Small Business Administration: Disaster Loan Processing Was Timelier, but Planning Improvements and Pilot Program Evaluation Needed
Released: 2020-03-09T00:00:00

Letter

Background

Federal agencies can respond to a disaster when effective response and recovery are beyond the capabilities of affected state and local governments. In such cases, the President can declare a major disaster in response to a request by the governor of a state or territory or the chief executive of a tribal government. The SBA Administrator also can issue an agency physical disaster declaration for events that do not rise to the level of a major Presidential disaster declaration in response to a timely request by a state governor.

The National Response Framework governs any type of federal disaster or emergency response. Under this framework, FEMA has lead responsibility and offers disaster assistance. At least 30 other federal agencies, including SBA, also administer disaster assistance programs and activities.

SBA’s Office of Disaster Assistance

The Small Business Act authorizes SBA to make direct loans to help businesses, nonprofit organizations, homeowners, and renters repair or replace property damaged or destroyed in a declared disaster (declared by the President or SBA). ODA is responsible for administering the SBA disaster loan program, primarily through the following offices:

Customer Service Center is a single nationwide point of contact for disaster survivors who have questions about SBA disaster loans. It provides a call center, email response, disaster application mailings, and pre-application entry.

Field Operations Centers coordinate disaster field operations and publicize ODA’s Disaster Loan Program before and after disasters. Field Operations Centers establish, staff, and maintain field operations in declared disaster areas, including Disaster Recovery Centers, Business Recovery Centers, and Disaster Loan Outreach Centers.

Processing and Disbursement Center screens all applications, reviews and processes those that are complete, closes all approved loans, and disburses loan proceeds.

In addition, ODA works with resource partners, such as SBDCs, to provide disaster assistance to businesses. SBDCs help SBA by conducting local outreach to disaster victims; assisting those who have had their business loan application denied or withdrawn with applications for reconsideration or re-acceptance; assisting declined applicants in remedying issues that initially precluded loan approvals; and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 to reconstruct business records, to better understand requirements to complete a loan application, and for compiling financial statements and collecting required documents.

SBA Disaster Loans and Loan Processing

The Small Business Act authorizes SBA to make available two different types of direct disaster loans to survivors located in a declared disaster area (see table 1):

Physical disaster loans are for the permanent rebuilding and replacement of uninsured or underinsured disaster-damaged property. They are available to homeowners, renters, most types of businesses regardless of size, and nonprofit organizations. Businesses in agriculture-related industries—also known as agricultural enterprises—are not eligible.

Economic injury disaster loans help meet working capital needs (until normal operations resume) for most disrupted small businesses and private nonprofit organizations that utilized all reasonable available funds and were not able to obtain credit elsewhere after a disaster declaration. The loans cover operating expenses the businesses could have paid had the disaster not occurred.

Business eligibility for the loans also differs. Certain businesses of all sizes are eligible for physical disaster loans, but only small businesses are eligible for economic injury disaster loans. Small businesses that did not sustain physical damage from a disaster cannot apply for physical disaster business loans but can apply for economic injury disaster loans. And, applicants seeking both types of loans may be approved for one type of disaster loan but denied for the other.

SBA procedures generally require that applications for a physical disaster loan be submitted no later than 60 days following the disaster declaration and no later than 9 months after this date for an economic injury disaster loan. SBA may authorize an extension of the filing period, and did so for each of the 2017 hurricanes.

Applicants can apply for a loan (1) at a FEMA Disaster Recovery Center, (2) at a Business Recovery Center or SBA Disaster Loan Outreach Center, (3) by mail, or (4) online through SBA’s electronic loan application system. SBA requires applicants seeking any disaster loan to submit documents with their application package, including permission for SBA to access applicants’ tax return information.

SBA’s regulations contain underwriting criteria that require reasonable assurance of repayment. The regulations state that SBA must have reasonable assurance that all disaster loan applicants can repay their loans based on SBA’s analysis of the applicants’ credit or personal or business cash flow.

Processing of disaster loan applications involves several stages (see fig. 1). For example, loss verifiers conduct desktop or on-site inspections for physical disaster loan applications to estimate the cost of restoring damaged property to predisaster condition. The verified loss becomes the basis for the loan amount. Loan officers determine eligibility during processing, taking into consideration any insurance or other recoveries, and make the decision to approve or decline an application. Case managers work with borrowers through the disbursement process (until the loan is fully disbursed).

SBA Disaster Response Planning

To plan for its response to Presidentially declared disasters, SBA maintains long-term disaster planning documentation, conducts disaster simulations, maintains an outreach plan, and creates action plans for specific disasters.

Disaster planning documents. SBA’s major planning documents for disasters include its Disaster Preparedness and Recovery Plan and its Disaster Playbook. The Disaster Preparedness and Recovery Plan outlines SBA’s responsibilities as part of federal disaster response efforts. The plan is intended to ensure a broad scope of coordination, awareness, and support throughout the organization, and describes how SBA conducts its disaster-related missions. The plan also includes appendixes describing different aspects of SBA’s disaster response operations, including SBA’s forecasting and modelling to predict internal resource requirements such as staff. The document is revised annually. The Disaster Playbook outlines the roles and responsibilities of ODA departments, resource partners, and other private-sector partners at each major phase of the disaster recovery process. For example, it describes the steps taken by each ODA department to receive and process incoming disaster loan applications. According to SBA officials, the Disaster Playbook that guided the disaster response for the 2017 hurricanes was issued in 2014.

