Small Business Administration: Additional Steps Needed to Help Ensure More Timely Disaster Assistance
Published: 2014-09-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: On October 29, 2012, Hurricane Sandy made landfall, causing an estimated $65 billion in damage. SBA administers the Disaster Loan Program, which provides physical disaster loans (used to rebuild or replace damaged property) and economic injury disaster loans (used for working capital until normal operations resume) to help businesses and individual homeowners recover from disasters. In the aftermath of Hurricane Sandy, Congress passed the Disaster Relief Appropriations Act of 2013, which appropriated $779 million to SBA for disaster loans and administrative expenses.
GAO was asked to review SBA's assistance to small businesses following Hurricane Sandy. This report examines (1) the timeliness of SBA's disaster assistance to small businesses; (2) the loan approval rates for small businesses and reasons for decline for Hurricane Sandy and previous disasters; and (3) the extent to which SBA has implemented programs mandated by the Small Business Disaster Response and Loan Improvements Act of 2008. GAO analyzed SBA data on application processing; reviewed documentation related to SBA's planning, relevant legislation, and regulations; and interviewed SBA officials.
section_title: What GAO Found
paragraphs: Following Hurricane Sandy, the Small Business Administration (SBA) did not meet its timeliness goal for processing business loan applications. From application receipt to loan decision, SBA took an average of 45 days to process physical business disaster loans and 38 days for economic injury loans, both of which exceed SBA's 21-day application processing goal. SBA said it was challenged by an unexpectedly high volume of loan applications that it received early in its response to the disaster, in addition to other challenges, such as technological issues. SBA estimated that application submissions would peak about 7 to 9 weeks after Hurricane Sandy, but it received a larger volume of applications than were expected prior to that period. While SBA officials told GAO that the agency has taken steps to respond to some challenges, it has not revised its disaster planning documents—including the Disaster Preparedness and Recovery Plan—to reflect the early volume of application submissions received after Hurricane Sandy and the potential impact a similar experience could have on staffing, resources, and forecasting models for future disasters. Federal internal control standards state that management should identify risks and take action to manage them. Without taking its experience with early application submissions after Hurricane Sandy into account in its disaster planning documents and analyzing the potential risk early submissions may pose for timely disaster response, SBA may be unprepared for a large volume of applications to be submitted quickly following future disasters, which may result in delays in loan funds for disaster victims.
SBA approved 42 percent of business loan applications following Hurricane Sandy. This rate was lower than those of Hurricanes Katrina, Rita, and Wilma, higher than that of Ike, and comparable to that of Irene (the five disasters that generated the most SBA disaster loan applications since 2005). For Hurricane Sandy and for previous disasters, SBA declined business loan applications primarily because of applicants' lack of repayment ability and credit history.
SBA has not implemented the guaranteed disaster loan programs Congress mandated in 2008, including the Immediate Disaster Assistance Program (IDAP)—a bridge loan program through private sector lenders providing disaster victims with up to $25,000 with a 36-hour application approval period. SBA officials told GAO they are trying to implement IDAP but have received feedback from lenders that some program requirements—such as a statutory minimum 10-year time frame for servicing the loan under certain circumstances—may discourage lenders from participating. However, SBA has not conducted a formal documented evaluation of lenders' feedback that would establish the basis for proposed changes to requirements for Congress to consider. Without an appropriately documented evaluation of its outreach to lenders, SBA may not have complete and reliable information on which to base its reporting to Congress about its challenges with implementing the programs required by the act.
section_title: What GAO Recommends
paragraphs: GAO recommends that SBA revise its disaster planning documents, conduct a formal documented evaluation of lenders' feedback on IDAP, and report to Congress on challenges to implementing the program. SBA generally agreed with GAO's recommendations.

section_title: Letter
paragraphs: Hurricane Sandy made landfall along the southern New Jersey shore on  October 29, 2012, causing historic devastation and substantial loss of life.  Although 24 states were affected, New Jersey and New York (particularly  the New York City metropolitan area) were the most impacted states— experiencing power outages and damage to public infrastructure, homes,  and businesses. The National Oceanic and Atmospheric Administration  estimates that damage from Hurricane Sandy totaled approximately $65  billion, making it the second costliest Atlantic storm since 1980 (after  Hurricane Katrina in 2005). In the aftermath of Hurricane Sandy,  Congress passed the Disaster Relief Appropriations Act of 2013, which  appropriated $779 million to the Small Business Administration (SBA) for  disaster loans and administrative expenses.
While SBA is known primarily for its financial support of small businesses,  the agency also plays a critical role in assisting the victims of natural and  other declared disasters through its Disaster Loan Program. This program  provides assistance to businesses of all sizes and homeowners affected  by federally declared disasters. In the wake of Hurricane Sandy, concerns  were raised regarding the timeliness of the financial assistance business  owners received. In particular, there have been questions regarding the  extent to which the program has been improved since Hurricane Katrina,  and whether previously identified deficiencies, such as delays in  processing disaster loan applications, have been addressed. Post-Katrina  reforms have included increasing the capacity of SBA’s electronic loan- processing platform and addressing requirements in the Small Business  Disaster Response and Loan Improvements Act of 2008, such as  updating SBA’s disaster response plan.
You asked us to examine SBA’s response to Hurricane Sandy.  Specifically, this report discusses (1) the timeliness of SBA’s disaster  assistance to small businesses following Hurricane Sandy and the factors  that affected SBA’s timeliness; (2) the loan approval rates for small  businesses and reasons for application decline and withdrawal and loan  cancellation following Hurricane Sandy, in comparison with those of  previous disasters; and (3) the extent to which SBA has implemented  loan programs mandated by the Small Business Disaster Response and  Loan Improvements Act of 2008.
To evaluate the timeliness of SBA’s disaster assistance to small  businesses following Hurricane Sandy, we obtained and analyzed data on  stages of the application process, such as application receipt to loan  decision, from SBA’s Disaster Credit Management System (DCMS), and  interviewed SBA officials knowledgeable about these data. To identify  factors that affected the timeliness of SBA’s assistance, we reviewed  documentation related to SBA’s loan processing procedures and its  internal assessment of its response to Hurricane Sandy, and we  interviewed knowledgeable SBA officials. We also spoke with Small  Business Development Centers and other local business organizations,  such as chambers of commerce, to identify challenges businesses faced  in receiving timely disaster assistance. To compare loan approval rates  and describe the reasons why disaster business loan applications were  declined or withdrawn and loans were cancelled following Hurricane  Sandy and previous disasters, we obtained and analyzed DCMS data for  Sandy and the five largest disasters since 2005 (as measured by  application volume): Hurricanes Katrina, Rita, Wilma, Ike, and Irene. We  also performed comparisons on the DCMS data we received to ensure its  accuracy and completeness and interviewed SBA officials responsible for  maintaining the DCMS data. We concluded that SBA’s data were  sufficiently reliable for the purposes of our report. To assess the extent to  which SBA has implemented programs mandated by the Small Business  Disaster Response and Loan Improvements Act of 2008, we reviewed  relevant legislation and regulations, and interviewed officials  knowledgeable about these matters. See appendix I for more detailed  information on the scope and methodology of this report.
