid, the subsidy cost for disaster loans increases. SBA provides 

loans to cover physical damage to both small and large businesses, 

enabling them to repair or replace damaged real property, machinery, 

equipment, fixtures, and inventory to begin restoring the property to its 

pre-disaster condition. SBA provides EIDLs only to eligible small 

businesses, allowing them to meet necessary financial obligations that 

could have been met if the disaster had not occurred and to maintain 

necessary working capital during the period that business activities are 

affected by the disaster. For most disasters, SBA has primarily assisted 

businesses with physical disaster loans. However, given the nationwide 

economic impact resulting from the terrorist attacks of September 11, 2001, 

EIDLs became SBA’s primary form of assistance. Of the approximately 

24,000 September 11 disaster loan applications, SBA approved about 

11,000, totaling $1.1 billion. Over 10,000 of these loans, amounting to $1 

billion, were for EIDLs.

Under its statutory authority to provide economic injury disaster loans to 

small businesses, SBA has established policies and procedures for 

determining whether an applicant qualifies for a loan and the likely viability 

of the loan, using pre-disaster financial information from the applicant. 

SBA loan officers determine whether applicants meet agency criteria. SBA 

loan officers may determine that applicants do not meet these criteria for 

one or more of the following reasons: 

• lack of repayment ability;

• unsatisfactory history on an existing or previous SBA loan;

• unsatisfactory history on a federal obligation, such as taxes;

• unsatisfactory credit history;

• unsatisfactory debt payment history;

9

For physical and economic injury disaster loans made after October 1, 1982, to businesses 

that cannot obtain credit elsewhere, the maximum interest rate is 4 percent per annum. For 

businesses with credit available elsewhere, SBA provides loans for physical damage at a 

maximum rate of 8 percent with a 3-year term; economic injury loans are not available to 

businesses with credit available elsewhere. See 15 U.S.C. § 636(c)(5) (2000 & Supp. 2003).
Page 7 GAO-04-885 Small Business Administration

• economic injury not substantiated;

• business activity not eligible;

• not a small business;

• credit available elsewhere (for instance, from a commercial financial 

institution);

• recovery available from other sources, such as an insurance settlement; 

• failure to maintain required flood insurance on an SBA loan;

• not a qualified business;

• refusal to pledge collateral;

• no direct link established between the business downturn and the 

disaster (for September 11 EIDLs only); and

• outstanding judgment for a federal debt.

When SBA does not receive all the required information or documentation 

from an applicant, it withdraws the loan application. SBA also withdraws 

applications when the Internal Revenue Service (IRS) has no record that 

the applicant has filed income tax returns for 1 or more years10 or because 

of an unresolved character issue (for example, an applicant’s criminal 

activity). Additionally, an applicant may request that SBA withdraw its 

application. After SBA declines or withdraws an application, the applicant 

has 6 months to request reconsideration. SBA explains its reason(s) for not 

approving the loan and the process for reapplying in correspondence to the 

applicants.

In addition to SBA, several nonprofit organizations (nonprofits) in New 

York City offered economic relief to small businesses in the area affected 

by the events of September 11. The nonprofits that we contacted to discuss 

their September 11 programs typically provide economic and technical 

support to small, entrepreneurial, and nontraditional businesses such as 

10In processing loan files, SBA requests 3 years of an applicant’s business federal tax 

transcripts and 1 year of the principal’s personal federal tax returns directly from the IRS.
Page 8 GAO-04-885 Small Business Administration

street vendors and taxi drivers, in New York City and generally receive 

funding from private and public sources. Funding for their September 11 

programs came from these sources as well as from federal grants allocated 

to support such programs. All three nonprofits received grants from the 

September 11th Fund and raised additional capital with the help of private 

banks and partner organizations.11 Two of the three nonprofits reported 

that they provided both grants and loans to small businesses, but all 

provided working capital loans to help businesses meet short-term 

obligations such as rents, salaries, and accounts payable. These working 

capital loans were expected to help businesses weather expected recovery 

periods of between 3 and 6 months. One nonprofit offered only low-interest 

working capital loans of up to $150,000, while another reported providing 

$900,000 in grants and $3.1 million in low-interest loans. The third nonprofit 

reported providing $7.1 million in grants and no-interest loans, $12.4 

million in low-interest loans, and $4 million in wage subsidies. 

Small businesses in New York were also assisted by $3.5 billion in 

Community Development Block Grant funding appropriated by Congress. 

Congress earmarked at least $500 million of this funding to compensate 

small businesses, nonprofits, and individuals for their economic losses. 

This assistance included grants to compensate small businesses for some 

of their losses, as well as payments to attract and retain small businesses in 

an effort to revitalize the affected areas.12

11The September 11th Fund was established on the day of the terrorist attacks by The New 

York Community Trust and United Way of New York City. Grants from the fund enable cash 

assistance, counseling, and other services to individuals and families, small businesses, and 

community organizations affected by the disaster. The fund, which continues to operate, 

makes grants directly to nonprofit organizations and agencies with the expertise to meet a 

wide range of needs in a timely manner, as well as those that were directly affected by the 

disaster.

12We have discussed federal assistance in response to the September 11 terrorist attacks in 

several other reports. See GAO, September 11: Small Business Assistance Provided in 

Lower Manhattan in Response to the Terrorist Attacks, GAO-03-88 (Washington, D.C.: Nov. 

