Small Business Administration: Improvements Made, but Loan Programs Face Ongoing Management Challenges
Published: 2006-04-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Small Business Administration's (SBA) purpose is to promote small business development and entrepreneurship through business financing, government contracting, and technical assistance programs. SBA's largest business financing program is its 7(a) program, which provides guarantees on loans made by private-sector lenders to small businesses that cannot obtain financing under reasonable terms and conditions from the private sector. In addition, SBA's Office of Disaster Assistance makes direct loans to households to repair or replace damaged homes and personal property and to businesses to help with physical damage and economic losses. This testimony, which is based on a number of reports that GAO issued since 1998, discusses (1) changes in SBA's oversight of the 7(a) business loan program; (2) steps SBA has taken to improve its management of information technology, human capital, and financial reporting for business loans; and (3) SBA's administration of its disaster loan program.
section_title: What GAO Found
paragraphs: Since the mid-1990s, when GAO found that SBA had virtually no oversight program for its 7(a) guaranteed loan program, SBA has, in response to GAO recommendations, established a program and developed some enhanced monitoring tools. The oversight program is led by its Office of Lender Oversight, which was established in 1999. Strong oversight of SBA's lending partners is needed to protect SBA from financial risk and to ensure that qualified borrowers get 7(a) loans. In addition to its bank lending partners, loans are made by Small Business Lending Companies (SBLC)--privately owned and managed, non-depository lending institutions that are licensed and regulated by SBA. Since SBLCs are not subject to safety and soundness oversight by depository institution regulators, SBA has developed such a program under a contract with the Farm Credit Administration. Over the years, SBA has implemented many GAO recommendations for lender oversight and continues to make improvements toward addressing others. Since the late 1990s, SBA has experienced mixed success in addressing other management challenges that affect its ability to manage the 7(a) loan program. With respect to using information technology to monitor loans made by 7(a) lenders, between 1997 and 2002, SBA was unsuccessful in developing its own system to establish a risk management database as required by law. However, SBA awarded a contract in April 2003 to obtain loan monitoring services. Regarding SBA's most recent workforce transformation efforts begun in 2002, GAO found that SBA applied some key practices important to successful organizational change but overlooked aspects that emphasize transparency and communication. SBA has implemented some related GAO recommendations for improvements in those areas. SBA has also made good progress in response to GAO recommendations addressing financial management issues. With respect to SBA's administration of its disaster loan program after the September 11, 2001, terrorist attacks, GAO found that SBA followed appropriate policies and procedures for disaster loan applications in providing approximately $1 billion in loans to businesses and individuals in the disaster areas, and to businesses nationwide that suffered economic injury. GAO's preliminary findings from ongoing evaluations of SBA's response to the 2005 Gulf Coast hurricanes indicate that SBA's workforce and new loan processing system have been overwhelmed by the volume of loan applications. GAO identified three factors that have affected SBA's ability to provide a timely response to the Gulf Coast disaster victims: (1) the volume of loan applications far exceeded any previous disaster; (2) although SBA's new disaster loan processing system provides opportunities to streamline the loan origination process, it initially experienced numerous outages and slow response times in accessing information; and (3) SBA's planning efforts to address a disaster of this magnitude appear to have been inadequate.

section_title: Letter
paragraphs: I appreciate the opportunity to be here today as you consider the  effectiveness of the Small Business Administration (SBA). Established by  Congress in 1953 to fulfill the role of several previous agencies, SBA’s  purpose is to promote small business development and entrepreneurship  through business financing, government contracting, and technical  assistance programs. In addition, SBA’s Office of Disaster Assistance  (ODA) makes loans to households to repair or replace damaged homes  and personal property, and to businesses to help with physical damage  and economic losses. For over a decade, SBA has been centralizing some  functions to improve efficiency and has moved more toward partnering  with outside entities, such as private-sector lenders, to provide direct  services to small businesses. Significant changes in SBA’s management of  its loan programs, information technology, human capital, and financial  resources have occurred, and we have studied various aspects of these  changes.
My statement today is based on a number of reports that we have issued  over the past decade addressing SBA’s administration of its major loan  guarantee and disaster loan programs. I will discuss (1) changes in SBA’s  oversight of the 7(a) business loan program; (2) steps SBA has taken to  improve its management of information technology, human capital, and  financial reporting for business loans; and (3) SBA’s administration of its  disaster loan program after the September 11, 2001, terrorist attacks and  the recent Gulf Coast hurricanes.