We conducted our work from August 2013 through September 2014 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 provides funding and assistance to individuals and businesses after  disasters declared by either the President or SBA. Administered by  SBA’s Office of Disaster Assistance (ODA), the Disaster Loan Program is  the primary federal program for funding long-range recovery for nonfarm  businesses that are victims of disasters and is the only form of SBA  assistance not limited to small businesses. Disaster victims—including  homeowners and renters, as well as businesses—initially register with the  Federal Emergency Management Agency (FEMA) for assistance. FEMA  automatically refers applicants whose income exceeds certain income  thresholds to SBA’s Disaster Loan Program.
SBA’s Disaster Preparedness and Recovery Plan (DPRP) outlines how  the agency conducts operations in support of federal disaster response  efforts. The plan is intended to ensure a broad scope of coordination,  awareness, and support throughout the organization, and it describes  how SBA conducts its disaster-related missions. The execution of SBA’s  disaster-related mission, as set forth in the DPRP, involves both response  and recovery—including the recovery functions performed by SBA’s  Disaster Loan Program.
The Small Business Act authorizes SBA to make available several types  of disaster loans, including two types of direct loans: physical disaster  loans and economic injury disaster loans.
Physical disaster loans: These loans are for permanent rebuilding and  replacement of uninsured or underinsured disaster-damaged property.  They are available to homeowners, renters, businesses of all sizes,  and nonprofit organizations. These loans are intended to repair or  replace the disaster victims’ damaged property to its predisaster  condition up to a certain capped amount (see table 1). Almost any  business concern or charitable or other nonprofit entity whose  property is damaged in a declared disaster area is eligible to apply for  a physical disaster loan; however, businesses in agriculture-related  industries—also known as agricultural enterprises—are not eligible.
Economic injury disaster loans (EIDL): These loans provide small  businesses that are not able to obtain credit elsewhere with necessary  working capital until normal operations resume after a disaster  declaration. The loans cover operating expenses the business could  potentially have paid had the disaster not occurred. The Small  Business Act restricts EIDLs to small businesses and private nonprofit  organizations. protect property and the environment, and meet basic human needs after an incident has  occurred. The Recovery framework refers to capabilities necessary to assist communities  affected by an incident to recover effectively, including, but not limited to, rebuilding  infrastructure systems; providing adequate interim and long-term housing for survivors;  restoring health, social, and community services; promoting economic development; and  restoring natural and cultural resources.
Table 1 describes the characteristics of each of these two types of loans.
Not all businesses are eligible for both types of loans. Businesses of all  sizes may apply for physical disaster loans, but only small businesses are  eligible for an EIDL.damage from a disaster cannot apply for a physical disaster business  loan but may still apply for an EIDL, and any small business that applies   Small businesses that did not sustain physical  for a physical disaster business loan can also be considered for an EIDL.  Such applicants may be approved for a physical disaster business loan  but denied for an EIDL, or vice versa.
Business owners may apply in person at a FEMA-established Disaster  Recovery Center, at an SBA-established Disaster Loan Outreach Center  or Business Recovery Center, by mail, or via SBA’s Electronic Loan  Application system. SBA requires applicants seeking either type of  business disaster loan to submit a variety of documents as part of their  application package, including the most recent federal income tax return,  a signed copy of the Internal Revenue Service (IRS) tax information  authorization Form 8821, a schedule of liabilities, and a current (dated   There  within 90 days of the application) personal financial statement. are also additional filing requirements for applicants seeking an EIDL,  such as monthly sales figures for the past 3 years and a request for a  written explanation of the economic loss caused by the declared disaster.
To fulfill SBA documentation requirements, each principal owning 20 percent or more of  the applicant business and each general partner or managing member must also provide  a signed personal financial statement and Form 8821. Further, each affiliate of the  business must provide a signed Form 8821. Affiliates include, but are not limited to,  business parents, subsidiaries, or other businesses with common ownership or  management. For the complete list of required documents for a business disaster loan  application, see SBA’s website,  http://www.sba.gov/content/disaster-loan-paper-applications, accessed on September 4,  2014. of these states was granted four separate extensions for physical disaster  business loans (though none for EIDLs), and the final application  deadlines for New York and New Jersey were April 13, 2013, and May 1,  2013, respectively.
SBA’s regulations contain underwriting criteria that require, among other  things, reasonable assurance of repayment, satisfactory credit, and  satisfactory character. The regulations state that SBA must have  reasonable assurance that all disaster loan applicants can repay their  loans based on SBA’s analysis of the applicants’ credit or personal or  business cash flow. The regulations also state that SBA is prohibited from  lending to businesses that are engaged in lending or speculation or  engaged in any illegal activity.
SBA disaster loan application processing involves several stages   (see fig. 1):
Application entry stage. During the application entry stage, SBA  screens all incoming applications to determine if they are  acceptable. Staff members at SBA’s Processing and Disbursement  Center (PDC) enter any application information submitted in paper  format into the Disaster Credit Management System (DCMS), and  where necessary, coordinate and consolidate any supplemental  documentation received into one application per applicant. SBA can  also make automatic declines and pre-loss verification declines at this  stage.
Loss verification stage (physical disaster loans). After the application  entry stage, physical disaster loan applications move to the loss  verification stage, while EIDL applications proceed directly to the  application processing stage. During the loss verification stage, loss  verifiers conduct on-site damage inspections for physical disaster loan  applications to estimate the cost of restoring damaged property to  predisaster condition. The verified loss becomes the basis for the loan  amount.
Application processing stage. Once the loss verification is complete,  an application moves to the application processing stage, where loan  officers check for duplication of benefits and assess the applicant’s  credit history and ability to obtain credit elsewhere. Loan officers  also examine other applicant eligibility criteria, including compliance  with child support obligations and history on other federal debt, such  as student loans. Loan officers use a financial analysis tool within  DCMS to determine if the applicant has the ability to repay the loan.
Legal review stage. For secured loans, legal staff members review the  draft loan authorization and agreement for sufficiency of collateral  instruments and other legal concerns. They also create a loan- closing checklist—a list of the requirements necessary to generate the  loan closing and other legal documents. Attorneys enter a legal  concurrence into DCMS, which obligates the loan funds through an  interface with SBA’s accounting system. Legal support staff members  prepare closing documents and mail them to the applicant or nearest  Disaster Recovery Center.
Closing and disbursement. For Hurricane Sandy loans, SBA could  make a maximum initial disbursement, in the absence of collateral, of  up to $14,000 for physical disaster business loans and $5,000 for  EIDLs, once the agency received signed closing documents from the  applicant. SBA could make a maximum initial disbursement of up to  $50,000 for physical disaster loans and full disbursements for EIDLs,  once all requirements were met. SBA generally makes subsequent  disbursements on physical disaster loans based on the applicant’s  needs and how they spent prior disbursements. SBA procedures also  generally require small businesses to arrange for and obtain all loan  funds within 6 months from the date of the loan authorization and  agreement.