1, 2002); GAO, Disaster Assistance: Information on FEMA’s Post 9/11 Public Assistance to 

the New York City Area, GAO-03-926 (Washington, D.C.: Aug. 29, 2003); and GAO, 

September 11: Overview of Federal Disaster Assistance to the New York City Area, GAO04-72 (Washington, D.C.: Oct. 31, 2003). 
Page 9 GAO-04-885 Small Business Administration

The SBA Disaster Loan 

Program’s Policies and 

Procedures Are 

Consistent with the 

Law and the Program’s 

Overall Mission

SBA’s policies and procedures for providing EIDLs are consistent with the 

Small Business Act. The agency’s policies and procedures are consistent 

with the two requirements specific to EIDLs. These requirements are that 

applicants must have suffered a substantial economic injury as a result of a 

covered disaster and that SBA must find that the applicant is not able to 

obtain credit elsewhere. The act addresses some loan terms, such as length 

of maturity, but it does not specify underwriting criteria for SBA to follow. 

However, SBA’s regulations do contain underwriting requirements such as 

assessing an applicant’s ability to repay the loan, credit history, and the 

availability of collateral, as well as other requirements.

The Small Business Act 

Provides Little Specific 

Guidance on How SBA 

Should Manage Its Disaster 

Loan Program, Particularly 

in Providing EIDLs

The law provides for SBA to make loans to small business concerns that 

have suffered a substantial economic injury as a result of a covered 

disaster, provided that SBA finds that an applicant is not able to obtain 

credit elsewhere.13 Although the law does not define substantial economic 

injury for EIDLs, SBA’s regulations define it as economic harm to a 

business concern that results in its inability to meet its obligations as they 

mature or to pay its ordinary and necessary operating expenses. SBA may 

provide an EIDL if it determines that an applicant has suffered a substantial 

economic injury resulting from a disaster described in the act. For EIDLs, 

the act describes four disaster scenarios: (i) a major disaster, declared by 

the President of the United States; (ii) a natural disaster, as determined by 

the Secretary of Agriculture; (iii) a disaster declared by SBA; and (iv) if no 

disaster was declared under scenarios (i) through (iii), certification to SBA 

by the Governor of a State that eligible concerns have suffered economic 

injury as a result of a disaster and are in need of financial assistance which 

is not available on reasonable terms in the stricken area.14

Although the act specifies some terms for EIDLs, it does not specify 

underwriting requirements. For example, the law states that the loans 

should not exceed $1,500,000, unless the applicant is a major source of 

employment in the impacted area or have more than a 30-year maturity 

13The law excludes agricultural enterprises from eligibility to receive a disaster loan.

1415 U.S.C. § 636(b)(2)(A)-(D).
Page 10 GAO-04-885 Small Business Administration

period.15 It also provides some specific interest rate requirements, based on 

the year of the disaster. However, it does not specify underwriting criteria 

for EIDLs. The act does not specify that EIDLs should be of sound value or 

secured to provide reasonable assurance of repayment, as it does for SBA’s 

general business loans. Additionally, the act does not specifically address 

the issue of collateral for EIDLs, whereas it specifies that SBA not require 

collateral for physical disaster business loans in the amount of $10,000 or 

less.

SBA’s Regulations Specify 

Underwriting Criteria and 

Other Requirements for 

Disaster Loan Applicants

SBA’s regulations for EIDLs contain underwriting criteria that require, 

among other things, a reasonable assurance of repayment, satisfactory 

credit and character, and generally, collateral.16 The regulations state that 

SBA must have reasonable assurance that all disaster loan applicants can 

repay their loans from their personal or business cash flow. The regulations 

also state that SBA is prohibited from lending to businesses with an 

associate who is incarcerated, on probation, on parole, or who has been 

indicted for a felony or a crime of moral turpitude.17 The regulations do not 

elaborate on satisfactory credit, however, as discussed later, SBA’s policies 

and procedures address these issues. For EIDLs greater than $5,000, SBA 

regulations require that applicants provide collateral, although SBA will not 

decline a loan if the applicant lacks a particular amount of collateral, as 

long as it has reasonable assurance that the applicant can repay the loan. 

However, SBA may decline or cancel a loan where the applicant refuses to 

pledge available collateral when requested by SBA. SBA regulations also 

specify eligibility requirements for the types of businesses that may obtain 

an EIDL. The regulations exclude the following types of small businesses:

• businesses engaged in lending, speculation, or investment;

• nonprofits and charities;

• consumer or marketing cooperatives;

15Under certain circumstances, SBA may suspend payment of principal and interest for up to 

5 years. As discussed elsewhere in this report, Congress increased the limitation on loan 

amounts and provided a deferral of the repayment period for loans resulting from the 

September 11, 2001 attacks. 

1613 C.F.R. §§ 123.6, 123.11 (2003).

1713 C.F.R. § 120.110(n) (2003).
Page 11 GAO-04-885 Small Business Administration

• businesses deriving more than one-third of gross annual revenue from 

gambling activities;

• loan packagers that earn more than one-third of gross annual revenue 

from packaging SBA loans;

• businesses principally engaged in teaching, counseling or indoctrinating 

religion or religious beliefs; and

• businesses primarily engaged in political or lobbying activities.18 

SBA amended its regulations in October 2001, expanding eligibility to small 

businesses outside the declared disaster area, applicable only to September 

11 EIDLs. SBA made this change in recognition that the September 11 

disaster had a widespread economic impact, beyond the boundaries of the 

declared disaster areas in New York and Virginia. Under the new section of 

the regulations, SBA agreed to provide EIDLs to businesses outside of the 

declared disaster area if they could show that they suffered a substantial 

economic injury as a direct result of the destruction at the World Trade 

Center or the damage to the Pentagon, or any related federal actions (such 

as the suspension of air travel) taken between September 11, 2001, and 

October 22, 2001.19 The regulations specify that loss of anticipated profits 

or a drop in sales is not considered substantial economic injury for 

purposes of an EIDL under these provisions.20 Other than this change to 

expand EIDL eligibility nationwide, SBA’s general regulatory requirements 

for disaster loans, which we discuss more fully later in this report, applied 

to September 11 EIDLs.