Disaster simulations. SBA also participates in external and internal disaster simulation exercises. SBA participates in the FEMA-led National Exercise Program, which is a 2-year cycle of exercises that examine and validate capabilities in the National Preparedness System mission areas.

SBA’s internal disaster simulations occur at SBA’s biennial Senior Leadership Summit. SBA is required by law to conduct an internal disaster simulation exercise at least once every 2 fiscal years. The exercises are designed to improve understanding of preparedness concepts, identify opportunities or problems in SBA’s response to disasters, and discuss solutions for improvement.

Outreach plan. SBA maintains a marketing and outreach plan with the goal of continuing and strengthening lines of communication with stakeholders to build strong and productive partnerships. The plan describes how SBA promotes awareness of the risk of natural disasters, the need to be prepared, and SBA’s role in disaster recovery. The plan also outlines areas of responsibility, disaster event scenarios, strategies for achieving its outreach goals, and implementation of outreach efforts. According to the plan, implementation of outreach efforts should include distribution of SBA disaster information products by public information officers and SBA’s resource partners, including SBDCs.

Action plans. SBA Field Operations Centers create disaster-specific action plans to guide disaster responses. According to officials from the centers, action plans outline projected resource requirements, such as staff, and may include descriptions of the impending disaster scenario, SBA leadership responsibilities, and operational support requirements.

SBA has designated response levels that correlate staffing levels with anticipated numbers of applications. SBA has four response levels based on the number of loan applications it expects to receive (see fig. 2). Each level has different goals for staffing and processing applications. The 2017 hurricanes triggered a level III response from SBA.

Express Bridge Loan Pilot Program

SBA established the Express Bridge Loan Pilot Program to supplement the agency’s disaster response capabilities. The pilot program became available for use on October 16, 2017, and is set to expire on September 30, 2020.

The pilot allows 7(a) lenders with SBA Express lending authority to deliver SBA-guaranteed financing for disaster-related purposes to eligible small businesses on an emergency basis while the businesses apply for and await long-term financing.

The businesses must be located in, or contiguous to, communities with Presidentially declared disasters and have a pre-existing banking relationship with the 7(a) lender. Loan applications are subject to a streamlined underwriting process to ensure that small business owners receive a quick decision.

SBA Conducted Broad Outreach, but Lacks Guidance to Help It Plan for and Respond to Disasters

SBA’s Disaster Planning Does Not Incorporate Risk Analysis or Guidance on Developing Action Plans for Specific Disasters

Disaster Planning Documentation

SBA’s major disaster planning documentation lacks an in-depth discussion of risks SBA could face when responding to disasters. The Disaster Preparedness and Recovery Plan states that SBA must assess risk from two perspectives. First, it must address risk to its own resources and capabilities through its employee safety and continuity of operations plans to preserve its mission-essential functions, including the Disaster Loan Program. Second, SBA must evaluate the demands various disaster scenarios can place on the agency regardless of the impact to its own assets.

However, the Disaster Preparedness and Recovery Plan does not include a description of potential risks that may prevent SBA from successfully executing the Disaster Loan Program or discuss how SBA is to conduct risk analysis. Furthermore, SBA’s Disaster Playbook does not include any mention of risk and risk-mitigation techniques. Federal internal control standards state that management should identify, analyze, and respond to risks related to achieving defined objectives.

For example, the types of challenges SBA faced in executing its response to Hurricane Maria in Puerto Rico and the U.S. Virgin Islands represent potential risks to the program because they could compromise SBA’s ability to successfully execute the program. These challenges included

Loss of electricity: Electrical outages restricted SBA’s ability to quickly establish operations and help survivors access disaster loans. According to SBA officials, ODA established its base of operations at the SBA District Office in San Juan (which had generator power) because they had difficulty locating other usable office space due to power outages. In a report issued after the 2017 hurricanes, SBA noted that periodic outages also prevented applicant access to the online Disaster Loan Application Portal.

Other infrastructure damage: Physical infrastructure damage restricted SBA’s mobility around Puerto Rico and the U.S. Virgin Islands following Hurricane Maria, delaying SBA’s execution of the Disaster Loan Program. According to SBA officials, there were no flights into or out of the islands, and driving was difficult due to damage to and debris on the roads.

No or intermittent communications services: According to SBA officials, telephone lines were down and cellular phone service was intermittent in Puerto Rico immediately after Hurricane Maria, which made communicating with staff and disaster survivors more difficult.

We present applicant, other stakeholder, and SBA perspectives on these and other challenges later in this report.

SBA officials told us that the agency contracts with an outside firm to conduct monthly portfolio analysis reports. Officials also told us that they use this report to identify areas of credit risk and make adjustments to program parameters, such as minimum acceptable credit scores. However, officials told us that they do not formally document other types of risks, including operational risks, or the steps taken to mitigate these risks. For example, SBA’s major planning documentation does not include any discussion of steps taken by ODA to mitigate the risk to the program posed by the major infrastructure damage that occurred in Puerto Rico after Hurricane Maria.

Without identifying risk elements associated with its disaster response and documenting how it plans to mitigate these risks, SBA may not be adequately prepared to respond to challenges that arise during its disaster response efforts.

Action Plans for Specific Disasters

The action plans created for the 2017 hurricanes contained varied information and in some cases did not discuss certain resource requirements for responding to the disaster, such as equipment needs. For example, the Hurricane Harvey action plan is less detailed than the plans for Hurricanes Irma and Maria and only discusses the anticipated staffing needs and strategies to meet those needs. The action plans for Hurricanes Irma and Maria identified additional resource needs and issues unique to a particular location.

