Small Business Administration: Continued Attention Needed to Address Reforms to the Disaster Loan Program
Published: 2010-05-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: After the Small Business Administration (SBA) was widely criticized for its performance following the 2005 Gulf Coast hurricanes, the agency took steps to reform its Disaster Loan Program. Congress also enacted the Small Business Disaster Response and Loan Improvements Act of 2008 (Act), which places new requirements on SBA to ensure it is prepared for catastrophic disasters. This testimony discusses (1) the extent to which SBA has addressed the Act's requirements, and (2) how SBA's response to major disasters in 2008 aligned with key components of its June 2007 Disaster Recovery Plan (DRP). In completing this statement, GAO reviewed and updated, as appropriate, the July 2009 report, Small Business Administration: Additional Steps Should Be Taken to Address Reforms to the Disaster Loan Program and Improve the Application Process for Future Disasters (GAO-09-755). In that report, GAO recommended that SBA should fulfill the Act's region-specific marketing and outreach requirements; complete its annual report to Congress; issue an updated DRP; develop an implementation plan for remaining requirements; and develop procedures to further improve the application process for the Disaster Loan Program.
section_title: What GAO Found
paragraphs: SBA has made some progress since GAO's July 2009 report in addressing provisions of the Act and continued attention to certain provisions will be important for sustained progress. As of May 2010, SBA met requirements for 15 of 26 provisions of the Act and partially addressed 6. Five provisions do not require any action at this time. Since July 2009 SBA has taken a number of actions. For example, SBA issued an updated DRP in November 2009. In addition, SBA issued regulations on coordinating with the Federal Emergency Management Agency on timely submission of disaster assistance applications. SBA also has taken steps to address the Act's requirements for region-specific marketing and outreach. For example, SBA has begun a dialogue with the Small Business Development Center state directors in the Gulf Coast about disseminating disaster planning information in the five most hurricane-prone states before the hurricane season. However, these steps have not been discussed in public documents or venues, such as in the DRP or on the SBA Web site, which would make the information more transparent and easily accessible to the public and Congress. SBA officials told GAO the agency has not yet completely addressed some provisions because the agency must make extensive changes to current programs or implement new programs. In particular, for two requirements that will involve private lenders, SBA plans to implement pilots before finalizing regulations. SBA officials recently said that they had formed a cross-functional work group and began reaching out to lenders about the planned pilots. SBA has not yet developed an implementation plan with milestone dates for addressing the remaining requirements, but recently said it would provide a plan or report that included milestone dates for addressing the Act's requirements. SBA's initial response after the 2008 Midwest floods and Hurricane Ike aligned with certain components of its initial DRP, such as using technology and outreach efforts to better ensure timely assistance. The individuals GAO interviewed and results from SBA's 2008 Disaster Loan Program Customer Satisfaction Survey provided somewhat positive feedback about SBA's performance following the disasters. However, interviewees and survey results indicated areas for improvement; in particular, both indicated that application paperwork was burdensome and that the application process needed improvement. The agency did not appear to have a formal process for identifying problems in the application process and making needed improvements. SBA officials told GAO that they have been taking steps to improve the application process. However, SBA has not provided information to GAO on how it would implement a formal process to address identified problem areas in the disaster loan application process.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our work on reforms made to the  Small Business Administration’s (SBA) Disaster Loan Program. As you  know, SBA plays a critical role in assisting the victims of natural and other  declared disasters. SBA provides financial assistance through its Disaster  Loan Program to help homeowners, renters, businesses of all sizes, and  nonprofits recover from disasters such as earthquakes, hurricanes, and  terrorist attacks. Since the agency’s inception in 1953, SBA has approved  more than $47 billion in disaster loans for homeowners, businesses, and  nonprofits.
After the 2005 Gulf Coast hurricanes (Katrina, Rita, and Wilma), SBA faced  an unprecedented demand for disaster loans, while also being confronted  with a significant backlog of applications; therefore, hundreds of  thousands of loans were not disbursed in a timely way. Many criticized  SBA for what was perceived to be a slow and confusing response to the  disasters and one that exposed many deficiencies in the agency’s Disaster  Loan Program and demonstrated the need for reform. As a result,  Congress and SBA agreed that the program needed significant  improvements. Since then, SBA has taken several steps to reform its  Disaster Loan Program including creating an online loan application,  increasing the capacity of its Disaster Credit Management System (DCMS),  and developing a Disaster Recovery Plan (DRP). In June 2008, Congress  enacted the Small Business Disaster Response and Loan Improvements  Act (Act) which places new requirements on SBA to ensure that it is  prepared for future catastrophic disasters.