1813 C.F.R. § §123.301. Also, SBA EIDL assistance may not be provided to the following 

business concerns: concerns with a principal convicted, during the past year, of a felony 

during and in connection with a riot or civil disorder or other declared disaster; concerns 

with a principal presently incarcerated, or on probation or parole following conviction of a 

serious criminal offense; concerns engaged in illegal activities; government-owned entities 

(except for a business owned or controlled by a Native American tribe); concerns which 

present live performances of a prurient sexual nature or which derive more than de 

minimus gross revenue through the sale of products or services, or the presentation of any 

depictions or displays of a prurient sexual nature; concerns with a principal who owns more 

than 50 percent of the business and who is more than 60 days late on a child support order, 

unless the principal divests all interest in the business. See ID. and 12 U.S.C. § 633(e), (f) 

(2000).

1913 C.F.R. § 123.600.

2013 C.F.R. § 123.601(a)(2).
Page 12 GAO-04-885 Small Business Administration

SBA’s Underwriting 

Criteria Followed 

Program Guidelines 

and Best Practices and 

Were Similar to Those 

of Nonprofits Offering 

Disaster Loans

SBA’s underwriting policies and criteria for September 11 EIDLs generally 

followed established guidelines, even with the exceptions that were made 

for this disaster, and were similar to those of selected nonprofits in New 

York City. Small businesses that were eligible to apply for SBA loans were 

expected to meet standard requirements for documentation, 

creditworthiness, repayment ability, collateral, and appropriate character, 

as determined by SBA.21 We found that SBA’s lending activities followed 

best practices for private lending, as set out by industry experts. As we 

reported previously,22 modifications to SBA’s Disaster Loan Program were 

made to address the unusual circumstances surrounding the September 11 

disaster and to respond to the concerns of affected small businesses. 

However, the changes that were made were to eligibility and terms, not to 

loan underwriting criteria. Finally, the three nonprofits that we reviewed 

had requirements that were similar to SBA’s for documentation, 

creditworthiness, and repayment ability, but their requirements differed for 

collateral and appropriate character. 

SBA EIDL Requirements for 

September 11 Generally 

Followed Program 

Guidelines 

SBA used the same requirements for September 11 EIDLs as it would for 

any other disaster. In accordance with the guidelines of the Disaster Loan 

Program, SBA required small business applicants to provide the following:

• personal financial statements for all principals with at least 20 percent 

interest in the business and each general partner;

• business tax records for the 3 most recent tax years and 1 year of 

personal tax records;

• balance sheets and operating statements dated within 90 days of 

application; and

• monthly sales figures beginning 3 years before the disaster and 

continuing through the most current month available.

21According to SBA officials, SBA follows the requirements of the Office of Management and 

Budget Circular A-129, Managing Federal Credit Programs, which, among other issues, 

prescribes policies and procedures for extending credit such as screening applicants, 

documenting loans, and collateral requirements.

22GAO-03-385.
Page 13 GAO-04-885 Small Business Administration

Applicants were also required to undergo the standard credit analysis 

required for the EIDL program. Since EIDLs are available only to small 

businesses unable to obtain credit elsewhere, SBA administers its own test 

to determine whether applicants are able to qualify for private funds under 

reasonable terms and conditions, or if the applicant has the financial 

capacity to recover without federal assistance. September 11 loan 

applications were processed using SBA’s “credit elsewhere” test, a 

combination of two formulas that looks at cash flow for debt servicing and 

available net worth. Loan officers then used information provided in the 

credit reports, balance sheets, and tax records to determine repayment 

ability, based primarily on pre-disaster financial performance. SBA required 

that EIDLs of more than $5,000 be secured by personal guaranties from all 

business principals and by the “best available collateral.”23 SBA officials 

stated that the best available collateral typically would be business or 

personal real estate, since real estate is the only asset that will likely 

maintain its value over the life of a 30-year SBA loan.24 In some cases, SBA 

accepted other business property as collateral for smaller September 11 

EIDLs, if it was the best available, according to SBA officials.

Finally, Disaster Loan Program guidelines require that SBA make a 

character determination on all loan applicants in order to determine 

eligibility for federal loans. By statute, SBA is required to deny loans to 

persons convicted during the past year of a felony committed during a riot 

or civil disorder and in connection with another declared disaster.25 SBA 

uses specific program guidelines to make a character determination on 

each loan applicant who has a prior arrest, indictment, or conviction or is 

on parole or probation. Applicants are required to provide information on 

any previous arrests or convictions.

SBA’s Program Policies 

Were Generally Consistent 

with Good Lending 

Practices 

SBA’s guidelines for its Disaster Loan Program generally coincide with best 

practices published by lending industry experts and guidance issued by

federal regulators. As stated previously, modifications that were made 

specifically for the September 11 disaster did not affect the administration 

of the program or underwriting criteria for EIDLs made to small businesses 

23Personal guaranties were not required for sole proprietorships, because the sole proprietor 

is individually obligated under the note. 

2430 years is the maximum term for an SBA disaster loan.

25P. L. No. 90-448 § 1106(e) (1968).
Page 14 GAO-04-885 Small Business Administration

nationwide. Disaster Loan Program requirements include specific and 

clearly stated criteria and processes for analyzing credit and determining 

repayment ability. Operating procedures for the program also detail 

internal control and supervisory review directives.

