Small Business Administration: Additional Steps Should Be Taken to Address Reforms to the Disaster Loan Program and Improve the Application Process for Future Disasters
Published: 2009-07-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: This testimony discusses our work on reforms made to the Small Business Administration's (SBA) Disaster Loan Program and the impact those reforms had following recent disasters. SBA plays a critical role in assisting the victims of natural and other declared disasters. SBA provides financial assistance through its Disaster Loan Program to help homeowners, renters, businesses of all sizes, and nonprofits recover from disasters such as earthquakes, hurricanes, and terrorist attacks. Since the agency's inception in 1953, SBA has approved more than $46 billion in disaster loans for homeowners, businesses, and nonprofit organizations. After the 2005 Gulf Coast hurricanes (Katrina, Rita, and Wilma), SBA faced an unprecedented demand for disaster loans, while also being confronted with a significant backlog of applications; therefore, hundreds of thousands of loans were not disbursed in a timely way. Many criticized SBA for what was perceived to be a slow and confusing response to the disasters and one that exposed many deficiencies in the agency's Disaster Loan Program and demonstrated the need for reform. For example, as we stated in our February 2007 report, SBA did not engage in or complete comprehensive disaster plans before the Gulf Coast hurricanes, and this limited logistical disaster planning likely contributed to the initial challenges the agency faced in responding to the 2005 hurricanes. As a result, Congress and SBA agreed that the program needed significant improvements. Since then, SBA has taken several steps to reform its Disaster Loan Program which include creating an online loan application, increasing the capacity of its Disaster Credit Management System (DCMS), and developing a Disaster Recovery Plan (DRP). In June 2008, Congress enacted the Small Business Disaster Response and Loan Improvements Act (Act) to expand steps taken by SBA and require new measures to ensure that SBA is prepared for future catastrophic disasters.
section_title: What GAO Found
paragraphs: While SBA has taken some steps toward implementing the Act, the agency still needs to take additional steps to completely address 8 provisions. According to SBA officials, the agency has not yet completely addressed some provisions that require new regulations because to do so, the agency must make extensive changes to current programs or implement new programs--such as the Immediate and Expedited Disaster Assistance Programs--to satisfy requirements of the Act. These programs, which require participation of private lenders, would be designed to provide businesses with access to short-term loans while they are waiting for long-term assistance. Moreover, as required by the Act, SBA has not issued an update of its comprehensive DRP that reflects recent changes resulting from the Act's requirements, as well as SBA's own reform efforts. Delays in updates to the DRP limit the agency's ability to adequately prepare for and respond to disasters. Also, SBA has not fully addressed the requirement for providing region-specific marketing and outreach and ensuring the information is made available to Small Business Centers (SBDCs) and other local resources. We consistently heard from regional entities, such as SBDCs and emergency management groups, about the need for more up-front information on SBA's Disaster Loan Program and their expected roles and responsibilities in disaster response efforts. By taking such actions, SBA could leverage the efforts and capacity of SBDCs, as well as state and local emergency management agencies, and ensure that it and they will be better prepared for future events, especially in disaster-prone areas. Furthermore, the Act established multiple new reporting requirements and while SBA has addressed some of these, the agency has failed to comply with the Act and issue a first annual report on disaster assistance--which was due in November 2008. Specifically, the Act requires that SBA report annually on the total number of SBA disaster staff, major changes to the Disaster Loan Program (such as changes to technology or staff responsibilities), a description of the number and dollar amount of disaster loans made during the year, and SBA's plans for preparing and responding to possible future disasters. Failure to produce annual reports on schedule can lead to a lack of transparency on the agency's progress in reforming the program. Additionally, 9 provisions set forth in the Act are subject to deadlines, which the agency has had limited success in meeting. The agency also has not developed a plan with expected time frames for addressing the remaining requirements. SBA's not providing reports to Congress and not having an implementation plan in place for addressing the remaining requirements can lead to a lack of transparencyabout the agency's Disaster Loan Program, program improvement, and capacity to reform the program, as well as its ability to adequately prepare for and respond to disasters. SBA's initial response following the 2008 Midwest floods and Hurricane Ike aligned with major components of its DRP, such as infrastructure, human capital, information technology, and communications. Additionally, individuals to whom we spoke affected by both disasters considered the agency's overall performance somewhat positive, but believed the disaster loan process could be improved.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our work on reforms made to the  Small Business Administration’s (SBA) Disaster Loan Program and the  impact those reforms had following recent disasters. As you know, SBA  plays a critical role in assisting the victims of natural and other declared  disasters. SBA provides financial assistance through its Disaster Loan  Program to help homeowners, renters, businesses of all sizes, and  nonprofits recover from disasters such as earthquakes, hurricanes, and  terrorist attacks. Since the agency’s inception in 1953, SBA has approved  more than $46 billion in disaster loans for homeowners, businesses, and  nonprofit organizations. After the 2005 Gulf Coast hurricanes (Katrina,  Rita, and Wilma), SBA faced an unprecedented demand for disaster loans,  while also being confronted with a significant backlog of applications;  therefore, hundreds of thousands of loans were not disbursed in a timely  way. Many criticized SBA for what was perceived to be a slow and  confusing response to the disasters and one that exposed many  deficiencies in the agency’s Disaster Loan Program and demonstrated the  need for reform. For example, as we stated in our February 2007 report,  SBA did not engage in or complete comprehensive disaster plans before  the Gulf Coast hurricanes, and this limited logistical disaster planning  likely contributed to the initial challenges the agency faced in responding  to the 2005 hurricanes. As a result, Congress and SBA agreed that the  program needed significant improvements. Since then, SBA has taken  several steps to reform its Disaster Loan Program which include creating  an online loan application, increasing the capacity of its Disaster Credit  Management System (DCMS), and developing a Disaster Recovery Plan  (DRP). In June 2008, Congress enacted the Small Business Disaster  Response and Loan Improvements Act (Act) to expand steps taken by SBA  and require new measures to ensure that SBA is prepared for future  catastrophic disasters.