FEMA provides guidance on developing disaster plans for local, state, and federal government planners to guide their on-site response to disasters. These plans should focus on managing personnel, equipment, and resources that play a direct role in the response. The plans are to define how specific actions will be performed to achieve a planned outcome and include the “who, what, where, and when” in describing deployment and direction of resources.

SBA officials told us they created a template to help in estimating staffing needs, but SBA has not identified whether any other elements, such as those defined by FEMA, should be included in these plans. Moreover, SBA has not provided guidance to the Field Operations Centers that is specific to preparing action plans for impending disasters. In addition, SBA’s major disaster planning documents, the Disaster Preparedness and Recovery Plan and the Disaster Playbook, do not mention action plans. According to SBA officials, these plans are internal documents, and the template and the Field Operations Center director’s prior experience creating action plans are sufficient guidance.

Without identifying the key elements of a disaster action plan and providing additional guidance to staff on how to incorporate these elements in future action plans, SBA’s Field Operations Centers may miss opportunities to better tailor their response to individual disasters, decreasing the effectiveness of their responses.

External and Internal Simulations

As discussed previously, SBA participates in external and internal disaster simulation exercises to help it prepare for disasters. For instance, SBA participated in the 2019 National Level Exercise, which simulated the interagency response to a large earthquake in Tennessee.

Prior to the 2017 hurricanes, SBA conducted an internal disaster simulation at its biennial leadership seminar in 2016. SBA simulated a series of three progressively more challenging events, including a simulated earthquake that, according to SBA officials, took out power to two major West Coast cities. According to SBA officials, this exercise helped them prepare for the widespread power outages encountered during the disaster response in Puerto Rico after Hurricane Maria.

SBA officials told us that after an internal simulation, SBA prepares a report that summarizes the events and recommends disaster response improvements. For example, after the 2016 simulation, SBA determined it did not currently have the resources to adequately respond to a large event. Suggested improvements to increase SBA’s response capacity included establishing timelines for screening and training of new hires.

SBA Increased Staffing and Established Business Recovery Centers during Its Initial Response to the 2017 Hurricanes

Staffing

In response to the 2017 hurricanes, SBA forecasted the need for additional staff and hired staff as outlined in its Staffing Strategy. SBA also encountered several challenges associated with its hiring and training processes.

The Staffing Strategy used by SBA in its response to the 2017 hurricanes describes the types of staff SBA hires for disaster response, how SBA determines and manages staffing levels, and factors to consider when hiring new or returning staff. For example, the guidance describes business needs SBA should consider when making hiring decisions, such as workload, special skills required, and cost-saving measures.

Before an impending disaster, SBA uses a model to forecast staffing levels. According to SBA officials, the model helps identify the expected number of staff needed in each ODA office and peak need based on the anticipated number of applications received. The officials noted that predicted applications typically peak about 3–4 weeks into the disaster response. Key assumptions and inputs to the model include the target application review and decision time frame; the requirements for specialized staff skills such as loss verification, loan processing, and legal review in the application process; staff productivity and training requirements; the total expected loan volume; and the type of disaster.

As shown in figure 3, SBA’s actual staffing lagged behind its predicted levels for the first 4 months following the 2017 hurricanes. Officials told us that SBA encountered challenges quickly hiring and getting new staff on board immediately following the 2017 hurricanes.

Due to the rapid need for qualified staff to respond to the 2017 hurricanes, SBA faced a variety of self-identified challenges in hiring the staff.

Recruitment: ODA lacked a national recruitment strategy and vehicle for advertising vacant positions. In addition, SBA processed resumes manually, without the ability to effectively match resumes with required skillsets. Due in part to its manual processes, it took SBA time to hire qualified human resources specialists to process the large number of applicants for positions, which affected the ability to hire and deploy new staff to disaster areas.

Hiring: Because of the size of the 2017 hurricanes, ODA initially was unable to effectively support staffing needs of centers. In addition, SBA officials said that the agency had to hire Puerto Rican attorneys because secured loans must be signed by a notary and in Puerto Rico, notaries must be lawyers. “On-boarding”: ODA’s on-boarding processes were manual, heavily paper-based, and inefficient and caused delays in processing new staff. In addition, not enough time was devoted to the on-boarding process, and delays, disruptions, and unforeseen issues routinely extended the process.

Training: New staff required significant training that SBA did not have time to provide. Shortened or omitted training created a greater need to provide on-the-job training.

In response to these challenges, SBA’s after-action report for the 2017 hurricanes and its 2018 Staffing Strategy made recommendations to improve SBA’s hiring processes. These recommendations included establishing regular intermittent postings; creating an enhanced recruitment toolkit that includes social media, advertisement, third-party partnerships, and an outreach plan; establishing interagency agreements for detailee staff; developing a template for deployment of staff; reviewing and updating position descriptions; building an applicant pipeline; developing an on-boarding plan; and implementing an integrated technology solution that includes recruitment, hiring, on-boarding, benefits, training, performance management, and “off-boarding.”

SBA officials told us they have begun implementing these recommendations. For example, the agency consolidated its hiring processes for new staff through USA Staffing, a federal online recruitment, evaluation, and hiring system.

Business Recovery Centers

SBA establishes outreach locations for businesses and individual disaster survivors, including Business Recovery Centers, in disaster areas. The SBA OIG noted that while the centers are designed to assist business owners, staff also were available to assist homeowners and renters. Based on our analysis of SBA data, SBA operated six such centers in response to Hurricane Harvey, 18 in response to Hurricane Irma, and 85 in response to Hurricane Maria.