Since the mid-1990s, when we found that SBA had virtually no oversight  program for its 7(a) guaranteed loan program, SBA has, in response to our  recommendations, established a program and developed some enhanced  monitoring tools. The oversight program is led by its Office of Lender  Oversight (OLO), which was established in 1999. Strong oversight of SBA’s  lending partners is needed to protect SBA from financial risk and to  ensure that qualified borrowers get 7(a) loans. In addition to its bank  lending partners, loans are made by Small Business Lending Companies  (SBLC)—privately owned and managed, non-depository lending  institutions that are licensed and regulated by SBA. Since SBLCs are not  subject to safety and soundness oversight by depository institution  regulators, SBA has developed such a program under a contract with the  Farm Credit Administration. Although we have not comprehensively  reviewed the 7(a) program in some time, over the years, SBA has  implemented many of our recommendations for lender oversight and  continues to make improvements toward addressing others.
Since the late 1990s, SBA has experienced mixed success in addressing  other management challenges that affect its ability to manage the 7(a)  program. With respect to using information technology to monitor loans  made by 7(a) lenders, between 1997 and 2002, SBA was unsuccessful in  developing its own system to establish a risk management database as  required by law. However, SBA awarded a contract in April 2003 to obtain  loan monitoring services. Regarding SBA’s most recent workforce  transformation efforts begun in 2002, we found that although SBA applied  some key practices important to successful organizational change, it  overlooked aspects that emphasize transparency and communication. SBA  has implemented some related recommendations for improvements in  those areas. SBA has made good progress in response to our  recommendations addressing financial management issues.
With respect to SBA’s administration of its disaster loan program after the  September 11, 2001, terrorist attacks, we found that SBA followed  appropriate policies and procedures for disaster loan applications in  providing approximately $1 billion in loans to businesses and individuals  in the disaster areas, and to businesses nationwide that suffered economic  injury. Our preliminary findings from ongoing evaluations of SBA’s  response to the 2005 Gulf Coast hurricanes indicate that SBA’s workforce  and new loan processing system have been overwhelmed by the volume of  loan applications. We identified three factors that have affected SBA’s  ability to provide a timely response to the Gulf Coast disaster victims: (1)  the volume of loan applications far exceeded any previous disaster; (2)  although SBA’s new disaster loan processing system provides  opportunities to streamline the loan origination process, it initially  experienced numerous outages and slow response times in accessing  information; and (3) SBA’s planning efforts to address a disaster of this  magnitude appear to have been inadequate.
subsections: section_title: Background
paragraphs: SBA was established in 1953, but its basic mission dates to the 1930s and  1940s when a number of predecessor agencies assisted small businesses  affected by the Great Depression and, later, by wartime competition. The  first of these, the Reconstruction Finance Corporation, was abolished in  the early 1950s; SBA was established by the Small Business Act of 1953, to  continue the functions of the previous agencies. By 1954, SBA was making  business loans directly to small businesses and guaranteeing loans banks  made, making loans directly to victims of disasters, and providing a wide  range of technical assistance to small businesses.
Today, SBA’s stated purpose is to promote small business development  and entrepreneurship through business financing, government contracting,  and technical assistance programs. SBA also serves as a small business  advocate, working with other federal agencies to, among other things,  reduce regulatory burdens on small businesses. Most SBA financial  assistance is now provided in the form of guarantees for loans made by  private and other institutions, but the agency’s disaster program remains a  direct loan program and is available to homeowners and renters that are  affected by disasters of any kind; and to all businesses, regardless of their  size, to cover physical damages.
At the end of fiscal year 2005, SBA had authority for over 4,000 full-time  employees and budgetary resources of approximately 1.1 billion.
section_title: SBA Has Developed and Continues to Improve an Oversight Program for Its Business Loan Program
paragraphs: Providing small businesses with access to credit is a major avenue through  which SBA strives to fulfill its mission. The 7(a) loan program, which is  SBA’s largest business loan program, is intended to serve small business  borrowers who cannot obtain credit elsewhere. Because SBA guarantees  up to 85 percent of each 7(a) loan made by its lending partners, there is  risk to SBA if the loans are not repaid.