My statement today summarizes our report released at this hearing. This  report focuses on (1) the extent to which SBA addressed the requirements  of the Act, and (2) how SBA’s response, following the major disasters of  2008, aligned with key components of its June 2007 DRP. To do this work,  we identified and analyzed the requirements of the Act and related  statutory deadlines; obtained information about SBA’s completed, current,  and planned reform efforts; reviewed documents and progress reports to  determine if requirements had been addressed and deadlines were met;  interviewed officials and obtained information on what, if any, challenges  exist that may affect SBA’s ability to implement certain requirements; and  interviewed officials to obtain information about next steps and resources  that the agency identified as needed to address any remaining  requirements. We also conducted site visits in Iowa and Texas, and  obtained information on SBA’s performance in the aftermath of the 2008  Midwest floods and Hurricane Ike. We interviewed SBA and Small  Business Development Center (SBDC) officials, state and local officials,  and representatives of local Chambers of Commerce, economic  development organizations, and affected small business owners about  what worked well and suggested improvements to SBA’s disaster loan  processes. Finally, we reviewed results from a survey of SBA loan  applicants on their satisfaction with SBA’s Disaster Loan Program in 2008.  Our work was performed between October 2008 and July 2009 in  accordance with generally accepted government auditing standards.
subsections: section_title: SBA Fully Addressed Half of the Act’s Provisions, but Has Not Yet Established Milestones for Implementation of Remaining Requirements
paragraphs: As of June 2009, SBA fully addressed requirements for 13 of 26 provisions  of the Act; partially addressed 8; and took no action on 5 that are not  applicable at this time (see table 1). For the 13 provisions SBA fully  addressed, the agency’s actions included putting in place a secondary  facility in Sacramento, California to process loans during times when the  main facility in Fort Worth, Texas is unavailable, making improvements to  DCMS to track and follow up with applicants, and expanding its disaster  reserve staff from about 300 to more than 2,000 individuals. Furthermore,  according to SBA and our review, 5 provisions require no action by SBA at  this time because they are discretionary or additional appropriations are  needed before SBA can satisfy the Act’s requirements.
SBA permitted to mke economic injry disaster lo to nonprofit.
SBA must ensure it disaster assnce progr re coordinted to the mximm extent prcticable with FEMA progr.
Better public reness of disaster decltion, ppliction period, nd cretion of rketing nd otrech pln.
SBA must condct  dy looking t the contency etween ndrd operting procedre nd regtion of the Disaster Lon Progrm.
SBA increased lomont from $10,000 to $14,000 withot requiring collterl.
SBA authorize privte contrctor to process disaster lo nd coordinte effort with IRS to expedite lon processing.
SBA must develop, implement, or mintin  centrlized informtion tem to trck nd follow p with disaster lopplicnt.
SBA i authorized to increase the deferment period of lo, but the deferment my not exceed 4 ye.
SBA must pt in  plce  econdry fcility for processing disaster lo in case the primry fcility i ilable.
SBA cn not require the orrower to pny non-mortized mont for the firt 5 ye fter repyment egin.
SBA i authorized to mke economic injry disaster lo in cas of ice torm nd lizzrd.
SBA must develop nd implement jor disaster repone plnd condct  disaster imtion exercit least once every 2 ye.
SBA musassign n individual the disaster plnning reponilitie nd report to Congress.