According to SBA officials, the number of Business Recovery Centers opened is dependent on two key data points—the number of declared counties with the greatest impact from the disaster and the business and population density. Officials told us that SBA opened the most centers in response to Hurricane Maria in Puerto Rico because of the high number of affected municipalities. Staffing levels at the centers are based on the number of businesses categorized as major and on population density, and then refined based on actual daily activity at the center. See figure 4 for a photograph of SBA staff at a center in a municipal sports complex in Bayamón, Puerto Rico.

In some locations we visited, SBA worked with its district office or local SBDCs to set up and staff Business Recovery Centers. For example, the Field Operations Center–East and the Florida SBDC Network created a staffing and deployment plan that outlined center locations in the Florida counties most affected by Hurricane Irma. The Florida centers were jointly staffed by SBA and SBDC employees, and included a mobile center.

According to SBA officials, SBA and SBDC representatives drove the mobile center to locations without a dedicated Business Recovery Center, such as the Florida Keys.

Similarly, the Field Operations Center–East created a staffing and deployment strategy for Business Recovery Centers with SBA’s District Office in Puerto Rico. They established fixed and mobile centers and each week staff traveled to multiple municipalities without fixed centers. The SBA District Office coordinated with local mayors and other officials to select the locations and ensure the public was informed. SBA officials noted that staff visited all the Puerto Rican municipalities over about 7 months.

SBA Conducted Outreach after the 2017 Hurricanes, but Has Not Incorporated Region-Specific Risks or Evaluated Its Efforts

SBA’s outreach for the 2017 hurricanes included local partners, generally was favorably regarded by stakeholders we interviewed, and met statutory requirements. But SBA’s current guidance on outreach efforts does not incorporate region-specific risks (such as those encountered after the 2017 hurricanes), and SBA has not evaluated its efforts.

Outreach Methods

According to SBA officials, SBA relied on public information officers, staff at recovery centers, local partners such as SBDCs and local government, and media contacts to disseminate information about the Disaster Loan Program to disaster survivors. When communicating with disaster survivors was difficult immediately after Hurricane Maria struck Puerto Rico, SBA officials told us they worked with the only operational radio station on the island to broadcast information about the program.

During our site visits to selected areas in the states and territories most affected by the 2017 hurricanes, stakeholders—including business owners and local SBA partners—told us they generally were satisfied with SBA’s outreach efforts to disaster survivors. Officials at one SBDC told us that they believed SBA public information officers did a good job reaching out to local businesses and keeping the SBDC informed about upcoming SBA disaster loan presentations and media outreach and went door-to- door to reach small businesses. Similarly, officials at an SBDC in Puerto Rico told us that SBA staff visited all the municipalities in their region, and that they participated in presentations about disaster assistance with SBA and FEMA. Nine of the 24 business owners with whom we talked told us they first learned about SBA’s disaster loans from prior experience with the loans or through the agency’s outreach efforts (presented online or on other media). As discussed in more detail below, SBA does not have metrics that allow it to assess the effectiveness of its outreach efforts.

Outreach Materials

Outreach materials SBA provided to us contained required statutory elements. By statute, if a disaster is declared, SBA must make “every effort to communicate through radio, television, print and web-based outlets, all relevant information needed by disaster loan applicants.” SBA must include (1) the date of the declaration; (2) cities and towns in the areas of the declaration; (3) loan application deadlines related to the disaster; (4) all relevant contact information for victim services available through SBA (including links to SBDC websites); (5) links to relevant state and federal disaster assistance websites, including links that provide information on assistance available through FEMA; (6) information on eligibility criteria for SBA loan programs, including where applications can be found; and (7) application materials that clearly state SBA’s function as the federal source of disaster loans for homeowners and renters.

We reviewed SBA Disaster Loan fact sheets available for Hurricanes Harvey, Irma, and Maria and other outreach materials distributed to disaster survivors and found they collectively included the required elements (see fig. 5 for examples). For example, the Hurricane Harvey fact sheet contains the date of the declaration and counties included in the declaration, as well as information about SBA’s function to provide disaster loans, the types of loans available, loan eligibility requirements, deadlines, and contact information for SBA disaster assistance.

SBA’s guidance on outreach does not include steps on identifying regional disaster risks. In 2009, we recommended that SBA develop procedures to enable it to meet the region-specific requirements of the Small Business Act. Specifically, we recommended that SBA include likely scenarios for certain regions prone to disasters. In 2012, SBA completed a marketing and outreach plan that stated SBA would develop webinars for specific regional risks. However, SBA’s 2018 Marketing and Outreach Plan did not mention or incorporate regional challenges such as those SBA encountered responding to the 2017 hurricanes in Puerto Rico and the U.S. Virgin Islands.

SBA officials told us that they experienced challenges in conducting outreach to the territories. As previously mentioned, SBA used the only operational media outlet in Puerto Rico—a radio station—immediately after Hurricane Maria to broadcast information. SBA officials told us that language barriers also presented a challenge during the response to Hurricane Maria. Outreach materials had to be printed in both Spanish and English (see fig. 6).

Federal internal control standards state that management should internally communicate the necessary quality information to achieve the agency’s objectives. However, SBA’s guidance on outreach does not identify regional disaster risks. SBA officials told us that they have not considered documenting these challenges in their outreach guidance, although they may do so in the future.

Without updating its outreach guidance to discuss region-specific challenges, such as those faced in responding to disasters in the U.S. territories, SBA misses a key opportunity to better ensure staff are adequately prepared to conduct outreach in similar situations and locations.