SBA is to ensure that lenders provide loans to borrowers who are eligible  and creditworthy. Therefore, strong oversight of lenders by SBA is needed  to ensure that qualified borrowers get 7(a) loans and to protect SBA from  financial risk. As of September 30, 2005, SBA’s portfolio of 7(a) loans  totaled $43 billion. In administering the 7(a) program, SBA has evolved  from making loans directly to depending on lending partners, primarily  banks that make SBA guaranteed loans. SBA’s other lending partners are  Small Business Lending Companies (SBLC)—privately owned and  managed, non-depository lending institutions that are licensed and  regulated by SBA and make only 7(a) loans. Unlike SBA’s bank lending  partners, SBLCs are not generally regulated by financial institution  regulators.
Since the mid-1990s, when SBA had virtually no oversight program for its  7(a) guaranteed loan program, the agency has established a program and  developed some enhanced monitoring tools. We have conducted four  studies of SBA’s oversight efforts since 1998 and made numerous  recommendations related to establishing a lender oversight function and  improving it. Although we sometimes repeated recommendations in more  than one report because SBA had not acted to address them, SBA has now  addressed many of the outstanding recommendations and is in the process  of addressing others.
Prior to December 1997, SBA’s procedures required annual on-site reviews  of lenders with more than three outstanding guaranteed loans. But in a  June 1998 study, we could not determine from the district offices’ files  which lenders met this criterion and should have been reviewed. In the  five SBA district offices we visited, we found that about 96 percent of the  lenders had not been reviewed in the past 5 years and that some lenders  participating in the program for more than 25 years had never been  reviewed. When we did our study, SBA was implementing a central review  program for its “preferred” lenders (those SBA certifies to make loans  without preapproval). The Small Business Programs Improvement Act of  1996 required SBA to review preferred lenders either annually or more  frequently.
In our 1998 report, we recommended that SBA establish a lender review  process for all of its 7(a) lenders, including the SBLCs. In 1999, SBA  established OLO and charged it with, among other duties, managing lender  reviews, including safety and soundness examinations of SBLCs. In the  same year, SBA contracted with the Farm Credit Administration—the  safety and soundness regulator of the Farm Credit System—to perform  examinations of SBLCs. Numerous deficiencies were identified in those  first examinations, but the SBLCs and SBA responded positively to  address the recommendations. SBA continues its contracting arrangement  with FCA.
It was during our 2000 study on oversight of SBLCs that we first  recommended that SBA clarify its authority to take enforcement actions, if  necessary, against SBLCs, and to seek any statutory authority it might  need to do so. We made this recommendation again in 2002 and in 2004  and included a call to clarify procedures for taking actions against  preferred lenders as well. We recommended that SBA provide, through  regulation, clear policies and procedures for taking enforcement actions  against preferred lenders or SBLCs in the event of continued  noncompliance with its regulations. During this time, SBA sought  appropriate authority from Congress to take enforcement actions against  SBLCs similar to those of other regulators of financial institutions, such as  cease-and-desist and civil money penalty powers. Congress provided SBA  enforcement authority over non-bank lenders in late 2004, and SBA  announced related delegations of authority in the Federal Register in April  2005 to clarify responsibilities within the agency. SBA officials have told  us that they will issue related regulations in 2006.
Our 2002 study focused more broadly on the relatively new OLO and found  that the agency had made more progress in developing its lender oversight  program. OLO had developed guidance, centralized the lender review  processes, and was performing more reviews of its lenders. We did,  however, find some shortcomings in the program and made  recommendations for improving it. For example:    While elements of the oversight program touched on the financial risk  posed by preferred lenders, weaknesses limited SBA’s ability to focus on,  and respond to, current and future financial risk to its portfolio. Neither  the lender review process nor SBA’s off-site monitoring adequately  focused on the financial risk lenders posed. The reviews used an  automated checklist to focus on lenders’ compliance with SBA’s 7(a)  processing, servicing, and liquidation standards. The reviews did not  provide adequate assurance that lenders were sufficiently assessing  borrowers’ eligibility and creditworthiness. We recommended that SBA  incorporate strategies into its review process to adequately measure the  financial risk lenders pose to SBA, develop specific criteria to apply to the  “credit elsewhere” standard, and perform qualitative assessments of  lenders’ performance and lending decisions. By 2004, as I will discuss in a  moment, we found that SBA had made progress in its ability to monitor  and measure the financial risk lenders pose but had not developed criteria  for its credit elsewhere standard.