SBA hold ensure tht the ner of fll-time equivlent ODA employee not fewer thn 800 nd in the disaster cdre not fewer thn 1,000.
SBA must develop, implement, or mintin  comprehenive written disaster repone plnd pdte the plnnually.
SBA must develop long-term pl to ecre sufficient office ce to ccommodte n increased workforce in time of disaster.
SBA my not rely olely on the lopplicnt’ us as jor rce of employment prior to the disaster to qualify for disaster lo eyond  the crrent tory limit.
Mximm disaster lomont increased from $1.5 to $2 million.
SBA may uarantee any urety aaint loss on a bid, payment, performance, or ancillary bond on any work order or contract that at  the time of the bond execution doe not exceed $5 million.
If the Preident declre jor disaster, SBA my declre eligiility for dditionl disaster assnce.
SBA permitted to mke economic injry disaster lo to eligile ll business concern locted nywhere in the US (inclding oide  the disaster re) when the SBA declre eligiility for dditionl disaster assnce.  SBA must eablind implement  Privte Disaster Assnce Progrm.  SBA my guantee timely pyment of principnd interet on  privte disaster lossued to eligile ll business nd homeowner within n eligile disaster re.
SBA must eablin Immedite Disaster Assnce Progrm to provide immedite ll dollr lo throgh privte lender.
SBA must eablin Expedited Disaster Assnce Business Lon Progrm.
SBA i llowed to intitte  progrm to refinnce Glf Coast disaster lo resulting form Hrricne Ktrin, Rit, or Wilm p to mont no  greter thn the originl lon.
SBA mussubmit report to Congress on disaster assnce.
Addressed (initil or ongoing) or dedline met Prtilly ddressed or ome dedline met Not ddressed or missed dedline Not pplicable ecause no ction i needed to e tken SBA t thi time, de to proviion’ dicretionry nre.
The Act requires SBA to issue regulations for these provisions.
SBA has not yet issued an updated DRP.
While SBA has taken some steps toward implementing the Act, the agency  still needs to take additional steps to completely address 8 provisions.  According to SBA officials, the agency has not yet completely addressed  some provisions that require new regulations because to do so, the agency  must make extensive changes to current programs or implement new  programs––such as the Immediate and Expedited Disaster Assistance  Programs––to satisfy requirements of the Act. These programs, which  require participation of private lenders, would be designed to provide  businesses with access to short-term loans while they are waiting for long- term assistance. Moreover, as required by the Act, SBA has not issued an  update of its comprehensive DRP that reflects recent changes resulting  from the Act’s requirements, as well as SBA’s own reform efforts. Delays  in updates to the DRP limit the agency’s ability to adequately prepare for  and respond to disasters. Also, SBA has not fully addressed the  requirement for providing region-specific marketing and outreach and  ensuring the information is made available to SBDCs and other local  resources. We consistently heard from regional entities, such as SBDCs  and emergency management groups, about the need for more up-front  information on SBA’s Disaster Loan Program and their expected roles and  responsibilities in disaster response efforts. By taking such actions, SBA  could leverage the efforts and capacity of SBDCs, as well as state and local  emergency management agencies, and ensure that it and they will be  better prepared for future events, especially in disaster-prone areas.
Furthermore, the Act established multiple new reporting requirements and  while SBA has addressed some of these, the agency has failed to comply  with the Act and issue a first annual report on disaster assistance––which  was due in November 2008. Specifically, the Act requires that SBA report  annually on the total number of SBA disaster staff, major changes to the  Disaster Loan Program (such as changes to technology or staff  responsibilities), a description of the number and dollar amount of  disaster loans made during the year, and SBA’s plans for preparing and  responding to possible future disasters. Failure to produce annual reports  on schedule can lead to a lack of transparency on the agency’s progress in  reforming the program. Additionally, 9 provisions set forth in the Act are  subject to deadlines, which the agency has had limited success in  meeting. The agency also has not developed a plan with expected time  frames for addressing the remaining requirements. SBA’s not providing  reports to Congress and not having an implementation plan in place for  addressing the remaining requirements can lead to a lack of transparency  about the agency’s Disaster Loan Program, program improvement, and  capacity to reform the program, as well as its ability to adequately prepare  for and respond to disasters.
section_title: SBA’s Response Following 2008 Disasters Aligned with Certain Components of its DRP, but SBA’s Response to Disaster Victims’ Feedback on the Application Process Could Be Improved
paragraphs: SBA’s initial response following the 2008 Midwest floods and Hurricane  Ike aligned with major components of its DRP, such as infrastructure,  human capital, information technology, and communications. Additionally,  individuals to whom we spoke affected by both disasters considered the  agency’s overall performance somewhat positive, but believed the disaster  loan process could be improved.