Following Hurricane Sandy, SBA received disaster loan applications from  9 states and Puerto Rico, with the majority of the 15,745 business  disaster loan applications generated by businesses in New Jersey and  New York. See figure 2 below for a map of highly impacted counties in  New Jersey and New York and information on business disaster loan  applications from these counties.
Congress enacted the Small Business Disaster Response and Loan  Improvements Act of 2008 to expand steps taken by SBA after Hurricane  Katrina and require new measures to help ensure that SBA would be  prepared for future disasters. The act included three provisions requiring  SBA to issue regulations to establish new guaranteed disaster programs  using private sector lenders:
Expedited Disaster Assistance Loan Program (EDALP). EDALP  would provide small businesses with expedited access to short-term  guaranteed loans of up to $150,000.
Immediate Disaster Assistance Program (IDAP). IDAP would  provide small businesses with interim guaranteed loans of up to  $25,000 with a loan decision within 36 hours.
Private Disaster Assistance Program (PDAP). PDAP would make  guaranteed loans available to homeowners and small businesses in  an amount up to $2 million.
See table 2 for characteristics of these loan programs.
section_title: Unanticipated Volume of Early Application Submissions and Delayed Increase in Staff Hindered SBA’s Ability to Provide Timely Assistance
paragraphs: Following Hurricane Sandy, SBA did not meet its timeliness goal of  processing business loan applications from receipt to loan decision within  21 days for a number of reasons, and a backlog of applications  developed rapidly. SBA officials said the agency was challenged by a  large, unanticipated volume of applications early in its response to the  disaster. In addition, SBA relied on inaccurate estimates of how quickly  staff could process applications, which delayed its decision to increase  the numbers of staff to process the applications. SBA also faced  challenges related to its information system, among others. According to  SBA, the agency is taking steps to address some of the challenges it  faced after Hurricane Sandy. However, SBA has not revised its disaster  planning to reflect the unanticipated volume of early applications it  received. As a result, SBA risks continuing to be unprepared for a large  number of disaster loan applications to be submitted at the beginning of a  disaster response.
subsections: section_title: SBA Did Not Meet Its Timeliness Goal for Application Processing and a Backlog of Applications Grew Rapidly
paragraphs: Following Hurricane Sandy, SBA did not meet its goal to process  business loan applications within 21 days from application receipt to loan  decision. As shown in figure 3, SBA took an average of 45 days for  physical disaster business loan applications and 38 days for EIDL  applications.
The average processing time for disaster business loans peaked in March  2013 (5 months after the storm); business loans for which SBA reached a  decision in March 2013 had been in processing for an average of nearly  60 days. One year after the storm, SBA’s processing times for business  loan applications still exceeded its goal of 21 days.
Following Hurricane Sandy, SBA met its goal to provide first loan  disbursements to 95 percent of borrowers within 5 days of loan closing.  On average, SBA provided first disbursements to approved businesses  within 5 days of closing. According to SBA officials, loan funds are  generally provided within four disbursements over a period of time after  closing.
While there are no timeliness goals associated with closing a loan,  borrowers who have been approved for a disaster loan have 60 calendar  days from the date of the loan authorization agreement to close it. In  order to close the loan, borrowers must sign and return all documents  required for an initial disbursement, which is then reviewed by SBA’s  Chief Legal Advisor. For Hurricane Sandy, it took on average an  additional 66 days from approval to close a physical disaster business  loan and an additional 43 days for an EIDL.
A backlog of applications that were “in processing” (meaning those SBA  had received but for which it had not yet made a loan decision) grew  rapidly over the course of SBA’s response to the disaster. Figure 4  illustrates the backlog of applications that developed over the course of  SBA’s response to Hurricane Sandy. As of January 2014, SBA officials  noted that five home applications, five physical disaster loan applications,  and two EIDL applications remained in processing.
section_title: SBA Did Not Anticipate Receiving a High Volume of Loan Applications Early in Its Response to Hurricane Sandy
paragraphs: SBA said that in the aftermath of Hurricane Sandy, it was challenged by a  high volume of loan applications submitted at a faster rate than it had  experienced in previous disasters. SBA’s initial estimates of when it would  receive applications differed from when it actually did receive them. To  prepare for a disaster, SBA uses assumptions about the volume and  timing of the applications it expects to receive based on historical data— known as the “application intake curve.” SBA inputs these assumptions  into forecasting models that predict the staff levels necessary to meet  processing needs. According to the application intake curve for Hurricane  Sandy, SBA estimated that application submission would peak about 7 to  9 weeks after Hurricane Sandy. However, as shown in figure 5, SBA  began receiving business applications earlier. According to SBA, the early  spike in applications occurred because a majority of applications were  submitted electronically rather than on paper, which resulted in a large  volume of applications within a few days of the disaster. SBA stated that  the earlier receipt of electronic submissions was caused by the  convenience and speed of the Internet-based application as well as the  elimination of postal handling time. While SBA created electronic loan  applications to simplify and expedite the application process and  continues to encourage submitting applications electronically, SBA noted  that it did not anticipate receiving such a large volume of electronic loan  applications early in its response following Hurricane Sandy.
Based on its experience in fiscal year 2012, SBA initially estimated that it  would receive between 11,000 and 21,600 business disaster loan  applications after Hurricane Sandy and 36 percent of all disaster  applications would be submitted electronically. Following Hurricane  Sandy, SBA received 15,745 business disaster loan applications, and 55  percent of all disaster applications were submitted electronically. SBA  also initially estimated that it would receive a certain percentage of each  business loan type electronically, and these estimates were lower than  the actual submissions (as shown in table 3).
In addition, SBA was unprepared for the use of multiple entry points  through which applications could be submitted electronically. According to  SBA officials, applicants could submit application documents  electronically in a piecemeal fashion via numerous portals, including  computer stations set up at each Disaster Loan Outreach Center and  personal computers. In contrast, SBA noted that paper applications would  only be accepted if all forms and documentation were submitted to the  Processing and Disbursement Center (PDC). Because of the various  entry points for electronic applications, SBA officials said that the PDC  experienced difficulties in consolidating the application documents, which  caused delays in processing the electronic applications.
According to SBA, the agency is taking steps to process electronic  application submissions more effectively for future disasters based on its  experience with Hurricane Sandy. Specifically, SBA officials noted that  the agency is consolidating the number of entry points through which  supporting documentation can be submitted electronically and is  improving DCMS to allow documents from SBA follow-up requests to now  be submitted electronically instead of in paper form. In addition, SBA  officials noted that the agency expects to build an electronic portal where  applicants can check the status of their applications and whether  documents have been received. SBA officials noted that these efforts  began in October 2013 and said they will be monitoring their  effectiveness as they continue to automate and streamline the  consolidation process.