Although SBA had taken a number of steps to develop its lender oversight  function, the placement of its OLO within the Office of Capital Access  (OCA) did not give OLO the necessary organizational independence it  needed to accomplish its goals. OCA has other objectives, including  promoting the lending program to appropriate lenders. We recommended  that SBA make lender oversight a separate function and establish clear  authority and guidance for OLO. SBA has taken several steps to address  this recommendation but has not made OLO an independent office. In the  2005 delegations of authority published in the Federal Register, SBA  specified that a Lender Oversight Committee (comprised of a majority of  senior SBA officials outside of OCA) would have responsibilities for  reviewing reports on lender-oversight activities; OLO recommendations  for enforcement action; and OLO’s budget, staffing, and operating plans.  SBA officials believe that these and other measures will ensure sufficient  autonomy and authority for OLO to independently perform its duties.  These measures appear to provide the opportunity for more independence  for OLO, but we have not evaluated how the measures are actually  working.
Our most recent review of SBA’s oversight efforts, completed in June 2004,  focused on the agency’s risk management needs and its acquisition and  use of a new loan monitoring service. Using an assessment of best  practices, we determined that SBA would need to base its capabilities for  monitoring its loan portfolio and lender partners on a credit risk  management program. Largely because SBA relies on lenders to make its  guaranteed loans, it needs a loan and lender monitoring capability that will  enable it to efficiently and effectively analyze various aspects of its overall  portfolio of loans, its individual lenders, and their portfolios. While SBA  must determine the level of credit risk it will tolerate, it must do so within  the context of its mission and its programs’ structures. Since SBA is a  public agency, its mission obligations will drive its credit risk management  policies. For example, different loan products in the 7(a) program have  different levels of guarantees. These and other differences influence the  mix of loans in SBA’s portfolio and, consequently, would impact how SBA  manages its credit risk.
Such a credit risk management program would likely include a  comprehensive infrastructure—including, skilled personnel, strong  management information systems, and functioning internal controls  related to data quality—along with appropriate methodologies and policies  that would ensure compliance with SBA criteria.
In 2003, SBA contracted with Dun and Bradstreet for loan monitoring  services.  These services could enable the agency to conduct the type of  monitoring and analyses typical of “best practices” among major lenders,  and are recommended by financial institution regulators. The services SBA  obtained reflect many best practices, particularly those related to  infrastructure and methodology, and can facilitate a new level of  sophistication in SBA’s oversight efforts. The services also give SBA a  way to measure the financial risk posed by its lending partners, and  analyze loan and lending patterns efficiently and effectively. However,  SBA did not develop the comprehensive policies it needed to implement  the best practices as we recommended.
SBA officials have told us that they have taken steps to address this  recommendation. For example, the management plan governing the  agency’s relationship with Dun and Bradstreet addresses a process for  continuous improvement. SBA has also established the Lender Oversight  Committee and a Portfolio Analysis Committee to review portfolio  performance. SBA officials told us that these committees meet frequently.  They also described the type of analyses of the loan portfolio and  individual lenders made available for review and discussion by the  committees, and provided examples of these analyses. Although these  developments could provide the tools for risk management that we  envisioned, we have not evaluated them.
section_title: SBA Has Experienced Mixed Success in Addressing Other Management Challenges to Its 7(a) Loan Program
paragraphs: Since the late 1990s, SBA has taken steps to address other management  challenges that affect its ability to manage its business loan program and  the technical assistance it provides small businesses. Information  technology, human capital, and financial management have posed  challenges for SBA, as we have noted in special reports to Congress.
subsections: section_title: SBA Has Made Advancements in Information Technology Critical to Business Loans
paragraphs: SBA has now acquired the ability to monitor its portfolio of business loans  through its arrangement with Dun and Bradstreet, as mentioned earlier.  SBA took this positive step after an unsuccessful attempt to establish a  risk management database as required by the Small Business Programs  Improvement Act of 1996. We monitored the agency’s progress as it  attempted to meet this challenge on its own. When we reviewed SBA’s  plans in 1997, we found that it had not undertaken the essential planning  needed to develop the proposed system. We periodically reported on  SBA’s progress in planning and developing the loan monitoring system  since 1997. From 1998 to 2001, SBA’s estimate for implementing the  system grew from $17.3 million to $44.6 million. By 2001, SBA had spent  $9.6 million for developmental activities, but had never completed the  mandated planning activities or developed a functioning loan monitoring  system.