Metrics to Evaluate Outreach Efforts

SBA does not have metrics for how well its outreach efforts informed disaster survivors about the Disaster Loan Program. Although SBA surveyed a sample of disaster loan applicants in August 2018, the survey did not include questions specific to applicants’ perception of SBA’s outreach efforts that the agency could use to measure the success of its efforts. Officials told us the survey was primarily used to evaluate SBA’s loan processing and not its outreach efforts.

In past work, we convened an expert panel to discuss challenges with consumer education and key planning components to overcome these challenges. One of the key practices identified in the expert panel was the need to establish metrics to measure success in achieving the objectives of an outreach campaign. For example, process metrics can help ensure the quality, quantity, and timeliness of a campaign, and outcome metrics evaluate how well the campaign influenced the attitudes and behaviors of the target audience.

Without metrics evaluating its disaster outreach efforts, SBA will not be able to determine how well and to what extent its outreach efforts have informed disaster survivors about the Disaster Loan Program.

SBA Expedited Its Application Processing, but Applicants Cited Continuing Challenges

Since 2005, SBA has streamlined its loan application and review process and recognized such changes resulted in a need for earlier staff activation. SBA’s approval rate for all disaster loan applications following the 2017 hurricanes was approximately 49 percent and Hurricane Maria had the highest approval rate (62 percent). Disaster loan applicants, SBA resource partners, and SBA officials identified challenges that affected application or review processes, including burdensome documentation requests and translation issues.

SBA Changes Expedited and Simplified Loan Application and Processing, Creating Need to Activate Staff Earlier

Loan Application and Processing Changes

Since 2005, SBA has made changes to its disaster loan program to streamline the loan application and review process. Some of the changes SBA implemented include

Using electronic loan applications. In 2008, SBA created an online portal for the Disaster Loan Program, which eliminated the need for applicants to mail in applications or visit a recovery center. According to SBA officials, they typically receive paper applications within 14 days and electronic loan applications within 1–2 days after a disaster. They also indicated that increased usage of electronic loan applications has reduced data entry errors and improved loan processing times. The vast majority (96 percent) of the approximately 340,000 applications SBA accepted after the 2017 hurricanes were submitted electronically.

Expediting declines for applicants with poor credit. According to SBA officials, in 2005 SBA established automatic declination for applicants with poor credit (instead of moving forward with full processing of all applications). SBA refers homeowners who are automatically declined to FEMA for a potential grant and refers such businesses to resource partners for assistance. Overall, more than half (55 percent) of the approximately 146,000 applications declined after the 2017 hurricanes were automatically declined.

Expediting approvals for applicants with strong credit. In 2014, SBA revised its disaster loan program regulations for physical disaster loans to allow it to consider an applicant’s credit instead of only looking at a full cash flow analysis when determining an applicant’s ability to repay. Overall, SBA processed 28 percent of the applications approved after the 2017 hurricanes using this revised method.

Using desktop verification. In 2017, SBA began conducting desktop verification to evaluate the cause and extent of property damage. The process involves an initial loss verification through interviews with the applicant and use of third-party information (such as from a tax assessor’s website or Google maps) to estimate the cost of repairs. SBA is to conduct a post-desktop review following the initial disbursement using FEMA’s inspection report, SBA’s on-site inspection, or supporting documentation to validate the initial estimate. In a September 2019 report, the SBA OIG found that the use of desktop loss verification contributed to SBA meeting its timeliness goals for processing loan applications for the 2017 hurricanes.

Standardizing loan terms. In 2017, SBA established 15- and 30-year fixed terms for loans, which streamlined the loan process by using the loan amount (instead of income) to determine repayment. According to SBA officials, the use of fixed loan terms is consistent with standard private-sector lending practices and therefore is easier for borrowers to understand.

SBA also has continued to make technological changes to streamline DCMS and the web portal. The DCMS version SBA used for the 2017 hurricanes supported up to 10,000 concurrent users. According to SBA officials, they have been transitioning to DCMS 2.0, which is expected to support more concurrent users. As noted in SBA’s fiscal year 2019 Congressional Budget Justification and its 2017 Annual Performance Report, SBA anticipates that DCMS improvements will increase loan officer productivity from processing three to processing six loan applications per day. Similarly, SBA integrated new features into the online portal to improve applicants’ access to information resources during the application process. For example, applicants can readily access general questions and information, check the status of their applications, receive status notifications, and electronically upload and sign documents such as Internal Revenue Service Form 4506-T.

Effect of Changes on Timeliness

According to SBA officials, electronic loan application and other changes have reduced SBA’s processing times. For Hurricanes Harvey and Irma, the number of applications to be processed peaked about 2 months after each disaster; applications for Hurricane Maria peaked nearly 3 months after the disaster (see fig. 7). The number of business applications to be processed peaked more than 3 months after Hurricane Sandy made landfall on October 29, 2012.

Our analysis of SBA data found that despite a high volume of applications, SBA exceeded its goal for the 2017 hurricanes of processing at least 85 percent of applications from receipt to decision within 45 days (see fig. 8). More specifically, SBA processed 96 percent of its applications within 45 days. As noted previously, SBA’s processing goal varies based on expected application volume. The average processing times for loans submitted after Hurricanes Harvey, Irma, and Maria were 16, 16, and 18 days, respectively. In general, SBA processed loans for homeowners faster than loans for businesses after the 2017 hurricanes. In contrast, SBA did not meet its 21-day processing goal after 2012’s Hurricane Sandy and developed a backlog of more than 6,000 applications that lasted approximately 4 weeks.