My statement today is based on our 2009 report and updated information  on SBA’s progress in addressing the Act’s requirements and our report’s  recommendations. Specifically, this statement focuses on (1) SBA’s  progress in addressing certain requirements of the Act, and (2) how SBA’s  response, following the major disasters of 2008, aligned with key  components of its June 2007 DRP.
For our 2009 report, we identified and analyzed the requirements of the  Act and related statutory deadlines; obtained information about SBA’s  completed, current, and planned reform efforts; reviewed documents and  progress reports to determine if requirements had been addressed and  deadlines were met; interviewed officials and obtained information on  what, if any, challenges exist that may affect SBA’s ability to meet certain  requirements; and interviewed officials to obtain information about next  steps and resources that the agency identified as needed to address any  remaining requirements. We visited Iowa and Texas, and obtained  information on SBA’s performance in the aftermath of the 2008 Midwest  floods and Hurricane Ike. We interviewed SBA and Small Business  Development Center (SBDC) officials, state and local officials, and  representatives of local Chambers of Commerce, economic development  organizations, and affected small business owners about what worked  well and what improvements to SBA’s disaster loan processes they would  suggest. Finally, we reviewed results from a survey of SBA loan applicants  on their satisfaction with SBA’s Disaster Loan Program in 2008. To update  this information, we interviewed SBA officials and reviewed documents  related to the disaster reform provisions and actions taken to implement  our recommendations.
We conducted our work for the July 2009 report between October 2008  and July 2009 and updated information between March 2010 and May 2010  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: SBA’s Office of Disaster Assistance (ODA) responds to disasters and  administers the Disaster Loan Program. A Presidential disaster declaration  puts into motion long-term federal recovery programs, such as the  Disaster Loan Program, but SBA is not a “first responder” after a disaster.  Rather, local government emergency services assume that role with help  from state and volunteer agencies. For catastrophic disasters, and if a  governor requests it, federal resources can be mobilized through the U.S.  Department of Homeland Security’s Federal Emergency Management  Agency (FEMA). SBA typically responds to a disaster within 3 days by  sending ODA field staff to the affected area to begin providing public  information about SBA’s services.
Once a disaster is declared, SBA by law is authorized to make two types of  disaster loans: (1) physical disaster loans, and (2) economic injury disaster  loans. Physical disaster loans are for the permanent rebuilding and  replacement of uninsured or underinsured disaster-damaged property,  including personal residences and businesses of any size. That is, SBA  provides loans to cover repair costs that FEMA or other insurance has not  already fully compensated or covered. Economic injury disaster loans  provide small businesses, including agricultural cooperatives and private  nonprofit organizations, with necessary working capital until normal  operations can resume.
The Act comprises 26 provisions with substantive requirements for SBA;  some with specific deadlines and some needing appropriations, and  includes requirements that SBA must meet for disaster planning and  response, disaster lending, and reporting. For instance, the Act includes  provisions to improve SBA’s coordination with FEMA, require that the  agency conduct biennial disaster simulations, create a comprehensive  disaster response plan, and improve communication with the public when  disaster assistance is made available. It includes requirements to improve  ODA’s infrastructure, appoint an official to oversee the disaster planning  and responsibilities of the agency, and establish reporting requirements  for various reports to Congress. The Act also creates new programs, such  as the Immediate Disaster Assistance Program that would provide small  dollar loans immediately following a disaster and the Expedited Disaster  Assistance Loan Program that would provide expedited disaster assistance  to businesses.
subsections: section_title: SBA Continues to Make Progress in Addressing the Act’s Provisions, but Has Not Yet Established Milestones for Implementing Remaining Requirements
paragraphs: As of May 2010, SBA fully addressed requirements for 15 of 26 provisions  of the Act; partially addressed 6; and took no action on 5 that are not  applicable at this time (see fig. 1). For the 15 provisions SBA fully  addressed, the agency’s actions included putting in place a secondary  facility in Sacramento, California to process loans when the main facility  in Fort Worth, Texas is unavailable, making improvements to DCMS to  track and follow up with applicants, and expanding its disaster reserve  staff from about 300 to more than 2,000 individuals. According to SBA and  our review, 5 provisions require no action at this time because they are  discretionary or additional appropriations are needed before SBA can  satisfy the Act’s requirements.