According to experts, “a cornerstone of safe and sound banking is the 

design and implementation of written policies and procedures related to 

identifying, measuring, monitoring, and controlling credit risk. Such 

policies should be clearly defined, consistent with prudent banking 

practices and relevant regulatory requirements, and adequate for the 

nature and complexity of the bank’s activities.”26 Further, in order to be 

effective, credit policies must be communicated throughout the 

organization, implemented through appropriate procedures, and monitored 

and periodically revised to take into account changing internal and external 

circumstances. We compared SBA’s policies and procedures with industry 

best practices and regulatory guidance for extending credit. SBA’s policies 

and procedures for its Disaster Loan Program in general and EIDLs in 

particular are presented in SBA’s standard operating procedures and 

related program memoranda. Underwriting criteria are clearly defined, 

with specific formulas for SBA’s loan officers to use in evaluating credit risk 

for each loan applicant. Industry standards also specify the importance of a 

comprehensive analysis of a borrower’ s ability to repay the loan and 

requiring a borrower to pledge collateral. SBA’s requirements for loan 

guaranties and collateral and its analysis of applicants’ cash flow to 

determine repayment ability are in line with industry guidance on 

mitigating lender risk in individual credit transactions. Modifications that 

were made to eligibility and terms for September 11 EIDLs were 

communicated throughout the agency in program memoranda. SBA 

provided applications for the expanded program nationwide through its 

resource partners.27 Our review of September 11 loan files also indicated 

that SBA complied with its procedures for supervisory review of all loan 

decisions.

26Principles for the Management of Credit Risk: Basel Committee on Banking Supervision, 

September 2000.

27Some of SBA’s resource partners are Small Business Development Centers (SBDC).
Page 15 GAO-04-885 Small Business Administration

Congress and SBA 

Approved Modifications in 

Key Areas of the Disaster 

Program

With the Defense Appropriations Act of 2002, Congress approved notable 

modifications for this disaster that changed the terms for September 11 

EIDLs for small businesses. These included increasing the maximum loan 

limit from $1.5 million to $10 million and raising the maximum repayment 

deferral period.28 SBA’s policy of a 4-month deferral period was increased 

to 2 years, by legislation, for businesses in the immediate areas of the 

disaster. EIDLs granted in the immediate areas of the disaster also did not 

accrue interest during the 2-year deferral period. 

By regulation, borrowers in the immediate disaster areas receiving 

economic injury loans also had 2 years from the date of approval to apply 

for additional funds or a modified loan, and borrowers in the expanded 

area had 1 year.29 Borrowers would thus have sufficient time to assess 

additional disaster-related damage that had not been detected or reported 

at the time of the initial application. 

Under its regulatory authority, SBA expanded eligibility for the September 

11 disaster to businesses nationwide that were directly affected by the 

terrorist attacks and subsequent federal actions such as airport closures 

that resulted in business disruptions across the country.30 The expanded 

program also addressed the needs of small businesses that depended on 

other businesses and industries whose operations were suspended or 

disrupted because of the disaster. Businesses in the expanded areas were 

required to provide an economic injury statement. Applicants needed to 

make a direct link between the economic downturn affecting their business 

and the events of the disaster in order to qualify for loans under the 

expanded program.31

28The $10 million loan limit also included loans to businesses with joint economic injury and 

physical disaster claims.

2913 C.F.R. § 123.20 and 13 C.F.R. § 123.606.

3066 Fed. Reg. 53329 (Oct. 22, 2001).

31SBA developed standard eligibility criteria and a sample question and answer form for the 

Expanded EIDL Program to help loan officers determine whether businesses qualified for 

loans. The criteria stated that a general decline in business since September 11 was not in 

itself enough to establish eligibility. The downturn had to be the direct result of the 

destruction of the World Trade Center, damage to the Pentagon, or related federal actions. 

The program did not cover a decline in revenue due to public reaction in the wake of the 

disaster. 
Page 16 GAO-04-885 Small Business Administration

SBA made other accommodations for September 11 applicants, including 

increasing the size limits for eligible businesses, expediting loan 

processing, and providing translators to help non-English speaking 

applicants. As we noted in a previous report, small business owners had 

complained to Congress about some facets of the Disaster Loan Program.32

These complaints prompted SBA and the Congress to modify the program. 

First, because of the immediate and devastating effect on the travel 

industry nationwide, SBA increased the business size standards for travel 

agencies and certain other travel-related businesses.33 Applications that 

were pending or had been previously declined or withdrawn solely on the 

basis of the size of the business were automatically reconsidered, and SBA 

adjusted the size determination date to the application acceptance date 

instead of the date of the disaster. For travel agencies and other travel 

businesses, the size standard was increased from $1 million to $3 million in 

annual receipts, allowing larger businesses to qualify. Second, in an effort 

to improve efficiency in processing the large number of EIDL requests for 

September 11, particularly under the expanded program, SBA developed an 

expedited process for reviewing loan applications. Under the expedited 

process, applicants that did not qualify based on eligibility criteria or predisaster credit and repayment issues were declined early in the review 

process. Loan officers were required to inform these applicants about the 

abbreviated process, and applicants could ask to be reconsidered and 

could submit additional documentation to justify their request. According 

to SBA officials, expedited processing also allowed it to provide quick loan 

approval to businesses within the declared disaster area in operation at the 

time of application up to a maximum amount of $200,000 and those that 

were not in operation because of the events of September 11, up to 

$350,000. Expedited processing allowed businesses outside of the declared 

disaster area meeting certain basic requirements to receive quick approval 

for loan amounts up to $50,000.34 Third, in direct response to complaints 

from small business owners in New York City with limited proficiency in 

English, SBA made efforts to provide loan application documents in 

languages other than English, including Spanish and Asian languages, and 

to provide multilingual personnel at New York City application centers. 

One SBA small business development center representative told us that 

32GAO-03-385, see pages 10-15 and appendix III.

3367 Fed. Reg. 11874 (Mar.15, 2002).

34Basic requirements were adequate repayment ability, satisfactory credit, and a verifiable 

federal tax return showing that the business had operated for at least 12 months.
Page 17 GAO-04-885 Small Business Administration

although this initiative was positive, interpreters who were not familiar 

with business and financial jargon still faced limitations in communicating 

adequately with some small business owners.