The SBA OIG noted issues with and recommended two improvements to how SBA calculates processing time from acceptance to decision. In a June 2014 report, the OIG found that SBA included times for automatically declined applications in its average processing times. The OIG recommended SBA report processing times for automatically declined applications separately from applications requiring more processing. In the summary data SBA provided for the 2017 hurricanes, SBA continued to include automatically declined applications, which require significantly less time to process than other accepted loans, in its average processing times.

The OIG also found SBA’s computation did not include all the processing time for applications previously submitted and withdrawn, but later reaccepted. SBA used only the days elapsed between the reacceptance and the decision date. As discussed in more detail later in the report, SBA and applicants can withdraw and later resubmit applications. The OIG recommended that SBA establish processing time goals that consider the full processing time for withdrawn applications that later are reaccepted. According to OIG officials, the OIG closed this recommendation although SBA did not implement it because SBA officials stated that system limitations would not allow for this measurement to be readily accomplished and reaccepted loans require a level of analysis and diligence that justifies separate measurement of processing time.

Although SBA officials told us there are no timeliness goals associated with closing a loan, approved borrowers have up to 60 calendar days from the date of the loan authorization and agreement to sign and return all loan closing documents to close the loan. For Hurricanes Harvey and Irma, SBA took less than 50 days on average to close a loan, with business loans taking the longest. For Hurricane Maria, it took more than 53 days on average to close loans. In comparison, for Hurricane Sandy SBA took 66 days on average from approval to close a physical disaster business loan and 43 days for an economic injury loan.

After the 2017 hurricanes, SBA also met its disbursement goal of providing initial disbursements to 95 percent of borrowers within 5 days of loan closing. On average, SBA provided initial disbursements to approved borrowers within about 4 days of closing. SBA also had met its initial disbursement goal following Hurricane Sandy.

As a result of SBA’s changes to its loan processing and review functions, SBA reduced its overall processing times. For the 2017 hurricanes, SBA took about 70 days on average to go from acceptance to initial disbursement, which is much less time than it took for Hurricane Sandy and the 2005 Gulf Coast hurricanes (see fig. 9).

According to SBA officials, increased usage of electronic loan applications and expedited loan processing has resulted in the need to activate staff earlier, although SBA still faced challenges doing so. The number of applications that SBA received peaked at 95,000 applications in October 2017. SBA began adding staff immediately after the hurricanes, but the number of staff in ODA’s Processing and Disbursement Center did not peak until December 2017 (see fig. 10). In contrast, following Hurricane Sandy, application numbers peaked in December 2012 but ODA’s Processing and Disbursement Center did not reach peak staffing until March 2013.

While hiring processes were ongoing, SBA temporarily utilized staff from other SBA divisions to assist with reviewing applications. ODA then hired additional loan officers and also used other SBA employees and detailees from other federal agencies to process loans. By October 2017, ODA had more than quadrupled processing staff (from 536 in August to 2,302 in October), and the workload for those staff had peaked (see fig. 11). Each loan officer averaged more than 50 new loan applications in September 2017, but by January 2018 the average decreased to about six or fewer new applications per month. As discussed earlier, SBA anticipates its DCMS update will double loan officer productivity.

Overall Approval Rates for the 2017 Hurricanes Were Higher Than for the 2005 Gulf Coast Hurricanes, but Lower Than for Hurricane Sandy

In response to the 2017 hurricanes, SBA accepted about 340,000 applications and approved about 141,000 of them, making about $7.2 billion in loans (see fig. 12). SBA accepted the most applications for Hurricane Irma, but about half of the total approved loan amount was for applicants affected by Hurricane Harvey.

Overall, SBA’s approval rate for all disaster loan applications following the 2017 hurricanes was approximately 49 percent (see fig. 13). Of the three 2017 hurricanes, Hurricane Maria had the highest approval rate, 62 percent. The approval rate for physical disaster loans for homeowners was higher for Hurricane Maria (64 percent) than for Harvey (46 percent) and Irma (42 percent). There was not much variation in approval rates for physical and economic injury disaster loans for businesses.

As shown in figure 14, the overall approval rate for loan applications was lower for Hurricanes Harvey, Irma, and Maria than for Hurricane Sandy, but higher than the combined rate for Hurricanes Katrina, Rita, and Wilma.

Following the 2017 hurricanes, SBA declined about 146,000 loan applications. The primary reasons for declining applications were lack of repayment ability and unsatisfactory credit history. Other common reasons included unsatisfactory history on a federal obligation and that the damaged property was not an applicant’s primary residence or a qualified rental property.

Declined applicants can request that SBA reconsider their applications. SBA received about 15,000 such requests after the 2017 hurricanes. Of the requests SBA accepted, about half had their applications approved, and about 30 percent were denied. Applicants who have their reconsideration requests denied can appeal SBA’s decision. Ninety-one percent of applicants who were denied after the 2017 hurricanes and subsequently appealed won their appeal.

We also discuss withdrawal and cancellation rates for the 2017 and prior hurricanes in appendix II.

Applicants and SBA Identified a Number of Challenges Faced after the 2017 Hurricanes

Disaster loan applicants, SBA resource partners, and SBA officials we interviewed in Florida, Puerto Rico, Texas, and the U.S. Virgin Islands identified a number of challenges that affected the application or review processes following the 2017 hurricanes.

