Small Business Administration: Actions Taken to Help Improve Disaster Loan Assistance
Published: 2017-04-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: While SBA is known primarily for its financial support of small businesses, the agency also assists businesses of all sizes and homeowners affected by natural and other declared disasters through its Disaster Loan Program. Disaster loans can be used to help rebuild or replace damaged property or continue business operations. After SBA was criticized for its performance following the 2005 Gulf Coast hurricanes, the agency took steps to reform the program and Congress also passed the 2008 Act. After Hurricane Sandy (2012), questions arose on the extent to which the program had improved since the 2005 Gulf Coast Hurricanes and whether previously identified deficiencies had been addressed.
This statement discusses (1) SBA implementation of provisions from the 2008 Act; (2) additional improvements to agency planning following Hurricane Sandy; and (3) SBA's recent and planned actions to improve information resources for business loan applicants. This statement is based on GAO products issued between July 2009 and November 2016. GAO also met with SBA officials in April 2017 to discuss the status of open recommendations and other aspects of the program.
section_title: What GAO Found
paragraphs: The Small Business Administration (SBA) implemented most requirements of the Small Business Disaster Response and Loan Improvements Act of 2008 (2008 Act). For example, in response to the 2008 Act, SBA appointed an official to head the disaster planning office and annually updates its disaster response plan. SBA also implemented provisions relating to marketing and outreach; augmenting infrastructure, information technology, and staff; and increasing access to funds for nonprofits, among other areas. However, SBA has not yet implemented provisions to establish three guaranteed loan programs. In 2010, SBA received an appropriation to pilot one program and performed initial outreach to lenders. However, in 2014, GAO found that SBA had not implemented the programs or conducted a pilot because of concerns from lenders about loan features. GAO recommended that SBA evaluate lender feedback and report to Congress about implementation challenges. In response, SBA sought comments from lenders and sent a letter to Congress that explained remaining implementation challenges.
After Hurricane Sandy, SBA further enhanced its planning for disaster response, including processing of loan applications. In a 2014 report on the Disaster Loan Program, GAO found that while SBA encouraged electronic submissions of loan applications, SBA did not expect early receipt of a high volume of applications after Sandy and delayed increasing staffing. SBA also did not update key disaster planning documents to adjust for the effects of such a surge in future disasters. GAO recommended SBA revise its disaster planning documents to anticipate the potential impact of early application submissions on staffing and resources. In response, SBA updated its planning documents to account for such impacts.
SBA has taken some actions to enhance information resources for business loan applicants but could do more to improve its presentation of online disaster loan-related information. In 2016, GAO found that SBA took or planned to take various actions to improve the disaster loan program and focused on promoting disaster preparedness, streamlining the loan process, and enhancing online application capabilities. However, GAO found that SBA had not effectively presented information on disaster loans (in a way that would help users efficiently find it), had not consistently described key features and requirements of the loan process in print and online resources, or clearly defined financial terminology used in loan applications. Absent better integration of, and streamlined access to, disaster loan-related information, loan applicants may not be aware of key information and requirements for completing the applications. Therefore, GAO recommended that SBA (1) integrate disaster loan-related information into its web portals to be more accessible to users, (2) ensure consistency of content about the disaster loan process across information resources, and (3) better define financial terminology used in the loan application forms. In January 2017, SBA indicated it was working on a glossary for the application. GAO plans to follow up with SBA about the other two open recommendations.

section_title: Letter
paragraphs: Thank you for the opportunity to discuss the Disaster Loan Program of  the Small Business Administration (SBA) and actions the agency has  taken to help ensure timely disaster assistance in response to major  disasters. 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.