In 2001, Congress did not appropriate funds for the loan monitoring  system and instead permitted SBA to use reprogrammed funds, provided  that SBA notify Congress in advance of SBA’s use of the reprogrammed  funds. Congress also directed SBA to develop a project plan to serve as a  basis for future funding and oversight of the loan monitoring system. As a  result, SBA suspended the loan monitoring system development effort. Of  the $32 million appropriated for the loan monitoring system effort, about  $14.7 million remained. In 2002, SBA contracted for assistance to identify  alternatives and provide recommendations for further developing a loan  monitoring system. This effort led to SBA awarding a contract to Dun and  Bradstreet in April 2003 to obtain loan monitoring services, including loan  and lender monitoring and evaluation; and risk management tools. The  contract includes four 1-year options at an average cost of approximately  $2 million a year.
section_title: SBA Has Applied Key Practices but Overlooked Transparency and Communication During Its Workforce Transformation
paragraphs: In 2001 we reported on SBA’s organizational structure and the challenges  it presented for SBA to deliver services to small businesses. We reviewed  how well SBA’s organization was aligned to achieve its mission. We found  a field structure that did not consistently match with SBA’s mission  requirement. This was caused by past realignment efforts during the mid- 1990s that changed how SBA performed its functions, but left some  aspects of the previous structure in place. Among the other weaknesses  we identified were:  ineffective lines of communication;   confusion over the mission of district offices; and    complicated, overlapping organizational relationships.
SBA began realigning its organization, operations, and workforce to better  serve its small-business customers in the 1990’s. With less responsibility  for direct lending and a declining operating budget, SBA streamlined its  field structure by downsizing its 10 regional offices, moving the workload  to district or headquarters offices, and eliminating most of the regional  offices’ role as the intermediate management layer between headquarters  and the field. SBA created the Office of Field Operations, largely to  represent the field offices in headquarters and to provide guidance and  oversight to field office management. In 2002, the agency planned to  approach its 5-year transformation efforts in phases, testing a number of  initiatives in order to make refinements before implementing the  initiatives agencywide. These efforts are ongoing. SBA’s current  transformation objectives are to:    streamline ODA by realigning offices, employees, and space to better serve  disaster victims and leverage use of the new disaster loan processing  system;   centralize all 7(a) loan processing in two centers to standardize  procedures and reduce the workforce required for this program;   centralize all 504 loan liquidations in two centers to standardize  processing and increase efficiency;   centralize disaster loan liquidations in one center to standardize  processing and increase efficiency; and transform the regional and district offices by standardizing their size and  function.
In October 2003, when we reported on SBA’s transformation, SBA was  near completion of the first phase of its transformation process. This  initial phase aimed to  transform the role of the district office to focus on outreach to small  businesses about SBA’s products and services, and link these businesses  to the appropriate resources, including lenders; and   centralize some of its loan functions to improve efficiency and the  consistency of its loan approval and liquidation processes.
We found that the agency had applied some key practices important to  successful organizational change, but had overlooked aspects that  emphasize transparency and communication. For example, SBA had top  leadership support and a designated transformation-implementation team,  but the makeup of the team was not communicated to employees and  stakeholders, and the team’s leadership was not always consistent. Also,  SBA had developed a transformation plan that contained goals, anticipated  results, and an implementation strategy--but the plan was not made public,  and employees and stakeholders were not apprised of the details of the  plan. Also, certain aspects of the plan were revised, causing further  confusion among non-management employees. Further, SBA had  developed strategic goals to guide its transformation, but these goals were  not linked with measurable performance goals that would demonstrate the  success of the agency’s plan to expand the focus of the district offices on  marketing and outreach.
Based on our findings and the possibility that further progress could be  impeded by budget and staff realignment challenges, we recommended  that SBA:    ensure that implementation leadership is clearly identified to employees  finalize its transformation plan and share it with employees and  stakeholders;    develop performance goals that reflect the strategic goals for  transformation, and budget requests that clearly link resource needs to  achieving strategic goals;   use the new performance management system to define responsibilities;    develop a communication strategy that promotes two-way communication;    solicit ideas and feedback from employees and the union, and ensure that  their concerns were considered.
SBA officials have told us of the Administrator’s increased efforts to  communicate with staff by holding agencywide meetings with employees,  for example. In addition, the agency plans to finalize a transformation plan  and share it with employees in June. These actions could address some of  the recommendations we made to SBA, but we have not documented or  evaluated the efforts.
section_title: SBA Addressed Major Financial Management Issues, but Additional Steps are Necessary to Sustain Progress
paragraphs: SBA has made good progress towards addressing financial management  issues that for several years prevented it from obtaining an unqualified  audit opinion on its financial statements. We reported on some of these  issues in our January 2003 report on SBA’s loan sales. Specifically, we  found that SBA lacked reliable data to determine the overall financial  results of its loan sales. Further, because SBA did not analyze the effect of  loan sales on its remaining portfolio, we reported that its credit program  cost estimates for the budget and financial statements may have contained  significant errors. In addition, SBA could not explain unusual account  balances related to the disaster loan program, which indicated that the  subsidized program was expected to generate a profit. These issues raised  concerns about SBA’s ability to properly account for loan sales and to  make reasonable estimates of program costs.