Nonprofit Lenders in New 

York City Had Similar 

Requirements for Disaster 

Loans

Three nonprofits in New York City that made September 11 disaster loans 

had requirements similar to SBA’s, but the programs had some additional 

flexibility to address the needs of their small business constituents (fig. 1). 

One of the nonprofits reported ineligibility for SBA loans or not meeting 

SBA’s requirements as one of its own criteria for application acceptance. 

Another reported that its program was geared, in particular, toward small 

businesses that had not qualified for significant loans from SBA or other 

recovery loan programs. The existence of these nonprofit lenders provided 

alternative economic injury assistance to small businesses in New York 

City.
Page 18 GAO-04-885 Small Business Administration

Figure 1: SBA’s Underwriting Criteria Compared with Those of Three Nonprofit 

Lenders 

Like SBA, the nonprofits we spoke with had requirements for 

documentation, creditworthiness, and repayment ability. All three 

nonprofits required that applicants provide business financial statements, 

business and personal tax records, credit reports, and a number of other 

documents. One nonprofit requested, among other documents, corporate 

bank statements, a business plan, insurance statements, and receipts and 

invoices for expenses related to September 11. The same nonprofit 

required that applicants commit to remaining in New York City and asked 

for a current executed commercial lease. Another nonprofit said that 

commitment to rebuilding in the area was a factor in the decisionmaking 

process but did not include this factor in its eligibility requirements. Like 

SBA, the nonprofits used credit reports and business financial statements 

to determine an applicant’s level of past debt, management of past credit, 

SBA's Disaster Loan 

Program: Economic 

Injury Disaster Loan

Lender

ACCION New York: 

American Dream 

Fund

Alliance for Downtown 

New York: Lower 

Manhattan Small 

Business & Workforce 

Retention Project

Renaissance Economic 

Development 

Corporation: Chinatown 

Recovery Loan Program

Business and/or

personal financial

statements/documents

Business and/or

personal tax records

Credit reports

Demonstrated

repayment ability

Collateral to 

secure loan

(over $5,000 for SBA)

Character

determination

Loan application requirements

Source: GAO.

No requirement

Limited requirement

Requirement
Page 19 GAO-04-885 Small Business Administration

and likelihood of repaying the disaster loan.35 All of the nonprofits reported 

that credit and repayment histories played an important role in the 

decisionmaking process, but two of the nonprofits emphasized that 

applicants were not declined solely on the basis of the information 

provided in credit reports. One nonprofit considered the direct impact of 

the disaster on a business’s ability to manage its recent credit, and another 

reported that it made allowances for special circumstances such as illness 

and divorce if applicants provided documentation and could show a 

pattern of good faith efforts to address delinquencies. 

Unlike SBA, all of the nonprofits had limited requirements for collateral 

and reported that collateral was only requested on a case-by-case basis. 

One nonprofit reported that collateral was not required, but was accepted 

in lieu of a guaranty or cosigner for applicants who had been approved with 

less than satisfactory pre-disaster credit. In such cases, collateral would be 

accepted, even if it was not enough to secure the entire loan and would be 

considered “psychological collateral.” Another nonprofit reported that 

collateral was typically required when a business had a limited operating 

history or highly unpredictable and inconsistent cash flow, and offered 

unsecured loans up to $250,000. The third nonprofit reported that business 

collateral was required on a case-by-case basis but provided no further 

details. Two of the nonprofits indicated that they required personal 

guaranties, with one specifying that owners with 20 percent or more 

interest in the business would need to provide some guarantee. The third 

nonprofit indicated that it also determined whether to ask for personal 

guaranties on a case-by-case basis. 

None of the nonprofits had a requirement similar to SBA’s for appropriate 

character for their September 11 programs. One of the nonprofits indicated 

that an applicant’s character was called into question if a written or verbal 

account was inconsistent with the documentation provided.

35Personal credit reports are available from one of three credit-reporting bureaus in the 

United States—Equifax, Experian, and TransUnion. A typical consumer credit report 

provides an overall credit rating, credit history detail, and records of any bankruptcies, 

liens, and judgments filed against an individual. Besides requesting personal credit reports 

for each principal of an applicant business, SBA also requested business credit reports from 

Dun & Bradstreet, which provide information on company structure, an overall business 

credit rating, and records of any bankruptcies, liens, and judgments. 
Page 20 GAO-04-885 Small Business Administration

SBA Followed Its Own 

Policies and 

Procedures in Making 

Determinations on 

September 11 

Economic Injury 

Disaster Loans 

In our review of SBA’s September 11 EIDL application files, we found that 

SBA followed its own policies and procedures in determining whether to 

provide loans to prospective borrowers. Our review of a representative 

random sample of applications SBA declined or withdrew showed that all 

of the 99 files contained the documentation and analysis needed to support 

the determination. We also found that SBA followed its procedures for 

processing loan applications, such as conducting supervisory reviews of 

loan decisions, and made its determinations and notified applicants in a 

timely manner. Our review of a small random sample of approved loans 

also indicated that SBA followed its policies and procedures in granting 

loans.

SBA Followed Its Policies 

and Procedures in Declining 

and Withdrawing Its 

September 11 Economic 

Injury Disaster Loan 

Applications

In all of the 99 loan files we reviewed in our representative random sample, 

SBA correctly declined 70 and withdrew 29 of the applications. Overall, 

SBA declined September 11 loan applications primarily because it 

determined that the applicants were unlikely to be able to repay the loan. 