After SBA was widely criticized for its performance following the 2005  Gulf Coast hurricanes (Katrina, Rita, and Wilma), the agency took steps  to reform the Disaster Loan Program and Congress enacted the Small  Business Disaster Response and Loan Improvements Act of 2008 (2008  Act). In the wake of Hurricane Sandy in 2012, there were questions on  the extent to which the program had improved since the 2005 Gulf Coast  hurricanes and whether previously identified deficiencies, such as delays  in processing disaster loan applications, had been addressed. We  reported in 2014 that following Hurricane Sandy, business owners found  documentation requirements for disaster loan applications to be onerous,  and we found SBA did not meet its timeliness goals for processing such  applications.
In this statement, I will discuss SBA’s efforts in recent years to improve  disaster planning and response to loan applicants for the Disaster Loan  Program. Specifically, this statement discusses (1) SBA implementation  of provisions from the 2008 Act; (2) additional improvements to agency  planning following Hurricane Sandy; and (3) SBA’s recent and planned  actions to improve information resources for business loan applicants. In  preparing this statement, we relied on the body of work we issued  between July 2009 and November 2016. Our prior work includes  examinations of SBA’s efforts to address requirements of the 2008 Act;  the timeliness of SBA’s disaster assistance to small businesses and  factors that affected timeliness in response to Hurricane Sandy; and the  steps SBA took to improve information resources for business loan  applicants. More detailed information on our scope and methodology can  be found in each of the reports cited in this statement. In addition, in April  2017 we met with SBA officials to discuss the status of open  recommendations and other aspects of the program. We also reviewed  updated documentation related to SBA’s disaster planning efforts.
The work on which this statement is based was performed 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: 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. It is also  the only form of SBA assistance not limited to small businesses.
Small Business Development Centers (SBDC) are SBA’s resource  partners that provide disaster assistance to businesses. SBA officials said  that SBDCs help SBA by doing the following:  conducting local outreach to disaster victims, assisting declined business loan applicants or applicants who have  withdrawn their loan applications with applications for reconsideration  or re-acceptance, assisting declined applicants in remedying issues that initially  precluded loan approvals, and providing business loan applicants with technical assistance, including  helping businesses reconstruct business records, helping applicants  better understand what is required to complete a loan application,  compiling financial statements, and collecting required documents.
SBA can make available several types of disaster loans, including two  types of direct loans: physical disaster loans and economic injury disaster  loans.
Physical disaster 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.
Economic injury disaster loans provide small businesses that are  not able to obtain credit elsewhere with necessary working capital  until normal operations resume after a disaster declaration.
Businesses of all sizes may apply for physical disaster loans, but only  small businesses are eligible for economic injury loans.
SBA has divided the disaster loan process into three steps: application,  verification and loan processing, and closing. Applicants for physical  disaster loans have 60 days from the date of disaster declaration to apply  for the loan and applicants for the economic injury disaster loan  applicants have 9 months. Disaster victims may apply for a disaster  business loan through the disaster loan assistance web portal or by paper  submission. The information from online and paper applications is fed  into SBA’s Disaster Credit Management System, which SBA uses to  process loan applications and make determinations for its disaster loan  program.
section_title: SBA Implemented Most Provisions of the 2008 Act, but Has Not Yet Implemented New Disaster Loan Programs
subsections: section_title: SBA Implemented Most of the Provisions in 2008 Act
paragraphs: SBA has implemented most of the requirements of the 2008 Act, which  comprises 26 provisions with substantive requirements for SBA, including  requirements for disaster planning and simulations, reporting, and plan  updates (see app. I for a summary of the provisions).
For example, SBA made several changes to programs, policies, and  procedures to enhance its capabilities to prepare for major disasters.
Section 12063 states that SBA should improve public awareness of  disaster declarations and application periods, and create a marketing  and outreach plan. In 2012, SBA completed a marketing and outreach  plan that included strategies for identifying regional stakeholders  (including SBDCs, local emergency management agencies, and other  local groups such as business and civic organizations) and identifying  regional disaster risks. SBA’s plan stated that it would (1) develop  webinars for specific regional risks and promote these before the  traditional start of the season for certain types of disasters such as  hurricanes; and (2) establish a recurring schedule for outreach with  stakeholders when no disaster is occurring. Furthermore, the most  recent Disaster Preparedness and Recovery Plan from 2016 outlines  specific responsibilities for conducting region-specific marketing and  outreach through SBA resource partners and others before a disaster  as well as plans for scaling communications based on the severity of  the disaster. (See below for more information about SBA’s Disaster  Preparedness and Recovery Plan.)