Challenges Identified by Applicants and SBA Resource Partners

Disaster loan applicants and SBA resource partners we interviewed identified the following challenges that applicants had when applying for SBA disaster loans following the 2017 hurricanes:

Providing required loan documentation. Eight (of the 24) business loan applicants and officials from 10 entities, including from five SBDCs, felt that meeting SBA’s loan documentation requirements was time-consuming or burdensome. Following the hurricanes, applicants experienced difficulty readily producing required documentation (such as insurance policies, property titles, and tax returns) because of extensive physical damage and power issues or outages. Additionally, 11 applicants reported that follow-up requests from SBA for additional documentation delayed processing, added confusion, or led some to withdraw their applications.

According to the results of a 2018 customer satisfaction survey conducted for SBA, the satisfaction of business loan applicants with the disaster loan application process had decreased by 9 percentage points since the previous survey in 2017. The lowest-rated aspects of the application process for businesses were “ease of attaining information required for completing the application,” the “amount of paperwork involved,” and the “overall ease of filling out the application.”

According to SBA officials, they are statutorily required to request certain information from disaster victims who apply for a disaster loan. Although more documentation is requested for business loans than for home loans, the officials believe the information requested from business applicants is similar to information requested from individuals applying for a loan at a commercial bank. In response to previous recommendations we made, SBA recently has taken steps to streamline the application process by improving accessibility and consistency of loan-related information and requirements in paper and electronic resources. For example, SBA added a list of frequently asked questions to its Disaster Loan Application Portal with a list of documents required to file an application. The paper applications for both home and business loans list potential additional documents that SBA may request as well as when they may be required.

Officials from all three SBDCs in Puerto Rico told us that applicants in Puerto Rico particularly had difficulty accessing tax documentation in a timely manner. SBA has an automated process to request and obtain tax transcripts from the Internal Revenue Service for final approval of loans. However, in Puerto Rico SBA must use a manual process with the Departamento de Hacienda (Puerto Rican taxing authority). Further delays occurred due to widespread physical damage to infrastructure, including the Departamento de Hacienda. As a result, SBA permitted applicants in Puerto Rico to postpone submitting tax documentation until later in the application process. Instead of submitting tax documentation during the loan decision process, SBA allowed applicants to submit such documentation during conditional commitment (the point at which SBA’s recommendation for loan approval is contingent on the applicant submitting additional required documents). In addition, ODA co- located loan officers with staff from the commitments department to facilitate prompt access to the tax transcripts they were awaiting from the Departamento de Hacienda.

Meeting flood insurance requirements. Officials from two Florida entities told us many of the small businesses with which they worked had problems submitting insurance documentation as part of their application. Officials from one SBDC in Puerto Rico told us they had a client who was unable to obtain flood insurance. By law, SBA requires borrowers whose damaged or collateral property is located in a special flood hazard area to obtain and maintain appropriate flood insurance for the term of the loan.

Delays also occurred as a result of miscommunication between SBA and loan applicants about flood insurance requirements, according to an applicant we interviewed. That business owner told us that when he submitted a disaster loan application for physical and economic injury damages, SBA informed him the insurance requirements applied only to the physical damage portion of the loan. However, SBA later told the individual that insurance coverage was necessary for the entire loan, not just physical damages.

Frequent changes in loan officers or case managers. More than two-thirds (17 of 24) of the business owners we interviewed and officials at four of the nine SBDCs told us they (or their clients) worked with more than one case manager or loan officer during the loan application process. Two small business owners said they had interacted with as many as nine. These changes led to the applicants having to repeat or resubmit information. In addition, they sometimes received different answers to questions when a new loan officer or case manager was assigned.

SBA officials told us that SBA does not track the extent to which applicants work with multiple loan officers and case managers but that applicants should generally have only one of each. According to SBA officials, one loan officer is typically assigned to an application until a loan decision is made. Once a loan is approved, one case manager is assigned until the loan is fully disbursed. However, according to SBA officials, an applicant may interact with more than one loan officer and case manager for reasons such as staff turnover and staff downsizing. In addition, whenever an applicant requests reconsideration of a declined application, the application is to be assigned to a new loan officer for processing. According to SBA officials, a newly assigned loan officer or case manager should be able to use DCMS to access an applicant’s loan file, including records of past communication between prior loan officers and the applicant, loss verification reports, and previously submitted documents. When an applicant electronically submits a document through the web portal, ODA scans and uploads it into DCMS (typically in 24–48 hours), at which point it is viewable in DCMS. The officials explained that document storage methods in DCMS are uniform, which should minimize the possibility of documents being improperly stored.

Poor customer service and translation issues. Five of the applicants (of 24) and officials from four entities we interviewed said disaster loan applicants perceived a lack of SBA responsiveness after submitting their applications. Staff from two of the entities attributed this lack of responsiveness to SBA having an inadequate amount of staff to handle the number of applications. SBA officials indicated that Processing and Disbursement Center staff strive to contact each applicant within 3 days of assigning a loan officer and within 5 days of assigning a case manager. They also stated the center should contact each applicant at least every 30 days using whatever available forms of communication, including mail, email, and telephone. But two applicants told us they only heard from their case manager after the applicant initiated the contact. Nine applicants also stated that when they did talk to their loan officer or case manager that person was not very helpful. For example, officials from one SBDC told us they talked to some loan officers on behalf of their clients and those loan officers were not able to clarify what documentation their clients needed to provide to SBA to complete their applications.