While SBA can cite several reasons for declining a loan, it gave lack of 

ability to repay as at least one of the reasons for declining 38 of the 70 

declined loan applications that we reviewed. In these cases, SBA concluded 

that the applicants’ income was insufficient to repay a disaster loan, given 

existing debts and expenses, based on the analysis that loan officers 

conducted using financial information provided by the applicant. Our 

analysis of the universe of September 11 EIDLs revealed that SBA declined 

4,513 applications, or more than half of all declined applications for lack of 

repayment ability. For the 34 declined Expanded EIDL applications in our 

sample, SBA declined 18 applications, or about half, because the applicants 

failed to establish a direct link between their business downturn and the 

events of September 11 or related federal actions, as SBA required of 

applicants outside of the declared disaster areas. In the universe of 

Expanded EIDLs, SBA declined 4,186 applications and 1,975 were declined 

for this reason. For example, a small business in an airport that lost 

revenue during the period in which air travel was suspended would have 

been eligible for an SBA September 11 Expanded EIDL. However, a 

business that simply showed losses after September 11 would not be 

eligible for a loan. 

SBA withdrew loan files primarily because the applicants had not filed 

federal income tax returns. Of the 29 withdrawn loan applications in our 

sample, SBA withdrew 16 for this reason. Following its usual procedures, 

SBA requested the most recent 3 years of business tax records and 1 year of 
Page 21 GAO-04-885 Small Business Administration

personal tax records directly from IRS. According to a senior SBA official, 

SBA has a special arrangement with IRS for obtaining federal tax 

documentation for disaster loan applicants. IRS dedicates staff to 

processing these requests, and the IRS staff work the same hours as the 

SBA loan officers in order to provide the needed information as the loans 

are processed. IRS provides SBA with transcripts of available returns or a 

notification that no records could be found. SBA withdraws an application 

if IRS has no record of the applicant’s tax return for at least a year and will 

also generally withdraw an application when missing or incomplete 

information prevents the loan officer from making a determination. Figure 

2 provides additional information on the reasons SBA declined and 

withdrew loan applications in our sample. Our analysis of the universe of 

September 11 EIDLs revealed that SBA withdrew 1,294 applications, or 

about 38 percent of all withdrawn applications, because IRS had no record 

of tax returns for the applicants for 1 or more years.
Page 22 GAO-04-885 Small Business Administration

Figure 2: Reasons SBA Declined and Withdrew September 11 Loan Applications in Our Sample

Note: SBA may decline or withdraw a loan application for more than one reason. The bars represent 

the frequency with which the decline and withdrawal codes were cited in the loan applications we 

reviewed.

We found technical errors in 2 of the 99 files we reviewed, although the 

facts presented in the application files showed that SBA would not have 

granted the loan, even if the errors had not been made. SBA declined one 

application because the applicant owed federal income taxes and lacked 

repayment ability, even though the applicant was a nonprofit and therefore 

ineligible for an EIDL. SBA notified another applicant that it was declining 

the application for policy reasons because the applicant was a subsidiary of 

a foreign company and had no revenues in the United States. According to 

0

5

10

15

20

25

30

35

40

21 25 26 27 28 31 32 34 38 39 40 42 51 53/55 56 59

Decline codes Withdrawal codes

Number of applications

Source: GAO.

21 Lack of repayment ability

25 Inadequate working capital even if SBA could approve a loan

26 Unsatisfactory history on an existing or previous SBA loan

27 Unsatisfactory history on a federal obligation

28 Unsatisfactory credit history

31 Economic injury is not substantiated

32 Business activity is not eligible 

34 Credit is available elsewhere

38 Not eligible due to recoveries from other sources

39 Not eligible; failure to maintain flood insurance on an existing SBA loan

40 Not a qualified business 

42 Policy reasons; business does not meet eligibility criteria

51 Applicant did not furnish the requested 

 additional information necessary to 

 process the loan application

53/55 Applicant's request

56 Other

59 IRS has no record of personal or 

 business tax returns for one or more of 

 the years requested
Page 23 GAO-04-885 Small Business Administration

an SBA official, SBA’s policies and procedures suggest that the application 

could have also been declined for lack of repayment ability.

SBA Followed Its 

Procedures for Processing 

Declined and Withdrawn 

Loan Applications 

In our review of declined and withdrawn loan files, we found that SBA 

followed its policies and procedures for conducting supervisory reviews of 

loan decisions and notifying applicants of the decisions and that the agency 

generally processed applications in a timely manner. In all of the 99 

declined and withdrawn files that we reviewed, an SBA supervisory loan 

officer signed the loan officer’s report, which documents how the loan 

officers came to the decision on the application.36 On many of the loan 

officer’s reports, the supervisory loan officer made some notations 

assessing the loan officer’s analysis of the application. Additionally, all of 

the files contained correspondence to the applicant documenting SBA’s 

decision that clearly described SBA’s reasons for declining or withdrawing 

the application, the deficiencies in the application and additional 

documentation required (if applicable), and the applicant’s right to have the 

application reconsidered. We also found that SBA generally processed the 

loan applications in a timely manner, as defined in SBA procedures. At the 

time SBA processed the September 11 loans, its benchmark was to process 

loan applications within 21 days. For most of the files that we reviewed, 

SBA made a decision within 14 days of the application date (fig. 3).37 Our 

analysis of the universe of all September 11 EIDLs found that SBA 

processed declined files in an average of 11 days and withdrew files in an 

average of 13 days.

36In addition to supervisory reviews of loan decisions, SBA also conducts an annual quality 

assurance review in each of its area offices to assess whether loan officers are following 

SBA’s policies and procedures in making loan decisions. SBA reviews a randomly chosen 

sample of loan files as a part of this review.