Section 12073 states that SBA must assign an individual with  significant knowledge of, and substantial experience in, disaster  readiness and planning, emergency response, maintaining a disaster  response plan, and coordinating training exercises. In June 2008,  SBA appointed an official to head the agency’s newly created  Executive Office of Disaster Strategic Planning and Operations. SBA  officials recently told us that the planning office, now named the Office  of Disaster Planning and Risk Management, is under the office of the  Chief Operating Officer. Although the organizational structure  changed, the role of the director remains the same: to coordinate the  efforts of other offices within SBA to execute disaster recovery as  directed by the Administrator. Among the director’s responsibilities are  to create, maintain, and implement the comprehensive disaster  preparedness and recovery plan, and coordinate and direct SBA  training exercises relating to disasters, including simulations and  exercises coordinated with other government departments and  agencies.
Section 12075 states that SBA must develop, implement, or maintain  a comprehensive written disaster response plan and update the plan  annually. SBA issued a disaster response plan in November 2009 and  the agency has continued to develop, implement, and revise the  written disaster plan every year since then. The plan, now titled the  Disaster Preparedness and Recovery Plan, outlines issues such as  disaster responsibilities of SBA offices, SBA’s disaster staffing  strategy, and plans to scale disaster loan-making operations. The plan  is made available to all SBA staff as well as to the public through  SBA’s website.
SBA has taken actions to fully address other provisions, such as those  relating to augmenting infrastructure, information technology and staff as  well as improving disaster lending. For example, to improve its  infrastructure, information technology, and staff, SBA put in place a  secondary facility in Sacramento, California, to process loans during  times when the main facility in Fort Worth, Texas, is unavailable. SBA  also improved its Disaster Credit Management System, which the agency  uses to process loan applications and make determinations for its  disaster loan program, by increasing the number of concurrent users that  can access it. Furthermore, SBA increased access to funds by making  nonprofits eligible for economic injury disaster loans.
section_title: SBA Has Not Yet Implemented Three Guaranteed Disaster Loan Programs
paragraphs: SBA has not piloted or implemented three guaranteed disaster loan  programs. The 2008 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) would  provide small businesses with expedited access to short-term  guaranteed loans of up to $150,000.
Immediate Disaster Assistance Program (IDAP) would provide  small businesses with guaranteed bridge loans of up to $25,000 from  private-sector lenders, with an SBA decision within 36 hours of a  lender’s application on behalf of a borrower.
Private Disaster Assistance Program (PDAP) would make  guaranteed loans available to homeowners and small businesses in  an amount up to $2 million.
In 2009, we reported that SBA was planning to implement requirements  of the 2008 Act, including pilot programs for IDAP and EDALP. SBA  requested funding for the two programs in the President’s budget for  fiscal year 2010 and received subsidy and administrative cost funding of  $3 million in the 2010 appropriation, which would have allowed the  agency to pilot about 600 loans under IDAP. SBA officials also told us  that they performed initial outreach to lenders to obtain reactions to and  interest in the programs. They believed such outreach would help SBA  identify and address issues and determine the viability of the programs. In  May 2010, SBA told us its goal was to have the pilot for IDAP in place by  September 2010. Furthermore, the agency issued regulations for IDAP in  October 2010.