Although SBA is making technological improvements, it has not updated  its key disaster planning documents—namely the DPRP and ODA  Playbook—to reflect the early volume of application submissions received  after Hurricane Sandy and the potential impact that a similar experience  could have on staffing, resources, and forecasting models for future  disasters. Federal internal control standards state that management  should identify risk and that risk identification methods may include,  among others, forecasting and strategic planning. Once risks have been  identified, they should be analyzed for their possible effect. Risk analysis  generally includes estimating the risk’s significance, assessing the  likelihood of its occurrence, and deciding how to manage the risk and  what actions should be taken.primary goals of forecasting and modeling are to predict as accurately as  possible the application volume that will result from a disaster and the  timing of when applications will be received. Without taking its experience  with early application submissions after Hurricane Sandy into account in  its plans, SBA risks continuing to be unprepared for a larger number of  disaster applications to be submitted at the beginning of a future disaster  response, potentially resulting in delays in receipt of loan funds for  disaster victims.
section_title: Inaccurate Loan Processing Expectations Delayed the Decision to Increase Staff
paragraphs: One factor that affected the timeliness of SBA’s disaster assistance was  inaccurate expectations for the rate at which SBA staff could process loan  applications, which caused SBA to delay its decision to increase staff  levels. ODA officials said that the PDC communicated inaccurate  production estimates to ODA headquarters, which led to delays in  increasing staff levels to respond to the early influx of applications.  According to ODA officials, management at PDC and ODA participated in  daily conference calls during Hurricane Sandy to discuss, among other  things, production levels of loan officers and any need to increase staff.  ODA officials said that PDC management projected an average  productivity level of 3 home loan applications a day per loan officer and  1.5 business loan applications a day per loan officer, for a combined  average of 2.25 disaster loan applications a day. However, this  productivity expectation was not met over the course of the response.  According to ODA officials, the PDC loan officers were actually  completing a combined average of 1.5 loan applications a day per loan  officer, yet continued to maintain in communications with ODA that they  could meet their initial productivity expectations. Because these estimates  were based on production benchmarks established after Hurricane  Katrina, ODA officials noted that they relied on the PDC’s production  estimates and delayed their decision to increase staff. However, ODA  officials said they later recognized that the past disaster production rate  was not an appropriate indicator of production following Hurricane Sandy  due to, among other things, differences in the types of businesses  impacted and the larger number of approved applications.
As shown in figure 6, although the number of business applications  received peaked in December 2012, ODA ultimately added loan officers  at its Sacramento loan center in mid-December 2012 and its Buffalo  center in the beginning of March 2013, past the peak months of business  application receipt.
Per the DPRP, SBA has the flexibility to incrementally add pre-identified  staff to its workforce in order to tailor its response to the size of the  disaster and number of loan applications expected. According to SBA,  during the peak of staffing in March 2013, about a fifth of the loan  processing staff belonged to its core or permanent staff; the remaining 80  percent were either pre-identified processing staff or new hires. Further,  ODA officials noted that most of the additional processing staff members,  particularly those in the Sacramento center, were new hires because it  was more cost-effective to hire loan officers from the area than to incur  costs of transporting pre-identified staff from various locations. As a  result, SBA’s decision to increase its workforce to respond to the growing  backlog was further delayed.
Based on its experience with Hurricane Sandy, ODA told us that several  changes have been made with regard to communication with the PDC  and staffing increases. The PDC is now required to produce a new series  of daily reports for ODA headquarters to increase transparency and  improve communication during future disasters. Specifically, these reports  include more detailed information on the PDC’s production rates, number  of applications submitted, and size of the application backlog. ODA has  also created a standard template for centers to request and justify  additional staff to ensure that they provide consistent information about,  among other things, current and expected performance. Further, SBA is  determining if adding permanent loan processing staff in centers other  than the PDC, such as those in Sacramento and Buffalo, is needed to  respond to disasters.
section_title: SBA Faced Other Challenges to Processing Disaster Loan Applications and Has Taken Actions to Address Them
paragraphs: To address challenges with providing timely assistance following  Hurricane Sandy, SBA made various changes to its loan processing  approach, DCMS, and loan officer training. However, because SBA has  not received a large volume of applications since Hurricane Sandy, it is  too early to determine whether these changes will improve the timeliness  of SBA’s response for future disasters similar to Hurricane Sandy’s  magnitude.
Loan Processing Approach: Following Hurricane Sandy, SBA  processed loans in the order in which they were received, regardless  of whether the applicant was a business or homeowner—referred to  as a “first-in, first-out” approach. After Hurricane Sandy, SBA received  over four times as many home loan applications as business  applications, and these home loan applications were received  earlier. As a result, business owners could have faced delays due to  the large number of home loan applications submitted ahead of them.  In August 2013, the Hurricane Sandy Rebuilding Task Force  recommended that SBA create two separate application tracks for  home and business disaster loans, which SBA implemented in  October 2013. According to SBA officials, the agency had  processed approximately 2,166 business disaster applications using  the separate application tracks in an average of 12 days as of June  2014.
DCMS Challenges: Over the course of its response, SBA  encountered various challenges with DCMS, including server  hardware crashes and periods of system latency (periods of slowness  and freezing), which added to some delays faced by business owners  in receiving disaster assistance. According to SBA, the agency is  taking several steps to improve DCMS for future disasters. For  example, SBA planned to institute a process for updating system  equipment based on a consistent life-cycle by, among other things,  conducting a baseline inventory and implementing a plan to replace  outdated hardware. According to SBA officials, the inventory has been  validated by center directors and the plan has been completed. In  addition, SBA officials said that the agency has made improvements  to its DCMS Help Desk, which responds to loan officers who  experience system issues. These improvements include implementing  a tiered approach to addressing system issues and better ensuring  that the Help Desk is used by all centers in a standardized way.
Loan Officer Training: As mentioned previously, most of the  additional processing staff, particularly those at the Sacramento  center, were new hires, but SBA found that these new loan officers  were not effectively trained to quickly respond to the backlog of  business applications. According to SBA, loan processing production  was not fully realized immediately following the increase in staff  because it took new loan officers longer than expected to fully learn  how to process loan applications. In addition, loan officers were not  converted into business loan officers until they demonstrated  proficiency in processing home loans. Further, these loan officers  required additional specialized training to learn how to process a  business loan within DCMS. According to SBA, this strategy was  ineffective because it was implemented at the peak of receiving and  processing applications. SBA has taken steps to revise its loan officer  training for future disasters to be more production-oriented rather than  focusing on DCMS use. According to SBA officials, the PDC  developed a revised training course for processing business loans in  May 2014 that is required for all loan officers. As of July 2014, three  classes of approximately 18 loan officers each have completed the  training. Additionally, SBA officials noted that it has reorganized its  loan officers into two groups that specialize in processing home and  business loans based on the previously mentioned changes made to  its loan processing approach.
section_title: Small Business Development Centers and Other Local Organizations Identified Challenges Businesses Faced in Receiving Timely Disaster Assistance
paragraphs: Select Small Business Development Centers and local business  organizations in New York and New Jersey that we met with identified two  main challenges that affected the timeliness of SBA’s assistance from the  perspective of small businesses applying for loans: time-consuming loan  documentation requirements and lack of SBA follow-up. According to  SBA officials, the agency is taking actions to address these two  challenges for future disasters.
subsections: section_title: Loan Documentation Requirements
paragraphs: Nearly all 14 SBDCs and local business organizations we met with noted  that meeting the application’s documentation requirements was time- consuming and onerous to business owners. For example, 11 of the 14  entities we met with told us that gathering the necessary documentation  to complete an application was difficult given the physical damage caused  by Hurricane Sandy. Further, 6 of the 14 entities noted that follow-up  requests for additional or updated documentation by SBA prolonged the  application process and loan decision.