In response to our findings and several recommendations, SBA conducted  an extensive analysis to resolve the issues we identified and implemented  a number of corrective actions. For example, SBA developed a new cash-  flow model to estimate the costs of its disaster loan program, and  implemented standard operating procedures for annually revising the cost  estimates for its credit programs. SBA also revised its approach to  determine the results of loan sales and found that loans were sold at  losses, which was contrary to the original determination that the sales  generated gains. These findings prompted SBA to eventually discontinue  its loan sales program. We reviewed the improvements made by SBA and  reported in April 2005 that the loan accounting issues we previously  identified were resolved, and that the new cash-flow model improved its  ability to prepare more reliable cost estimates and to determine the results  of prior loan sales. However, we recommended additional steps that  would improve the long-term reliability of the cost estimates, such as  routine testing of the model. According to SBA officials, steps have been  taken to address each of our recommendations, including the development  of policies and procedures on how to operate and test the model.
These improvements helped SBA achieve an unqualified audit opinion on  its fiscal year 2005 financial statements, which represents significant  progress from prior years. However, for fiscal year 2005 SBA’s auditor  continued to note weaknesses in SBA’s overall internal controls. The  auditor noted three areas involving internal controls that are considered to  be weaknesses. The first area, which the auditor considered to be a  significant weakness, related to financial management and reporting  controls. Specifically, the auditor found that SBA needed to improve its  funds management (i.e., canceling loan amounts not disbursed and closing  out grants), its review process for accounting transactions, and its  financial statement preparation process. The other two less significant  control weaknesses related to SBA’s ODA administrative expenditure  controls and agencywide information system controls. While these internal  control weaknesses were not severe enough to impact SBA’s audit opinion  for fiscal year 2005, it is important for SBA to address them to help ensure  that SBA continues to be able to generate reliable financial data.
section_title: SBA Provided Disaster Loans in Response to September 11th and Now Is Responding to the Gulf Coast Hurricanes
paragraphs: Disaster assistance has been part of SBA since its inception, and SBA’s  physical disaster loan program is the only form of assistance not limited to  small businesses. Through the ODA, SBA provides low-interest, long-term  loans to individuals and businesses to assist them with disaster recovery.  Unlike the 7(a) program, the disaster loan program provides loans directly  to disaster victims. Businesses can apply for “physical loans” to repair or  replace business property to pre-disaster conditions, as well as economic  injury disaster loans (EIDLs) to obtain working capital funds to meet their  normal operating expenses. The maximum loan amount for both physical  business loans and EIDLs is $1.5 million, but SBA was given federal  authority and supplemental appropriations to increase the amount for 9/11  disaster loans. Homeowners and renters can also apply for loans to cover  their uninsured losses. The maximum amount available for home loans is  $200,000, and personal property loans to replace items such as  automobiles, clothing, and furniture are available up to $40,000. SBA  offers terms of up to 30 years for repayment. According to SBA, although  ODA aims to provide loan funds to disaster victims as quickly as possible,  its focus is on long-term recovery, and not on emergency relief.
Since SBA provides low-interest loans, the agency is required to determine  whether each applicant is able to obtain financial assistance at reasonable  rates and terms from non-government sources prior to assigning an  interest rate. A higher rate applies for physical loan applicants if they are  determined to have other credit available, and economic injury loan  applicants are ineligible if they have other credit available. Physical  business loans--where the applicant has credit available from other  sources--are also subject to a maximum 3-year term for repayment. SBA  also has standard procedures and requirements for disaster loans,  including verification of losses claimed, verification of repayment ability,  and collateral to secure loans for economic injury loans over $5,000 or for  home loans or physical disaster business loans over $10,000. SBA verifies  losses for physical loans and also deducts certain forms of compensation,  including insurance recoveries, from the eligible loan amount. Federal  Emergency Management Agency (FEMA) is the coordinating agency for  presidential disaster declarations, and most disaster victims register with  FEMA initially before receiving a referral to SBA. SBA can review  FEMA’s information to determine if an applicant has already received  federal assistance or insurance proceeds to avoid duplication of benefits.  If insurance reimbursement is undetermined at the time of application,  SBA can approve a loan for the total replacement cost, but any insurance  proceeds must be assigned to SBA to reduce the loan balance. In  considering any loan, SBA must have reasonable assurance that the loan  can be repaid. To make this determination, SBA examines federal tax  returns and income information and reviews credit reports to verify the  manner in which an applicant’s obligations, including federal debts, have  been met. One of the reasons that SBA may decline a loan application is  unsatisfactory history on a federal obligation. The law does not require  collateral for disaster loans, but SBA policy establishes collateral  requirements in order to balance the agency’s disaster recovery mission  with its responsibility as a lender of federal tax dollars. For example, for  physical disaster loans over $10,000, applicants are required to provide  collateral that will best secure the loan, and multiple loans totaling over  $10,000 also require collateral to secure each loan. Real estate is the  preferred form of collateral, but SBA will not automatically decline an  application if the best available collateral is insufficient in value to secure  the loan.