In 2014, we reported on the Disaster Loan Program (following Hurricane  Sandy) and found that SBA had yet to pilot or implement the three  programs for guaranteed disaster loans. In July 2014, SBA officials told  us that the agency still was planning to conduct the IDAP pilot. However,  based on lender feedback, SBA officials said that the statutory  requirements, such as the 10-year loan, made a product like IDAP  undesirable and lenders were unwilling to participate unless the loan term  was decreased to 5 or 7 years. Congressional action would be required to  revise statutory requirements, but SBA officials said they had not  discussed the lender feedback with Congress. SBA officials also told us  the agency planned to use IDAP as a guide to develop EDALP and  PDAP, and until challenges with IDAP were resolved, it did not plan to  implement these two programs. As a result of not documenting,  analyzing, or communicating lender feedback, SBA risked not having  reliable information—both to guide its own actions and to share with  Congress—on what requirements should be revised to encourage lender  participation. Federal internal control standards state that significant  events should be promptly recorded to maintain their relevance and value  to management in controlling operations and making decisions.
We concluded that not sharing information with Congress on challenges  to implementing IDAP might perpetuate the difficulties SBA faced in  implementing these programs, which were intended to provide assistance  to disaster victims. Therefore, we recommended that SBA conduct a  formal documented evaluation of lenders’ feedback on implementation  challenges and statutory changes that might be necessary to encourage  lenders’ participation in IDAP, and then report to Congress on these  topics.
In response to our recommendations, SBA issued an Advance Notice of  Proposed Rulemaking in October 2015 to seek comments on the three  guaranteed loan programs. In July 2016, SBA sent a letter to the Ranking  Member of the House Committee on Small Business that discussed how  the agency evaluated feedback on the three programs and explained the  remaining challenges to address the statutory provisions for the three  programs. Based on this action, we closed the recommendations for SBA  to develop an implementation plan, formally evaluate lender feedback,  and report to Congress on implementation challenges. SBA has yet to  announce how it will proceed with the statutory requirements to establish  these loan programs.
section_title: SBA Made Improvements in Response to Our Recommendation to Further Enhance Disaster Planning after Hurricane Sandy
paragraphs: SBA made several changes to its planning documents in response to  recommendations in our 2014 report about the agency’s response to  Hurricane Sandy. In 2014, we found that after Hurricane Sandy, SBA did  not meet its goal to process business loan applications (21 days from  receipt to loan decision). SBA took an average of 45 days for physical  disaster loan applications and 38 days for economic injury applications.  According to SBA, the agency received a large volume of electronic  applications within a few days of the disaster. While SBA created web- based loan applications to expedite the process and encouraged their  use, the agency noted that it did not expect early receipt of such a high  volume of loan applications early in its response and delayed increasing  staffing.
At the time of our 2014 report, SBA also had not updated its key disaster  planning documents—the Disaster Preparedness and Recovery Plan and  the Disaster Playbook—to adjust for the effects a large-volume, early  surge in applications could have on staffing, resources, and forecasting  models for future disasters. According to SBA’s Disaster Preparedness  and Recovery Plan, the primary goals of forecasting and modeling are to  predict application volume and application receipt as accurately as  possible. Federal internal control standards state that management  should identify risk (with methods that can include forecasting and  strategic planning) and then analyze the risks for their possible effect.
Without taking its experience with early application submissions after  Hurricane Sandy into account, SBA risked being unprepared for such a  situation in future disaster responses, potentially resulting in delays in  disbursing loan funds to disaster victims. We therefore recommended that  SBA revise its disaster planning documents to anticipate the potential  impact of early application submissions on staffing, resources, and timely  disaster response.