In May 2008, floods devastated 85 counties in Iowa (one of several states  affected) and in September 2008, Hurricane Ike devastated 50 counties in  Texas. SBA and SBDC officials, state and local representatives, private- entity officials, and business owners in Iowa and Texas told us that in the  days immediately following the disasters, SBA’s Office of Disaster  Assistance staff reported to the affected areas and began providing needed  disaster assistance. These individuals also said that SBA staff provided  outreach and public information about its Disaster Loan Program;  distributed application information; assigned knowledgeable customer  service representatives to various Disaster and Business Recovery  Centers; and assisted in the initial application process by answering  questions, providing guidance, and offering one-on-one help––as outlined  in SBA’s DRP. In addition, our review of SBA’s 2008 Disaster Loan  Program Customer Satisfaction Survey also showed that respondents were  somewhat satisfied with the assistance SBA provided during other recent  disasters.
However, both the individuals we interviewed and survey results indicated  areas for improvement and opportunities to increase satisfaction with  SBA’s disaster loan process. For example, individuals we interviewed and  survey responses pointed to concerns about the amount of paperwork  required to complete SBA’s disaster loan application and the timeliness of  loan disbursements. Also, some business owners said they had to provide  copies of 3 years of federal income tax returns, although they had signed  an Internal Revenue Service (IRS) form 8821—Tax Information  Authorization—which allows SBA to get tax return information directly  from IRS. To address these concerns, the individuals we interviewed  suggested several changes to the program, such as eliminating the  requirement that business loan applicants provide copies of IRS tax  records; providing partial disbursements earlier in the process; using  bridge loans to help ensure disaster victims receive timely assistance; and  involving SBA, SBDCs, and state and local officials in joint pre-planning  and disaster preparedness efforts.
Though SBA officials told us they have been taking steps to improve the  application process, these steps and improvement efforts were not  documented. In addition, we found that while SBA conducts an annual  customer satisfaction survey, the agency does not appear to incorporate  this feedback mechanism into its formal efforts to continually improve the  application process. Furthermore, SBA does not appear to have a formal  process for addressing identified problem areas and using this experience  to improve the application process for future applicants. By establishing  such a process to address identified problem areas, SBA could better  demonstrate its commitment to improving the Disaster Loan Program. As  discussed in our report, while SBA has made progress, the agency has  missed opportunities to further improve its Disaster Loan Program, and in  particular improve the application process for future applicants.
section_title: Actions Needed To Ensure That SBA Addresses Remaining Requirements and Improves the Application Process
paragraphs: In our report, we made five recommendations to facilitate SBA’s progress  in meeting and complying with requirements of the Act and improve the  Disaster Loan Program. Specifically, we recommended that the  Administrator of SBA:  (1) develop procedures for regional entities that would enable SBA to  meet all region-specific requirements of the Act and ensure regional  entities, such as SBDCs, have this information and other Disaster Loan  Program information readily available prior to the likely occurrence of a  disaster;  (2) complete the first annual report to Congress on disaster assistance and  adhere to the time frame for subsequent reports;  (3) expeditiously issue an updated DRP that reflects recent changes  resulting from the Act’s requirements, as well as SBA’s own reform efforts;  (4) develop an implementation plan and report to Congress on the  agency’s progress in addressing the requirements of the Act, including  milestone dates for completing implementation; and  (5) develop and implement a process to address identified problems in the  disaster loan application process for future applicants.
SBA generally agreed with our recommendations and stated the agency’s  plan to incorporate them into its ongoing efforts to implement the Act and  improve the application process. Specifically, SBA plans to expand its  outreach efforts to ensure the public in all regions of the country are more  aware of SBA disaster assistance programs before a disaster strikes. SBA  is also planning to submit both the required annual report, and the 2009  revision to its DRP to Congress by November 15, 2009. Additionally, SBA  officials said the agency has plans to develop an implementation plan for  completion of the remaining provisions. Finally, in response to our  recommendation on the application process, SBA cited ongoing efforts  since 2005 to improve its application process, such as the electronic loan  application, and said the agency has plans to continue its improvement  efforts and make them an ongoing priority. However, SBA did not say how  it would implement a formal process to address identified problem areas  in the disaster loan application process.
Madam Chairwoman, this concludes my prepared statement. I would be  pleased to respond to any questions you or other Members of the  Committee may have.
section_title: Contacts and Acknowledgments
paragraphs: For further information on this testimony, please contact William B. Shear  at (202) 512-8678 or ShearW@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. Individuals making key contributions to this testimony  include Kay Kuhlman, Assistant Director; Michelle Bowsky, Beth  Faraguna, and Alexandra Martin-Arseneau.
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