37In a previous report, GAO-03-385, we found that SBA’s average time for processing 

September 11 business loans was about 13 days. Thus, SBA was exceeding its own 

performance measure. We recommended that, to better demonstrate its program 

performance, SBA revise performance measures related to the disaster program. SBA has 

made several appropriate changes to its measures, as reported in its fiscal year 2003--2008 

strategic plan, but it has not substantially changed its performance goal for processing EIDL 

applications. For example, its goal for fiscal year 2004 is to process 85 percent of EIDL 

applications within 20 days. 
Page 24 GAO-04-885 Small Business Administration

Figure 3: SBA’s Processing Times for Declined and Withdrawn Loan Application 

Files in Our Sample

SBA Also Followed Its Own 

Procedures for Approving 

September 11 Loans

Based on our review of a small sample of loan files, SBA also followed its 

own policies and procedures in approving September 11 disaster loans.38

However, this sample was not representative and cannot be projected to 

the universe of September 11 EIDLs. In our review of 27 approved loan 

files, we found that they contained all of the financial documentation and 

underwriting analysis required to approve the loans, according to SBA’s 

policies and procedures. However, we did find an error in one of the 

approved loan files. In this case, an applicant had stated on his application 

that he was the sole proprietor of his business and not a U. S. citizen. Under 

Withdrawn

Declined

Source: GAO.

Number of cases

Number of days to process

0-14 15-21 22-30

0

10

20

30

40

50

60

38SBA’s Office of Inspector General (OIG) is conducting a more extensive review of 

approved September 11 loans to determine whether the loans were underwritten, disbursed, 

and administered according to SBA’s standard operating procedures. The OIG is also 

reviewing a sample of loans that have already defaulted.
Page 25 GAO-04-885 Small Business Administration

these circumstances, SBA was supposed to request that the applicant 

provide proof that he was a non-citizen national or qualified alien.39 Based 

on evidence in the file, the applicant had not provided proof of his alien 

status. As with our review of the declined and withdrawn files, the 

approved loans all showed evidence of supervisory review. 

Of the 27 approved loan files we reviewed, SBA had initially declined or 

withdrawn eight. In these eight files, applicants had deficiencies similar to 

those of the declined or withdrawn loan files we reviewed but were able to 

address the deficiencies and reapply. For example, the applicants whose 

files had been withdrawn because of income tax issues reapplied after 

filing and paying federal income taxes, allowing SBA to approve the loans. 

In one of the approved loan files we reviewed, SBA withdrew the 

application for failure to file for federal income taxes. After the applicant 

filed federal tax returns, SBA then declined the application for lack of 

repayment ability and unsatisfactory history on a federal obligation, or 

failure to pay federal income taxes. After setting up a payment plan with 

the IRS and reducing expenses, the applicant reapplied and SBA approved 

the loan. In another approved loan file, SBA initially declined the 

application because the applicant had not substantiated the economic 

injury. Based on SBA’s analysis of the applicant’s documentation, the 

business would be able to meet its financial obligations without a loan. 

However, the applicant provided further documentation to show that it had 

lost contracts because of the September 11 disaster and that the loss of 

business would have a negative effect on the firm over time. The additional 

documentation allowed SBA to approve the loan. 

Observations Although SBA is not required to maintain specific underwriting criteria for 

its Disaster Loan Program under the provisions of the Small Business Act, 

we think that SBA’s policies are generally consistent with good lending 

policies as reflected in industry best practices and regulatory guidance, 

and, when properly applied, should help maintain the integrity of the 

program. SBA’s underwriting procedures evaluate applicants’ credit risk 

and analyze their ability to repay the loan. These procedures, along with 

requiring collateral to secure the loans, help ensure that SBA fulfills its 

39SBA instituted this procedure to comply with Pub. L. 104-193, Title IV of the Personal 

Responsibility and Work Opportunity Reconciliation Act of 1996,which prohibits providing a 

federal public benefit to persons who are not United States citizens, non-citizen nationals, or 

qualified aliens.
Page 26 GAO-04-885 Small Business Administration

mission in providing loans that will assist small businesses in recovering 

from disasters. By assessing repayment ability, SBA can more effectively 

use its resources to assist small businesses that are more likely to be able 

to repay the loan, thus limiting the loan program’s cost to the government, 

and therefore the taxpayer. 

Agency Comments We provided a draft of this report to SBA and received written comments 

from the Associate Administrator For Disaster Assistance. SBA’s letter is 

reprinted in appendix II. SBA agreed with the findings presented in this 

report. In addition, SBA provided technical comments, which we 

incorporated into this report as appropriate.

We will provide this report to appropriate congressional committees. In 

addition, this report will be available at no charge on our web site at 

http://www.gao.gov. 

Please contact me at (202) 512-8678 or dagostinod@gao.gov or Katie Harris, 

Assistant Director at (202) 512-8415 or harrism@gao.gov if you or your staff 

have any questions about this report. Key contributors to this report were 

Bernice Benta, Gwenetta Blackwell-Greer, Diane Brooks, Jackie Garza, 

Fred Jimenez, and Carl Ramirez.

Sincerely yours,

Davi M. D’Agostino

Director, Financial Markets and 

Community Investment 
Page 27 GAO-04-885 Small Business Administration

Appendix I

Scope and Methodology ApApenednxidexiIs

To determine whether Economic Injury Disaster Loan (EIDL) program 

policies are consistent with the law and overall mission of SBA’s Disaster 

Loan Program, we reviewed the Small Business Act and SBA’s related 

regulations. We determined what the provisions of the law require of SBA 

in its operation of the program as well as SBA’s regulations and operating 

procedures. We discussed our views on the laws, regulations, and operating 

procedures with appropriate SBA officials. 