In response to our recommendation, SBA updated its key disaster  planning documents, including the Disaster Preparedness and Recovery  Plan and Disaster Playbook, to reflect the impact of early application  submissions on staffing for future disasters. For example, the documents  note that the introduction of the electronic loan application increased the  intake of applications soon after disasters. SBA received 83 percent of  applications electronically in fiscal year 2015 and 90 percent in 2016. The  documents also note that the electronic loan application has reduced the  time available to achieve maximum required staffing and that SBA has  revised its internal resource requirements model for future disasters to  activate staff earlier based on the receipt of applications earlier in the  process. Furthermore, our review of the most recent Disaster  Preparedness and Recovery Plan from 2016 shows that SBA continues  to factor in the effect of electronic loan application submissions on staffing  requirements.
section_title: SBA Took Some Actions to Improve Information for Business Loan Applicants but Could Improve Presentation of the Information
subsections: section_title: SBA Implemented Some Actions and Planned Others to Improve Information Resources for Business Loan Applicants
paragraphs: In our November 2016 report, we reviewed the actions SBA took or  planned to take to improve the disaster loan program, as discussed in its  Fiscal Year 2015 Annual Performance Report. SBA focused on  promoting disaster preparedness, streamlining the loan process, and  enhancing online application capabilities (see table 1).
We also reported in November 2016 that, according to SBA officials, the  agency made recent enhancements to the disaster loan assistance web  portal, such as a feature that allows a loan applicant to check the status  of an application and the application’s relative place in the queue for loan  processing. The web portal also includes a frequently asked questions  page, telephone, and e-mail contacts to SBA customer service, and links  to other SBA information resources. These enhancements may have had  a positive impact on the agency’s loan processing. For example, we  reported that an SBA official explained that information from online  applications is imported directly into the Disaster Credit Management  System, reducing the likelihood of errors in loan applications, reducing  follow-up contacts with loan applicants, and expediting loan processing.
section_title: SBA Has Opportunities to Further Refine Its Presentation of Information on the Disaster Business Loan Process
subsections: section_title: Disaster Loan-Related Information Not Easily Accessible
paragraphs: As we found in our November 2016 report, SBA published information  (print and electronic) about the disaster loan process, but much of this  information is not easily accessible from the disaster loan assistance web  portal. SBA’s available information resources include the following:
Disaster business loan application form (Form 5) lists required  documents and additional information that may be necessary for a  decision on the application.
Fact Sheet for Businesses of All Sizes provides information about  disaster business loans, including estimated time frames, in a  question-and-answer format.
2015 Reference Guide to the SBA Disaster Loan Program and  Three-Step Process Flier describe the three steps of the loan  process, required documents, and estimated time frames.
Partner Training Portal provides disaster-loan-related information  and resources for SBDCs (at https://www.sba.gov/ptp/disaster).
However, we found SBA had not effectively integrated these information  resources into its online portals; much of the information was not easily  accessible from the loan portal’s launch page or available on the training  portal. For example, when a user clicks on the “General Loan Information”  link in the loan portal, the site routes the user to SBA’s main website,  where the user would encounter another menu of links. To access the  fact sheet, the reference guide, and the three-step process flier, a site  user would click on three successive links and then select from a menu of  15 additional links. Among the group of 15 links, the link for Disaster Loan  Fact Sheets contains additional links to five separate fact sheets for  various types of loans.
According to SBA officials, SBA plans to incorporate information from the  three-step loan process flier in the online application, but does not have a  time frame for specific improvements. SBA officials also said that  disaster-loan information is not prominently located on SBA’s website  because of layout and space constraints arising from the agency’s other  programs and priorities. We concluded that absent better integration of,  and streamlined access to, disaster loan-related information on SBA’s  web portals, loan applicants—and SBDCs assisting disaster victims— may not be aware of key information for completing applications. Thus,  we recommended that SBA better integrate information (such as its  reference guide and three-step process flier) into its portals.
In response to our report, SBA stated in a January 2017 letter that the  disaster loan assistance portal includes links to various loan-related  resources and a link to SBA.gov, where users can access the SBA  Disaster Loan Program Reference Guide and online learning center.  However, SBA did not indicate what actions it would take in response to  our recommendation. We plan to follow up with SBA on whether the  agency plans to centrally integrate links to loan-related resources into its  disaster loan assistance web portal and Partner Training Portal.
section_title: Disaster-Related Resources Do Not Consistently Feature Key Information
paragraphs: We also found in our November 2016 report that SBA has not  consistently described key features of the loan process in its information  resources, such as the application form, fact sheet, and reference guide,  and none of these resources include explanations for required documents  (see table 2). The Paperwork Reduction Act has a broad requirement that  an agency explain reasons for collecting information and use of the  collected information.