As discussed previously, SBA requires business applicants to submit a  variety of documents in order to make a loan decision, including the most  recent federal income tax returns, a signed copy of the IRS tax  information authorization Form 8821, a current (dated within 90 days of  the application) personal financial statement, and a schedule of liabilities,  among others. According to SBA, additional requests for documentation  usually occur when either information needed to make a decision is  missing or information provided was not sufficient. For example, many  business owners submit their most recent federal income tax returns, but  do not include this information for their affiliates, which is required to  make a loan decision. In addition, tax returns are often requested—in  addition to the IRS Form 8821, which provides SBA access to an  applicant’s previous tax transcripts—because they provide loan officers  with more detailed information that may be needed to make a loan  decision.
SBA officials said that the agency is taking several steps to streamline the  documentation requirements for applicants and improve the process to  submit additional information. Specifically, SBA has examined the entire  loan application process in order to identify and eliminate documents that  do not help loan officers make a decision on an application. According to  SBA officials, the proposed changes to the required documentation have  been drafted and will be incorporated in the next iteration of SBA’s  disaster loan program standard operating procedures by the end of 2014.  Also, as previously mentioned, SBA officials told us that the agency plans  to consolidate entry points through which electronic loan applications can  be submitted and improve DCMS so that applicants can submit certain  documents from follow-up requests electronically rather than sending  paper copies in the mail.
Further, SBA took steps to reduce documentation requirements for  applicants with strong credit scores by amending regulations to allow the  agency to rely on credit scoring rather than cash flow when determining   Under these new regulations, SBA has  an applicant’s ability to repay.the option to base its repayment ability determination on either the  applicant’s cash flow or credit score. According to SBA, by removing the  requirement to analyze cash flow for applicants with strong credit scores  in order to determine ability to repay, the agency can process these  applications more expeditiously. Further, SBA stated that applicants with  strong credit scores will not be required to submit further information  documenting their personal and business cash flows to SBA. Finally, SBA  noted that credit scoring can help SBA dedicate staff to applicants that do  not have strong credit and reduce the overall processing time for loan  applications. SBA pursued these legal changes to determining repayment  ability in response to recommendations made by the Hurricane Sandy  Rebuilding Task Force as well as its experience with the Sandy  Alternative Processing Program (SAPP), in which selected home loan  applications were processed in a similar manner after Hurricane Sandy.
section_title: Applicant Follow-Up
paragraphs: Over half of the entities we met with said that business owners noted that  there was a lack of SBA contact after submitting their applications, and  many owners were unaware of the status of their application throughout  the process, including whether or not it had been received at the PDC.  Additionally, five of the entities noted that there was a lack of continuity  with loan officers or case managers over the course of the application  process. experienced up to eight different loan officers or case managers during  the process. In addition, these five entities reported that submitted  documentation and information were lost when loan officers and case  managers changed.
According to SBA, a loan officer is responsible for making loan application decisions and  a case manager is responsible for closing and disbursing the loan. required to supervise newer staff. In this case, the PDC will notify the  applicant of the change in loan officer or case manager as soon as  possible.SBA officials told us that some documents can be misplaced  during the application process due to the multiple ways applicants can  submit information to the PDC. In addition, some documents may not be  misplaced; rather, they may not yet have been entered into DCMS and  may not be available for loan officers to view.
According to SBA officials, efforts to process electronic application  submissions more effectively will address these issues. As part of this  project, as previously mentioned, officials said SBA expects to create an  electronic portal that will share information with applicants on the status of  their applications and documents received, which should increase  transparency and communication during the loan application process.
section_title: Approval Rates, Reasons for Decline, Withdrawals, and Cancellations for Hurricane Sandy and Previous Disasters
paragraphs: SBA’s overall approval rate for Hurricane Sandy business loan  applications was 42 percent, which was lower than those for Hurricanes  Katrina, Rita, and Wilma, higher than that for Hurricane Ike, and  comparable to the approval rate for Hurricane Irene. For Hurricane Sandy  and each of the five previous disasters we examined, lack of repayment  ability and unsatisfactory credit history were the two primary reasons why  SBA declined business loan applications. Application withdrawal rates  and loan cancellation rates were both higher for Hurricane Sandy than for  the five previous disasters we examined.
subsections: section_title: Business Loan Approval Rates for Hurricane Sandy Were Higher Than Those of Some Previous Disasters but Lower Than Others
paragraphs: In comparison to the five previous disasters we selected, the overall  approval rate for business loan applications for Hurricane Sandy was  lower than those for Hurricanes Katrina, Rita, and Wilma, higher than that  for Hurricane Ike, and comparable to the approval rate for Hurricane  Irene. The overall approval rate for Hurricane Sandy business loan  applications, including both physical disaster loans and EIDLs, was 42  percent. The approval rate for physical disaster loan applications was  45 percent, while the approval rate for EIDLs was 28 percent. For  physical disaster loan applications specifically, the approval rate for  Hurricane Sandy was lower than those for Hurricanes Katrina and Wilma,  but higher than those for Hurricanes Ike and Irene, and comparable to  that for Hurricane Rita. The approval rate for EIDL applications resulting  from Hurricane Sandy was lower than those for Hurricanes Katrina, Rita,  Wilma, and Irene, but higher than the rate for Ike (see fig. 7).
Hurricane Sandy resulted in the highest total approval rate of disaster  loan applications in comparison to the five previous disasters we  examined. The total approval rate for disaster loan applications includes  home loan applications combined with physical disaster loan and EIDL  applications. For Hurricane Sandy, the total approval rate was 53  percent.
section_title: Applicants’ Repayment Ability and Creditworthiness Were the Primary Reasons Loan Applications Were Declined for Hurricane Sandy and Previous Disasters
paragraphs: Lack of repayment ability and unsatisfactory credit history were the two  primary reasons why SBA declined business loan applications following  Hurricane Sandy and in each of the five previous disasters we examined.  Following Hurricane Sandy, SBA received 14,938 business loan  applications (excluding reconsiderations and appeals), and declined  5,663 applications as of January 31, 2014. Of these declined applications,  lack of repayment ability was at least one of the reasons SBA cited on  2,644 applications (47 percent), while unsatisfactory credit history was at least one of the reasons SBA cited on 2,317 applications (41 percent). See figure 8 below for more information on the leading decline codes for  Hurricane Sandy and previous disasters. Other reasons that Hurricane  Sandy business loan applications were declined include unsatisfactory  history on an existing or previous SBA loan or other federal obligation,  unsatisfactory debt payment history, a finding that the business was not  eligible due to recoveries from other sources, and availability of credit  elsewhere, among others.