When we issued our report in July 2009, SBA had fully addressed 13 of 26 provisions. Since then, SBA has fully addressed two additional  provisions. As we recommended and the Act requires, SBA issued an  updated DRP. SBA also issued regulations on coordinating with FEMA to  ensure that disaster assistance applications are submitted in a timely manner. In addition, SBA must revise the regulations annually and report  on the revisions when submitting its annual report to Congress. The  ments associated with the provision on FEMA coordination  annual require will help SBA, FEMA, and Congress to determine whether the regulations  are effective.
SBA still has to take additional steps to completely address 6 provisions.  For example, SBA officials told us that the agency has taken additional  steps to address the marketing and outreach provision, including that they (1) began an ongoing dialogue with the SBDC state directors in the Gulf  Coast about disseminating disaster planning and preparation informatio 2)  in the five most hurricane-prone states before the hurricane season, ( detailed an SBA employee who works with the SBDCs to the Offic Entrepreneurial Development to help the agency develop a strategic approach for its disaster role, and (3) issued some public service  announcements tailored to specific regions. In our 2009 report, we  recommended that SBA should fulfill the region-specific marketing and  outreach requirement, including making this information readily av to regional entities prior to the likely occurrence of a disaster. However,  the steps recently taken by SBA have not been discussed in public  documents or venues, such as in the DRP or on the SBA Web site, which  would make the information more transparent and easily accessible to public and Congress. As we reported in 2009, we consistently heard fro regional entities, such as SBDCs and emergency management groups,  e need for more up-front information on SBA’s Disaster Loan  about th Program and their expected roles and responsibilities in disaster response  efforts.
According to SBA officials, the agency has not yet completely addressed  some provisions because to do so, the agency would have to make  extensive changes to current programs or implement new programs––suc as the Immediate and Expedited Disaster Assistance Programs––to satisf y  requirements of the Act. These programs, which require participation of private lenders, would be designed to provide businesses with access to short-term loans while they are waiting for long-term assistance. A s we  reported in 2009, SBA plans to conduct pilots of these programs before  fully implementing them. SBA officials recently told us they have  established a cross-functional work group jointly chaired by officia ODA and the Office of Capital Access to address these requirements and develop the pilots. ODA officials said they drafted regulations and  received subsidy and administrative cost funding in the 2010 budget to  allow them to pilot test about 600 loans under the Immediate Disaster  Assistance Program (section 12084). Additionally, SBA officials told us  that they performed initial outreach to lenders—such as those who have  participated in their Gulf Opportunity Pilot Loan Program—to obtain their  reaction to and interest in the programs. They believe such outreach wi help SBA identify and address any issues that may arise and determine the viability of the loa have the pilot for the Immediate Disaster Assistance Program in place by  September 2010.  n programs. SBA officials told us that their goal is to  The Act establishes multiple new reporting requirements and while SBA  has addressed most of these, the agency has not met some statutory  deadlines. For example, as required by the Act and as we recommended,  the agency issued its first annual report on disaster assistance in  November 2009 but the report was due in November 2008. Specifically,  Act requires that SBA report annually on the total number of SBA disa staff, major changes to the Disaster Loan Program (such as changes to  technology or staff responsibilities), a description of the number and  dollar amount of disaster loans made during the year, and SBA’s plans for preparing and responding to possible future disasters. In 2009, we  reported that failure to produce annual reports on schedule can lead to a  lack of transparency about the agency’s progress in reforming the  program. The agency has had limited success in meeting nine additional  ster  provisions in the Act that have deadlines associated with them. The  agency also has not developed a plan with expected time frames for  addressing the remaining requirements. Not having an implementation  plan in place for addressing the remaining requirements can lead to a lac of transparency about the agency’s Disaster Loan Program, capacity to  reform the program and program improvements, as well as its ability to  e  adequately prepare for and respond to disasters. In our 2009 report, w recommended that SBA develop an implementation plan and include  milestone dates for completing implementation and any major program,  resource, or other challenges the agency faces as it continues efforts to  address requirements of the Act. Recently, SBA officials told us th would provide a plan or report that  addressing the Act’s requirements.
section_title: SBA’s Response Followi 2008 Disasters Aligned with Some DRP Components, but Its Responses to Disaster Victims’ Feedback on the Application Pr Be Improved
paragraphs: SBA’s initial response following the 2008 Midwest floods and Hurricane Ike aligned with major components of its DRP, such as infrastructu human capital, information technology, and communications. For  example, according to SBA, following both disasters the agency used its  organizational infrastructure and key staff in each of its core functions to provide disaster assistance. ODA also utilized available operational and  technological support, and communications and outreach, to help ensure  that the agency would be able to provide timely financial assistance to the  disaster victims. Additionally, individuals affected by both disasters with  what  whom we spoke considered the agency’s overall performance some positive, but believed the disaster loan process could be improved.