Following the terrorist attacks of September 11th, SBA provided  approximately $1 billion in loans to businesses and individuals in the  federally declared disaster areas and to businesses nationwide that  suffered related economic injury. Home and business owners in the  federally declared disaster areas received just under half of the disbursed  loans; the remainder went to eligible businesses around the country.  Congress and SBA made several modifications to the programs in  response to complaints from small businesses. For example, the EIDL  program was expanded to the entire country and to industries that had not  previously been covered, size standards for some eligible business were  changed, and loan approval and disbursement were expedited.
In 2004, in response to concerns that about half of the loan applications  submitted by small businesses were declined or withdrawn, we reviewed a  representative sample of these applications and found that SBA had  followed the appropriate policies and procedures in making loan  decisions. We compared SBA’s loan requirements to those of selected  nonprofit agencies in the New York area that provided financial assistance  to local small businesses following the disaster. Generally, we found that  SBA had loan requirements that were similar to these nonprofits, but the  nonprofits’ programs allowed some additional flexibility to address the  particular needs of their small business constituents.
We also currently have work under way to identify and assess the factors  that have affected the SBA’s ability to respond to victims of Hurricane  Katrina and the other 2005 Gulf Coast hurricanes in a timely manner. As  part of our work, we are evaluating how SBA’s new Disaster Credit  Management System, which has been in use since January 2005, affected  SBA’s response. As the primary federal lender to disaster victims,  including individual homeowners, renters, and businesses, SBA’s ability to  process and disburse loans in a timely manner is critical to the recovery of  the Gulf Coast region. As of February 25, 2006, SBA faced a backlog of  about 103,300 applications in loan processing pending a final decision, and  the average time these applications had been in process was about 94  days.  During the month of March, SBA continued to process applications.  By March 25, 2006, SBA had mailed out more than 1.6 million loan  applications, received over 350,000 completed applications, processed  more than 290,000 applications, and disbursed about $600 million in  disaster loan funds. Although SBA’s current goal is to process loan  applications within 7 to 21 days, as of March 25, 2006, SBA faced a backlog  of about 55,000 applications in loan processing pending a final decision  and the average age of these loan applications was about 88 days. SBA  also has more than 43,000 loan applications that have been approved but  have not been closed or fully disbursed. As a result, disaster victims in the  Gulf Region have not received timely assistance in recovering from this  disaster and rebuilding their lives.
Based on our preliminary analysis of SBA’s disaster loan origination  process, we have identified several factors that have affected SBA’s ability  to provide a timely response to Gulf Coast disaster victims. First, the  volume of loan applications SBA mailed out and received has far exceeded  any previous disaster. Compared with the Florida hurricanes of 2004 or  the 1994 Northridge earthquake, the hurricanes that hit the Gulf Coast in  2005 resulted in the issuance of roughly two to three times as many loan  applications. Second, although SBA’s new disaster-loan processing system  provides opportunities to streamline the loan origination process, initially  it experienced numerous outages and slow response times in accessing  information. However, we have not yet determined the duration and  impact of these outages on processing. SBA officials have attributed many  of these problems to a combination of hardware-and telecommunications-  capacity limitations as well as the level of service SBA has received from  its contractors. Third, SBA’s planning efforts to address a disaster of this  magnitude appear to have been inadequate. Although SBA’s disaster  planning efforts focused primarily on responding to a disaster the size of  the Northridge earthquake, SBA officials said that it initially lacked the  critical resources such as office space, staff, phones, computers, and other  resources to process loans for this disaster. SBA has participated in  disaster simulations on a limited basis only and it is unclear whether  previous disaster simulations of category 4 hurricanes hitting the New  Orleans area were considered.