SBA can cite more than one reason for declining a loan application. Of the 5,663  Hurricane Sandy applications that SBA denied, 1,020 (18 percent) had two or more  decline codes applied.
section_title: For Hurricane Sandy, Application Withdrawal Rates and Loan Cancellation Rates Were Higher Than for Previous Disasters
paragraphs: Of the 14,558 original Hurricane Sandy business loan applications that  had reached a decision status by January 31, 2014, 4,715 (approximately  32 percent) were withdrawn by either SBA or the applicant—a withdrawal  rate higher than those of the previous disasters we examined.withdrawal rates for these previous disasters ranged from approximately  18 percent (for Hurricane Ike) to approximately 23 percent (for Hurricanes  Katrina and Wilma), as shown in figure 9.
The  According to SBA, factors affecting the withdrawal and cancellation rates  for Hurricane Sandy include the footprint of the disaster area and the  availability of alternative sources of recovery (e.g., insurance coverage  and grants). The Hurricane Sandy footprint covered areas with higher  rates of insurance coverage compared to previous disasters. Additionally,  officials told us that the rollout of programs funded by the Department of  Housing and Urban Development’s Community Development Block Grant  program (CDBG) began earlier than in past disasters, and that state  grantees—specifically New Jersey and New York—obtained CDBG funds  and accepted applications for their respective state grant programs  shortly after the disaster struck.
section_title: SBA Has Not Implemented Three Guaranteed Disaster Loan Programs Required by Law
paragraphs: More than 6 years after Congress passed the Small Business Disaster  Response and Loan Improvements Act of 2008, SBA has not piloted nor  implemented three guaranteed disaster loan programs, which were  therefore unavailable in response to Hurricane Sandy. Therefore, the  potential effectiveness of these programs remains unclear. As previously  discussed, the act mandated the creation of the Immediate Disaster  Assistance Program (IDAP), the Expedited Disaster Assistance Loan  Program (EDALP), and the Private Disaster Assistance Program (PDAP).  According to SBA officials, the agency opted to implement IDAP first,  because the loan limit is lower than that of EDALP and PDAP and funds  were appropriated to pilot this program.
A majority of entities with whom we spoke said that a program like IDAP  (i.e., a loan up to $25,000 with a 36-hour application approval time) would  be useful, as it could provide business owners with a short-term infusion  of capital to complete tasks such as debris removal, repairing physical  damage, and purchasing inventory. As previously discussed, on average,  it took SBA 45 and 38 days to process physical business disaster loan  and EIDL applications resulting from Hurricane Sandy, respectively (from  application receipt to loan decision). As such, it took additional time for  funds to be disbursed to an applicant approved for a direct disaster  loan—time that could impact whether a business seeks other financing  options or remain in operation.
In a July 2009 report, GAO reported that SBA was planning to implement  pilot programs for IDAP and EDALP to test applicable program  requirements and to see how private lenders would administer the  programs. GAO also reported that SBA requested funding to carry out  the requirements for these two programs in the President’s budget for  fiscal year 2010. SBA received subsidy and administrative cost funding  totaling $3 million in the 2010 appropriation, which would allow the  agency to pilot test about 600 loans under IDAP The agency also issued  regulations for IDAP in October 2010. In May 2010, SBA also told GAO  that its goal was to have the pilot for IDAP in place by September 2010.
In addition, a SBA report noted in June 2012 that IDAP would be ready to  be put into operation by the end of that year. However, as of August  2014, the pilot program for IDAP had not been conducted.
According to SBA officials, the program has not been implemented for  two primary reasons: (1) information technology challenges and (2)  feedback from lenders indicating that program requirements may hinder  lender participation in the program. First, the electronic systems that  would be used to process IDAP applications did not interface smoothly  with one another. According to SBA officials, IDAP’s readiness was, in  part based on the ability of E-Tran (the 7(a) program’s electronic loan  processing system) to interface with DCMS (the Disaster Loan Program’s   Officials said that a new information  electronic loan processing system). technology system is being developed—SBA One—and that it is more  efficient to make DCMS interoperable with the new system to process  IDAP applications than to make enhancements to E-Tran.anticipates that SBA One will be operational by early 2015.
Second, SBA told us that they received feedback from lenders indicating  challenges that may discourage lenders from participating in the program,  although SBA’s documentation of this feedback is limited. In March 2010,  SBA organized a forum with 11 lenders in the Gulf Coast to obtain their  views on IDAP. Lenders stated that the program had to have simple  eligibility determination, as well as confirmation that a potential IDAP  borrower had applied for an SBA disaster loan before the lender would  approve an IDAP loan. Lenders also expressed concerns about the  possibility of guarantee denials if an applicant did not take out an SBA  disaster loan. In addition, according to SBA, in 2010 the agency also  consulted with Iowa lenders in flood-prone regions within the state via  conference calls and lenders expressed similar concerns about IDAP.  However, both the Gulf Coast forum and the conference calls with Iowa  lenders were not documented at the time the lender outreach was  conducted. As such, SBA officials must rely on the memory of staff who  were present for the discussions. In response to our request for  information on SBA’s outreach to these lenders, in July 2014, SBA  provided a one-page summary on the outreach to both the Gulf Coast  and Iowa lenders. The summary included a list of the Gulf Coast lenders  that participated but not the Iowa lenders, and the discussion of lenders’  concerns was limited.
If an applicant receives an IDAP loan before being declined for a direct disaster loan  (through the Disaster Loan Program), the applicant is required to repay the loan not earlier  than 10 years after the date of final disbursement 15 U.S.C. § 657n(d)(2). SBA regulations  state that the maturity of an SBA IDAP loan must be at least 10 years from the date of  final disbursement, but no more than 25 years. 13 C.F.R. § 123.703(d)(2). the one-time fee may not exceed $250 and an IDAP lender generally may  not charge a borrower any additional fees. According to SBA officials,  they also did not document lender feedback from this outreach effort.  SBA officials told us that feedback on IDAP requirements was obtained  from three banks, although officials could recall the identity of only one  bank.
In July 2014, SBA officials told us that the agency is still trying to conduct  the IDAP pilot by attempting to identify solutions to increase lender  participation. However, officials also noted that the lenders they met with  were not willing to participate in IDAP (or an IDAP pilot) without changes  to the statutory servicing term and the SBA regulatory program fee.  Based on lender feedback, SBA officials said that the current statutory  requirements, such as the 10-year loan term, make a product like IDAP  undesirable and that lenders are not likely to participate in IDAP unless  the loan term is decreased—for example, to between 5 and 7 years.  However, revising statutory program requirements requires congressional  action. SBA officials said that they have not discussed the feedback  received from lenders with Congress. As a result, Congress does not  have this information about SBA’s challenges with and plans to pilot and  implement IDAP. Further, SBA officials told us that the agency plans to  use IDAP as a guide to develop EDALP and PDAP, and until challenges  with IDAP are resolved, SBA does not plan to implement these two  programs.
In addition, federal internal control standards state that all transactions  and other significant events should be promptly recorded to maintain their  relevance and value to management in controlling operations and making  decisions. Documentation should also be readily available for   Although SBA obtained feedback from lenders on their  examination.willingness to participate in IDAP, documentation of these discussions  was limited and SBA has not conducted a formal documented evaluation  of lenders’ feedback that would establish the basis for proposed changes  to requirements for Congress to consider. Without an appropriately  documented evaluation of its outreach to lenders, SBA may not have  complete and reliable information on which to base its reporting to  Congress about its challenges with implementing the programs required  by the act.