According to SBDCs we interviewed and responses from SBA and  American Customer Satisfaction Index surveys, some business loan  applicants found the process confusing due to inconsistent information  about the application process, unexpected requests for additional  documentation, and lack of information about the reasons for required  documents.
We concluded that absent more consistent information in print and online  resources, loan applicants and SBDCs might not understand the disaster  loan process. As a result, we recommended SBA ensure consistency of  content about its disaster loan process by including information, as  appropriate, on the (1) three-step process; (2) types of documentation  SBA may request and reasons for the requests; and (3) estimates of loan  processing time frames and information on factors that may affect  processing time.
In response to our report, SBA stated in a January 2017 letter that the  agency provides consistent messaging about the time frame for making  approval decisions on disaster loan applications: SBA’s goal is to make a  decision on all home and business disaster loan applications within 2–3  weeks. However, SBA did not indicate that what actions it would take in  response to our recommendation. We plan to follow up with SBA on  whether the agency will take any action to ensure content is consistent  across print and online resources, among other things.
section_title: Some Business Loan Applicants Confused about Financial Terminology
paragraphs: In our November 2016 report, we further found that some business loan  applicants were confused about the financial terminology and financial  forms required in the application. Three SBDCs we interviewed  mentioned instances in which applicants had difficulty understanding the  parts of the loan application dealing with financial statements and  financial terminology. For example, applicants were not familiar with  financial statements, did not know how to access information in a financial  statement, and did not know how to create a financial statement.  Although the loan forms include instructions, the instructions do not define  the financial terminology. According to SBA officials, the agency’s  customer service representatives can direct applicants to SBDCs for help.  Two of the three SBDCs said these difficulties arose among business  owners who did not have formal education or training in finance or related  disciplines—and were attempting applications during high-stress periods  following disasters.
The Plain Writing Act of 2010 requires that federal agencies use plain  writing in every document they issue. According to SBA officials,  although the agency does not provide a glossary for finance terminology  in loan application forms, the disaster loan assistance web portal has a  “contextual help” feature that incorporates information from form  instructions. SBA customer service representatives and local SBDCs also  can help explain forms and key terms. SBA has taken other actions to  inform potential applicants about its loan program, including holding  webinars and conducting outreach. However, these efforts may not offer  sufficient assistance or reach all applicants. We concluded that without  explanations of financial terminology, loan applicants may not fully  understand application requirements, which may contribute to confusion  in completing the financial forms. Therefore, we recommended that SBA  define financial terminology on loan application forms (for example, by  adding a glossary to the “help” feature on the web portal).
In response to our report, SBA stated in a January 2017 letter that the  agency has been developing a glossary of financial terms used in SBA  home and business disaster loan applications and in required supporting  financial documents. Once completed, SBA stated that it will make the  glossary available through the agency’s disaster loan assistance portal  and the SBA.gov website. We plan to follow up with SBA once the agency  completes the glossary.
Chairman Chabot, Ranking Member Velázquez, and Members of the  Committee, this concludes my prepared statement. I would be pleased to  respond to any questions that you may have at this time.
section_title: GAO Contacts and Staff 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. GAO staff who made key contributions to this testimony  are Marshall Hamlett (Assistant Director), Christine Ramos (Analyst in  Charge), John McGrail, and Barbara Roesmann.
section_title: Appendix I: Summary of Provisions in the Small Business Disaster Response and Loan Improvements Act of 2008
paragraphs: Appendix I: Summary of Provisions in the  Small Business Disaster Response and Loan  Improvements Act of 2008 This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.