We are also assessing other factors that have affected SBA’s ability to  provide timely loans to disaster victims in the Gulf region including:   workforce transformation, the exercise of its regulatory authority to  streamline program requirements and delivery to meet the needs of  disaster victims, coordination with state and local government agencies,  SBA’s efforts to publicize the benefits offered by the disaster loan  program, and the limits that exist on the use of disaster loan funds.
Mr. Chairman, this concludes my prepared statement. I would be happy to  answer any questions at this time.
section_title: Contacts and Acknowledgments
paragraphs: For further information on this testimony, please contact William B. Shear  at (202) 512-8678. Individuals making key contributions to this testimony  included Katie Harris, Assistant Director, and Bernice Benta.
section_title: Selected GAO Products
paragraphs: SBA Disaster Loan Program: Accounting Anomalies Resolved but  Additional Steps Would Improve Long-Term Reliability of Cost  Estimates. GAO-05-409. Washington, D.C.: April 14, 2005.
Small Business Administration: SBA Followed Appropriate Policies and  Procedures for September 11 Disaster Loan Applications. GAO-04-885.  Washington, D.C.: August 31, 2004.
Small Business Administration: New Service for Lender Oversight  Reflects Some Best Practices, but Strategy for Use Lags Behind. GAO-04- 610. Washington, D.C.: June 8, 2004.
Small Business Administration: Model for 7(a) Program Subsidy Had  Reasonable Equations, but Inadequate Documentation Hampered  External Reviews. GAO-04-9. Washington, D.C.: March 31, 2004.
Small and Disadvantaged Businesses: Most Agency Advocates View  Their Roles Similarly. GAO-04-451. Washington, D.C.: March 22, 2004.
Small Business Administration: Progress Made, but Transformation  Could Benefit from Practices Emphasizing Transparency and  Communication. GAO-04-76. Washington, D.C.: October 31, 2003.
Small and Disadvantaged Businesses: Some Agencies’ Advocates Do Not  Report to the Required Management Level. GAO-03-863. Washington, D.C.:  September 4, 2003.
Small Business Administration: Observations on the Disaster Loan  Program. GAO-03-721T. Washington, D.C.: May 1, 2003.
Small Business Administration: Progress Made but Improvements  Needed in Lender Oversight. GAO-03-720T. Washington, D.C.: April 30,  2003.
Small Business Administration: Response to September 11 Victims and  Performance Measures for Disaster Lending. GAO-03-385. Washington,  D.C.: January 29, 2003.
Small Business Administration: Accounting Anomalies and Limited  Operational Data Make Results of Loan Sales Uncertain. GAO-03-87.  Washington, D.C.: January 3, 2003.
Major Management Challenges and Program Risks: Small Business  Administration. GAO-03-116. Washington, D.C.: January 1, 2003.
Small Business Administration: Progress Made but Improvements  Needed in Lender Oversight. GAO-03-90. Washington, D.C.: December 9,  2002.
September 11: Small Business Assistance Provided in Lower Manhattan  in Response to the Terrorist Attacks. GAO-03-88. Washington, D.C.:  November 1, 2002.
Small Business Administration: Workforce Transformation Plan Is  Evolving. GAO-02-931T. Washington, D.C.: July 16, 2002.
Loan Monitoring System: SBA Needs to Evaluate the Use of Software.  GAO-02-188. Washington, D.C.: November 30, 2001.
Small Business Administration: Current Structure Presents Challenges  for Service Delivery. GAO-02-17. Washington, D.C.: October 26, 2001.
Small Business Administration: Actions Needed to Strengthen Small  Business Lending Company Oversight. GAO-01-192. Washington, D.C.:  November 17, 2000.
SBA Loan Monitoring System: Substantial Progress Yet Key Risks and  Challenges Remain. GAO/AIMD-00-124. Washington, D.C.: April 25, 2000.
Small Business Administration: Planning for Loan Monitoring System  Has Many Positive Features but Still Carries Implementation  Challenges. GAO/T-AIMD-98-233. Washington, D.C.: July 16, 1998.
Small Business Administration: Mandated Planning for Loan  Monitoring System Is Not Complete. GAO/AIMD-98-214R. Washington,  D.C.: June 30, 1998.
Small Business Administration: Few Reviews of Guaranteed Lenders  Have Been Conducted. GAO/GGD-98-85. Washington, D.C.: June 11, 1998.
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