More generally, we previously recommended that SBA develop an  implementation plan and report to Congress on the agency’s progress in  addressing all requirements within the act 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 in the act. As of September 2014, the agency had not  implemented this recommendation. Not having an implementation plan in  place for addressing the remaining requirements and not reporting to  Congress on related challenges can lead to a lack of transparency about  the agency’s progress toward implementing these programs and its ability  to adequately prepare for and respond to disasters.
section_title: Conclusions
paragraphs: Following Hurricane Sandy, SBA did not meet its application processing  goal for a number of reasons. SBA said it was challenged by a high  volume of loan applications early in its response to the disaster primarily  due to the use of electronic applications, as well as technological and  other issues. Although electronic loan applications were created to  simplify and expedite the application process and SBA has continued to  encourage submitting applications electronically, SBA did not anticipate  receiving such a large volume of electronic loan applications early in its  response following Hurricane Sandy and was unprepared to process  them. While SBA officials told us the agency has taken steps to respond  to these challenges, it has not revised its disaster planning documents— including the Disaster Preparedness and Recovery Plan and ODA  Playbook—to reflect the unexpected volume of early applications and its  potential impact on staffing, resources, and forecasting models. Federal  internal control standards state that management should identify risks and  take action to manage them. Without taking the large volume of  applications it received shortly after Hurricane Sandy into account in its  disaster planning documents and analyzing the risk that trend may pose  for timely disaster response, SBA risks being unprepared for a similar  experience following future disasters, which may result in delays in  providing loan funds to disaster victims.
Due to lender feedback and technology challenges, SBA has yet to pilot  IDAP and has not implemented IDAP, EDALP, and PDAP as required by  Congress in the Small Business Disaster Response and Loan  Improvements Act of 2008. SBA has also not developed an  implementation plan for addressing the act’s requirements, as GAO  recommended in 2009. This plan was to include, among other things,  challenges the agency faces in implementing the act’s requirements.  Private sector lenders have given SBA feedback on barriers to their  willingness to participate in IDAP, such as statutory program  requirements that could make the make the loans undesirable for lenders.  However SBA has not conducted a formal documented evaluation of  lenders’ feedback that would establish the basis for proposed changes to  requirements for Congress to consider. In addition, SBA has not provided  lenders’ feedback and its evaluation of that feedback to Congress—the  entity that could remove potential barriers to SBA’s implementation of the  program. As a result, SBA may lack reliable information to share with  Congress about what program requirements should be revised to  encourage lender participation. Such information could, for example, be  obtained by conducting further outreach to lenders and documenting this  outreach in accordance with federal internal control standards. Without  sharing information with Congress on challenges to implementing IDAP,  SBA may continue to face difficulties in implementing programs intended  to provide assistance to disaster victims.
section_title: Recommendations for Executive Action
paragraphs: In order to address potential risk to SBA’s ability to provide timely disaster  assistance in the future, based on the agency’s experience from  Hurricane Sandy, we recommend that the Administrator of SBA direct the  Office of Disaster Assistance to take the following action:
Revise SBA’s disaster planning documents to anticipate the potential  impact of early application submissions on staffing and resources for  future disasters, as well as the risk this impact may pose for SBA’s  timely disaster response.
In order to provide Congress with reliable information on challenges SBA  has faced in implementing IDAP, we recommend that the Administrator of  SBA direct the Office of Capital Access to take the following two actions:
Conduct a formal documented evaluation of lenders’ feedback that  can inform SBA and Congress about statutory changes that may be  necessary to encourage lenders’ participation in IDAP.
Report to Congress on the challenges SBA has faced in implementing  IDAP and on statutory changes that may be necessary to facilitate  SBA’s implementation of the program.
section_title: Agency Comments
paragraphs: We provided a draft of this report to SBA for review and comment. SBA  provided written comments, which are described below and reprinted in  appendix IV. SBA generally agreed with all recommendations presented  in this report. In response to SBA’s comments addressing our first  recommendation, we added information to the report on the role of  electronic application submissions in the unanticipated large volume of  applications SBA received early in its response to Hurricane Sandy.
In response to our recommendation that SBA revise its disaster planning  documents to anticipate the potential impact of early application  submissions on staffing and resources for future disasters, SBA agreed  with the importance of incorporating this information into its planning  documents. In addition, SBA stated that it has already taken steps to  document and address the early volume of application submissions. For  example, SBA noted that the most recent Disaster Planning and  Recovery Plan (DPRP) released in June 2014 addresses the increased  usage of the electronic application and the resulting impact of early  application submissions on staffing and resources due to both the  convenience and speed of the Internet-based application and to the  elimination of postal handling time. SBA further stated that it believes the  agency has already met this recommendation. While SBA has  acknowledged the impact of early application submissions on staffing and  resources, SBA has not yet developed details of how it will incorporate its  experience with Hurricane Sandy throughout its disaster planning to  better address resource and staffing needs resulting from early  application submissions. Thus, we maintain that SBA should take  additional action to fully address this recommendation. SBA stated that it  plans to go further and incorporate the early application submissions in  the next update of the ODA Playbook and in other ODA planning  documents. It will be important for SBA to follow through on these plans in  order to reduce the risk that increased early application submissions pose  to SBA’s ability to deliver timely disaster assistance.
In response to our recommendations that SBA conduct a formal  documented evaluation of lenders’ feedback on IDAP, and report to  Congress on challenges to implementing the program, SBA agreed that  its Office of Capital Access (OCA) has not performed a formal  documented evaluation of IDAP. SBA further stated that OCA intends to  conduct such an evaluation that will include feedback from a variety of  lenders and will use the information to identify potential changes to the  statute, current regulations, procedures, and forms for IDAP.
SBA acknowledged that the focus of our report was on its assistance to  small businesses following Hurricane Sandy; however, SBA noted that its  mission to provide disaster loan assistance is not limited to small  businesses but also extends to businesses of all sizes, private nonprofit  organizations, homeowners, and renters. Specifically, SBA noted that  about 83 percent of loan applications received after Hurricane Sandy  were for home disaster loans, which caused a significant impact on the  agency’s overall response. In our report, which specifically reviewed  SBA’s assistance to small businesses following Hurricane Sandy, we  acknowledge that SBA disaster assistance is not limited to small  businesses and home loan applications comprised about 80 percent of all  Hurricane Sandy disaster applications. Our report also notes that  business owners could have faced delays due to the large number of  home loan applications submitted ahead of them and that one process  improvement SBA made after Hurricane Sandy was to revise its loan  processing approach to create two separate tracks for home and  business disaster loan applications.
