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

Letter

Background

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conducting local outreach to disaster victims, assisting declined business loan applicants or applicants who have withdrawn their loan applications with applications for reconsideration or re-acceptance, assisting declined applicants in remedying issues that initially precluded loan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.

SBA Implemented Most Provisions of the 2008 Act, but Has Not Yet Implemented New Disaster Loan Programs

SBA Implemented Most of the Provisions in 2008 Act

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.

SBA Has Not Yet Implemented Three Guaranteed Disaster Loan Programs

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.

SBA Made Improvements in Response to Our Recommendation to Further Enhance Disaster Planning after Hurricane Sandy

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.

SBA Took Some Actions to Improve Information for Business Loan Applicants but Could Improve Presentation of the Information

SBA Implemented Some Actions and Planned Others to Improve Information Resources for Business Loan Applicants

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.

SBA Has Opportunities to Further Refine Its Presentation of Information on the Disaster Business Loan Process

Disaster Loan-Related Information Not Easily Accessible

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.

Disaster-Related Resources Do Not Consistently Feature Key Information

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.

Some Business Loan Applicants Confused about Financial Terminology

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.

GAO Contacts and Staff Acknowledgments

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.

Appendix I: Summary of Provisions in the Small Business Disaster Response and Loan Improvements Act of 2008

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.