In May 2008, floods devastated 85 counties in Iowa (one of several states  n  affected) and in September 2008, Hurricane Ike devastated 50 counties i Texas. SBA and SBDC officials, state and local representatives, private- entity officials, and business owners in Iowa and Texas told us that in days immediately following the disasters, ODA staff reported to the  affected areas and began providing needed disaster assistance. Th individuals also said that SBA staff provided outreach and public  information about the Disaster Loan Program; distributed application  information; assigned knowledgeable customer service representatives to  various Disaster and Business Recovery Centers; and helped applicants by ese  answering questions, providing guidance, and offering one-on-one help–– as outlined in SBA’s DRP. In addition, our review of SBA’s 2008 Disaste r  Loan Program Customer Satisfaction Survey also showed that respond were somewhat satisfied with the assistance SBA provided during othe recent disasters.
However, both the individuals we interviewed and survey results indicated  areas for improvement and opportunities to increase satisfaction. For  example, individuals we interviewed and survey responses pointed to  concerns about the amount of paperwork required to complete SBA’s  disaster loan application and the timeliness of loan disbursements. Also,  some business owners said they had to provide copies of 3 years of feder income tax returns, although they had signed an Internal Revenue Service (IRS) form 8821—Tax Information Authorization—which allows SBA to  get tax return information directly from IRS. To  address these concerns,  the individuals we interviewed suggested several changes to the program, such as eliminating the requirement that business loan applicants provide copies of IRS tax records; providing partial disbursements earlier in the  process; using bridge loans to help ensure disaster victims receive timely  assistance; and involving SBA, SBDCs, and state and local officials in joint  pre-planning and disaster preparedness efforts.
Although SBA officials told us they have been improving the application  ion,  process, they had not documented the improvement efforts. In addit we found that while SBA conducts an annual customer satisfac the agency does not appear to incorporate this feedback mechanism int its formal efforts to continually improve the application process.  Furthermore, SBA does not appear to have a formal process for  addressing identified problem areas and using the information gained to  improve the experience of future applicants. By establishing such a  process to address identified problem areas, SBA could better  demonstrate its commitment to improving the Disaster Loan Prog Because the agency has missed opportunities to further improve its  Disaster Loan Program, and in particular improve the application p for future applicants, we recommended in our July 2009 report that SBA  develop and implement a process to address identified problems in the  disaster loan application process. In response to our recommendation,  SBA cited ongoing efforts since 2005, such as the electronic loan  application, and said the agency has plans to continue its improvement  efforts and make them an ongoing priority. However, SBA has not  provided information to us on how it would implement a formal process to  address identified problem areas in the disaster loan application process.  ram. rocess  As you know, we have reported on a variety of issues related to the federal  government’s response to the 2005 Gulf Coast hurricanes. As part of this  committee’s efforts to assess the level and success of federal efforts to  help Gulf Coast small businesses recover from the 2005 hurricanes, we are  conducting work at your request that focuses on small business recovery  efforts in four states impacted by Hurricanes Katrina and Rita: Alabama,  Louisiana, Mississippi, and Texas. This summer, we will report to this  committee on: (1) assistance small businesses in the Gulf Coast received  from the SBA, the Department of Housing and Urban Development, and  the Economic Development Administration; (2) federal contract funds  received by small businesses; and (3) the small business economy in the  Gulf Coast region.
Madam Chair, this concludes my prepared statement. I would be pleased  to respond to any questions you or other Members of the Committee may  have.
section_title: GAO Contacts and Acknowledgments
paragraphs: For further information on this testimony, please contact William B. Shear  at (202) 512-8678 or shearw@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. Individuals making key contributions to this testimony  include Kay Kuhlman, Assistant Director; Beth Faraguna, Alexandra  Martin-Arseneau, Marc Molino, Linda Rego and Barbara Roesmann.
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