Finally, consistent with information provided in the report, SBA  summarized various other process improvements that the agency has  implemented to mitigate the challenges faced during Hurricane Sandy  and for future disasters. The draft report that we sent to SBA for comment  also described many of these changes. For example, we note in our  report that SBA is taking several steps to streamline the documentation  requirements for applicants and improve the process to submit additional  information. However, as stated in our report, because SBA has not  received a large volume of loan applications since Hurricane Sandy, it is  too early to determine the extent to which these changes will improve the  timeliness of SBA’s response to future disasters with a magnitude similar  to that of Hurricane Sandy.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to SBA and  interested congressional committees. In addition, the report will be  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me 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 report. GAO staff who made major contributions to this report  are listed in appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to examine (1) the timeliness of the Small Business  Administration’s (SBA) disaster assistance to small businesses following  Hurricane Sandy and the factors that affected SBA’s timeliness, (2) the  loan approval rates for small businesses and reasons for decline following  Hurricane Sandy, in comparison with those of previous disasters, and (3)  the extent to which SBA has implemented loan programs mandated by  the Small Business Disaster Response and Loan Improvements Act of  2008.
To evaluate the timeliness of disaster assistance to small businesses, we  obtained and analyzed data from SBA’s Disaster Credit Management  System (DCMS) on the average number of days it took SBA to process  Hurricane Sandy business loans. Specifically, we analyzed the number of  days from application receipt to loan decision, loan approval to closing,  and closing to first loan disbursement. For analyses on the timeliness of  disaster assistance, we used information on all loan application decisions,  including information on reconsidered and appealed applications. To  assess whether SBA met its timeliness goal of processing applications,  we reviewed key documents, such as SBA’s Disaster Preparedness and  Recovery Plan (DPRP), to identify any timeliness goals SBA has  established and compared the DCMS data with such goals. Further, we  reviewed work conducted by the SBA Office of Inspector General (OIG) to  assess any changes SBA has made to setting and communicating goals  related to timely disaster-loan processing.
To identify factors that affected SBA’s timeliness of disaster assistance  following Hurricane Sandy, we reviewed an internal assessment of SBA’s  response to Hurricane Sandy as well as key SBA documents that outline  agency roles and responsibilities for responding to a disaster, including  the Disaster Assistance Program Standard Operating Procedures, DPRP,  and Office of Disaster Assistance (ODA) Playbook. We also obtained and  analyzed DCMS data on the number of business loan applications  received after Hurricane Sandy by type of submission method (electronic  or paper) and in processing from October 2012 to January 2014 to  assess the extent to which identified factors affected SBA’s timeliness.  Further, we interviewed SBA officials from the ODA, Processing and  Disbursement Center, and Office of Disaster Planning to obtain their  perspectives on challenges that SBA faced in providing disaster  assistance and efforts taken to respond to those challenges.
To obtain information on the factors that affected the timeliness of SBA’s  assistance from the perspective of small businesses applying for loans,  we spoke with selected Small Business Development Centers (SBDC)  and other local organizations, such as chambers of commerce in New  York and New Jersey, the states most heavily impacted by Hurricane  Sandy. These selected entities were located in the counties that (1) were  highly impacted based on assessments and reports by the Federal  Emergency Management Agency (FEMA) and Department of Housing  and Urban Development and (2) generated the most SBA business loan  applications after Hurricane Sandy. We attempted to contact at least one  SBDC and one local organization in each selected county. However, one  SBDC and the local business organizations contacted in one county  declined to be interviewed. Therefore, we spoke to a total of 14 entities (6  SBDCs and 8 local business organizations). While the results of these  interviews could not be generalized to all counties and states affected by  Hurricane Sandy, they provided insight into challenges SBA faced in  providing timely assistance to small businesses.
To calculate the loan approval rates for small businesses following  Hurricane Sandy, we obtained and analyzed DCMS data on approvals  and declines. Specifically, we divided the number of approved  applications by the total number of approved and declined applications.Because physical disaster loans are not restricted to small businesses,  we were not able to determine the physical disaster loan approval rate for  small businesses.
To evaluate the reasons why business loan applications were declined or  withdrawn following Hurricane Sandy, we obtained DCMS data on the  codes applied to declined and withdrawn applications and identified the  most prevalent codes. To identify the reasons why approved business  loans were cancelled following Hurricane Sandy, we obtained DCMS data  on the codes applied to cancelled loans and identified the most prevalent  cancellation codes.
To compare the application approval and withdrawal rates, the reasons  for decline, and the loan cancellation rates following Hurricane Sandy with  those of previous disasters, we selected the five largest disasters since  2005 based on disaster loan application volume and performed the same  analyses of the relevant DCMS data. The five disasters we selected were  Hurricanes Katrina, Rita, Wilma, Ike, and Irene. We interviewed SBA  officials to confirm that the Disaster Loan Program’s procedures for how  data elements are defined, entered, and maintained remained  substantially unchanged during this time period.
To assess the reliability of DCMS data, we (1) performed comparisons  across the data SBA provided to identify any obvious errors in accuracy  and completeness; (2) reviewed related documentation such as the  DCMS data dictionary and data verification documentation; and (3)  worked with appropriate agency officials to identify any data problems.  When we found discrepancies, such as unpopulated fields or data entry  errors, we notified agency officials and worked with these officials to  correct the discrepancies before conducting our analysis. We determined  that the data were sufficiently reliable for the purposes of our report.
To examine the extent to which SBA has implemented loan programs  mandated by the Small Business Disaster Response and Loan  Improvements Act of 2008, we reviewed the act, other relevant  legislation, and draft guidance for the Immediate Disaster Assistance  Program. Further, we interviewed SBA officials from ODA and the Office  of Capital Access to obtain their perspectives on SBA’s efforts to  implement the Immediate Disaster Assistance Program (IDAP) and  related challenges because IDAP is the only one of the three mandated  guaranteed loan programs for which SBA has issued regulations.
We conducted this performance audit from August 2013 through  September 2014 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.
section_title: Appendix II: New Jersey and New York Hurricane Sandy Business Disaster Loan Applications Received and Approved and Dollar Amounts (as of January 2014)
paragraphs: Appendix II: New Jersey and New York  Hurricane Sandy Business Disaster Loan  Applications Received and Approved and  Dollar Amounts (as of January 2014)
The table below outlines the number of Hurricane Sandy business  disaster loans that were received and approved and the dollar amounts of  approved loans for highly impacted counties in New York and New  Jersey. This table does not include all counties that were impacted by  Hurricane Sandy and all counties that received SBA business disaster  loans.
section_title: Appendix III: Explanation of Disaster Loan Program’s Decline Codes, Withdrawal Codes, and Cancellation Codes
paragraphs: The following tables include decline, withdrawal, and cancellation  codes—as described in SBA’s Standard Operating Procedures,  Appendixes 3, 4, and 9—that are used for physical disaster loan  applications (both home and business), and Economic Injury Disaster  Loan applications.
section_title: Appendix IV: Comments from the U.S. Small Business Administration
section_title: Appendix V: GAO Contact and Staff Acknowledgements
subsections: section_title: GAO Contact:
section_title: Staff Acknowledgements:
paragraphs: In addition to the contact named above, Marshall Hamlett (Assistant  Director), Shamiah T. Kerney (Analyst-In-Charge), Vaughn Baltzly, John  McGrail, Marc Molino, Christine Ramos, Jennifer Schwartz, and Andrew  Stavisky made key contributions to this report.