To compare SBA’s underwriting policies and criteria for September 11 

EIDLs with nonprofit lenders active in New York City after the disaster, we 

reviewed SBA’s policies and criteria for approving, declining, and 

withdrawing disaster loans, and amendments made after September 11. We 

also compared SBA’s underwriting requirements with industry best 

practices and banking regulators’ guidance for managing credit risk during 

the lending process. We spoke with officials of nonprofit organizations 

(nonprofits) that provided loans to small businesses in New York City after 

September 11,1

 and reviewed their underwriting policies and criteria. We 

requested specific information on their loan programs to answer questions 

regarding (1) eligibility requirements for each nonprofits’ program, (2) type 

of documentation that was required to accompany a loan application, (3) 

actual limits and terms associated with available loans, and (4) factors that 

each nonprofit considered in making the decision to approve or decline an 

application. We reviewed this information within each of the four 

categories and compared it with SBA’s EIDL policies and criteria applicable 

to post-September 11 lending. 

To determine whether SBA correctly applied its policies in the disposition 

of September 11 EIDL applications, we reviewed a representative random 

sample of declined and withdrawn September 11 EIDL application files 

across all disaster area offices, and a small sample of loan application files 

for approved September 11 EIDLs. We developed a data collection 

instrument containing key factors we identified in SBA’s standard operating 

procedures and reviewed each loan application file to determine whether 

there was evidence that the appropriate policies and criteria had been 

applied in determining the disposition of each application. The 

representative sample of declined and withdrawn files allowed us to 

project to the universe of about 12,000 declined and withdrawn EIDLs. The 

small sample of approved loans did not allow us to project to the universe 

1

These nonprofits were identified during our previous work on assistance provided to small 

businesses in New York City after September 11. See GAO-03-88, pp. 21-24.
Appendix I

Scope and Methodology

Page 28 GAO-04-885 Small Business Administration

of all approved loans, and we discuss the disposition only of the files that 

we reviewed. 

We sampled from the original population of all 24,041 September 11 

disaster loan applications.2

 We selected a probability sample using a design 

that was stratified by SBA’s four disaster area offices and whether or not 

the loan application was declined or withdrawn. We also selected a smaller 

simple random sample from among all of the accepted loan applications, as 

a check to see how the loan files differed from those withdrawn or 

declined. We assessed the reliability of SBA’s database, the Automated Loan 

Control System, and found it acceptable for our purposes. Additional 

details about our sampling methodology follow.

The sampling unit was the paper copy of a loan application file. The sample 

sizes were estimated at the 95 percent level of confidence for a desired 

precision of 6 percent. The sample size was estimated using a formula 

appropriate for estimating an attribute in a stratified design.3

 Within the 

universe, some older application files had already been shredded. Under 

SBA’s procedures, declined and withdrawn files that have been inactive for 

2 years may be shredded. To account for this, the sample size was 

increased slightly within each of the eight strata, in case one of these files 

appeared in the random sample. However, none of the files in our sample 

had been shredded—SBA was able to provide us with all of the files we 

requested. Between the eight strata, a sample size of 103 was 

proportionally allocated and then selected. The strata allocation and final 

disposition of the sample are shown in Table 1. 

Table 1: Disposition of Loan Application Sample by SBA Disaster Area Office

2

The number of applications in SBA’s universe of September 11 disaster loans was as of 

January 30, 2004, when SBA provided us with the data.

3

Cochran, William, Sampling Techniques: Third Edition (New York, New York: John Wiley 

and Sons, 1977).

Stratum Sample

Out of 

scope files

Adjusted 

sample

New York – Declined 44 2 42

New York – Withdrawn 21 2 19

Georgia – Declined 13 0 13
Appendix I

Scope and Methodology

Page 29 GAO-04-885 Small Business Administration

Source: GAO.

In our loan application file reviews, we found that 4 of the 103 loan 

application files sampled were physical injury disaster loans files, not EIDL 

applications, and we excluded them as out of our study’s scope. In the 

entire original population of 13,171 declined or withdrawn applications, we 

found 808 corresponding out of scope records. In addition, there were 223 

files that SBA indicated had been shredded. Therefore, the final study 

population that we analyzed and to which our data collection instrument 

sample is projected is 12,140. 

Our confidence in the precision of the results from this sample is expressed 

in 95-percent confidence intervals. The 95-percent confidence intervals are 

expected to include the actual results for 95 percent of the samples of this 

type. We calculated confidence intervals for our study results using 

methods that are appropriate for probability samples of this type. For all of 

the percentages presented in this report, we are 95-percent confident that 

the results would have obtained, had we studied the entire population, are 

within plus or minus 6 or fewer percentage points of our results, unless 

otherwise noted. 

We located and reviewed all 99 declined or withdrawn sampled files. We 

also reviewed 27 of the 30 approved loans in our nonprobability sample. 

SBA reported that three of the files in our sample were not readily available 

because the loans had been paid in full by the borrower, and the loan files 

had been placed in storage. To ensure accuracy of our file reviews, two 

GAO analysts reviewed each of the loan files. Based on the reviews of 

documentation in the files, we entered information into an automated data 

collection instrument. We also conducted basic checks on the 

programming and analysis of the file review data.

Georgia – Withdrawn 4 0 4

Texas – Declined 5 0 5

Texas – Withdrawn 2 0 2

California – Declined 10 0 10

California – Withdrawn 4 0 4

Total 103 4 99

(Continued From Previous Page)

Stratum Sample

Out of 

scope files

Adjusted 

sample
Appendix I

Scope and Methodology

Page 30 GAO-04-885 Small Business Administration

We conducted our work in Atlanta, GA; New York, NY; and Washington, 

D.C., between May 2003 and June 2004 in accordance with generally 

accepted government auditing standards.
Page 31 GAO-04-885 Small Business Administration

Appendix II

Comments From Small Business 

Administration ApendxiI
Appendix II

Comments From Small Business 

Administration

(250143) Page 32 GAO-04-885 Small Business Administration
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