One Puerto Rican applicant and officials from all three Puerto Rican SBDCs told us that applicants in Puerto Rico faced translation issues. They believed SBA had insufficient staff who spoke Spanish, which made it difficult to communicate with applicants regarding status updates and requests for additional documentation. The SBA OIG reported that SBA officials estimated that some disaster survivors waited more than 45 minutes for an interpreter or experienced dropped calls. In addition, officials from one Puerto Rican SBDC told us SBA only would accept official responses in English and believed that many applicants were denied in part because the documents with applicants’ personal and financial information were in Spanish. The SBDC officials were told only an SBA translator could translate official documentation between SBA and applicants from English to Spanish. According to SBA officials, they tried to hire as many Spanish- speaking staff as possible and relied on a contractor to provide interpretation services during telephone communications with applicants. But the volume of calls was higher than anticipated, resulting in long wait times and many lost telephone connections. Following Hurricane Maria, SBA replaced the contractor with three new language service providers, which SBA used during its response to Hurricanes Florence and Michael in 2018.

Disbursement delays. Eight business disaster loan applicants and officials from three SBDCs told us that applicants experienced delays receiving disbursements after their initial disbursement. Although applicants said they received initial disbursements within expected time frames, subsequent disbursements took longer than anticipated. For example, three small business owners told us it took more than a year from the time they applied to receive their full loan disbursement, and two others had to contact their federal representative to help get their disbursements because of delays. SBA data show that after the 2017 hurricanes it took, on average, about 141 days after applying for a loan for businesses to receive their full disbursement, including an average of 63 days from closing to final disbursement.

Similarly, business respondents to the 2018 customer satisfaction survey conducted for SBA expressed concerns about the timeliness of disbursements following loan closing. The lowest-rated aspect of the loan closing process was “timeliness of receiving loan funds after the closing was complete.” As a result, the firm that conducted the survey recommended that SBA examine data on the timing of loan disbursements over the past several years, determine whether the timing had changed significantly, determine the root causes of any notable changes, and develop plans to address any root causes.

SBA guidance requires approved borrowers to arrange for and obtain all loan funds within 6 months from the date of the loan authorization and agreement. However, SBA may extend the time frame on a case- by-case basis for ongoing projects. According to SBA officials, there are no timeliness goals for subsequent disbursements because the time frame for receiving further disbursements is contingent on the borrower’s ability to meet insurance requirements, secure a contractor to repair damages, and submit receipts to SBA. SBA also has improved features within the web portal so that borrowers can now use direct deposit to receive disbursements and commence repairs more quickly. Additionally, the portal now enables borrowers to electronically submit receipts for repairs or invoices to loan officers, who in turn can verify the use of disbursed funds and make additional disbursements much sooner than before.

Challenges Identified by SBA

During interviews and in an after-action report, SBA also identified challenges it experienced after the 2017 hurricanes that included a prolonged loss of electricity, DCMS performance issues, and unique loan closing requirements in Puerto Rico.

Loss of electricity. As discussed previously, a prolonged loss of electricity adversely affected application submission and loan processing, especially in Puerto Rico.

DCMS performance issues. SBA officials said the agency increased staffing to process incoming loan applications and the multitude of concurrent users caused technical issues and delays. Loan applicants also encountered periodic system outages. SBA released DCMS updates throughout the first few months of its response to the 2017 hurricanes to address system performance issues. As previously mentioned, SBA expects that DCMS 2.0 will address concurrent user issues.

Unique loan closing requirements in Puerto Rico. SBA officials said they were initially unaware of loan closing requirements unique to Puerto Rico, which led to processing delays. They told us that secured loans must be signed by a notary, who in Puerto Rico must be a Puerto Rican-licensed attorney. As a result, SBA had to hire additional locally licensed attorneys and devote resources toward training attorneys and other staff involved in processing and closing loans in Puerto Rico, a process hampered by the previously discussed hiring challenges for the 2017 hurricanes. SBA has been implementing changes to its hiring process for future disasters.

SBA Implemented the Express Bridge Loan Pilot Program, Issuing Few Loans, and Has No Plans to Evaluate It

Express Bridge Loan Pilot Has Issued Very Few Loans, and SBA Generally Did Not Target Outreach to Disaster-Prone Areas and Has No Plans to Evaluate the Pilot

Number of loans. As of September 2019, lenders had issued two loans totaling $50,000 under SBA’s Express Bridge Loan Pilot Program. The loans were issued by one lender in 2018 to small businesses in North Carolina and South Carolina recovering from Hurricane Florence.

Outreach. SBA generally has not targeted its outreach for the program to disaster-prone areas. According to SBA officials, to market the pilot program OCA issued two Federal Register notices and a program guide, and encouraged district office staff to notify area lenders of the program. Additionally, SBA officials told us that before anticipated disasters, they have mentioned the program on quarterly telephone conferences attended by 1,000–1,500 7(a) lenders, and referred to the pilot in press releases. One lender told us that it was notified of the pilot program through an SBA policy notice with program guide attached, while another noted receiving an email promoting the program. According to SBA officials, this same email was sent to OCA field staff to be shared with all 7(a) Express lenders before the 2019 hurricane season. Internally, according to SBA officials, OCA has made information on the Express Bridge Loan Pilot Program available to all SBA employees on an internal website.

However, OCA has not marketed the Express Bridge Loan Pilot Program to ODA. OCA officials were unaware of any conversation with ODA (whose staff are on the ground after disasters and therefore most likely to interact with small business owners) about the pilot program, but assumed that ODA officials had high-level information about the pilot. However, staff we interviewed from both Field Operations Centers were unaware of the program.

OCA also has not targeted its external marketing to partners, such as 7(a) Express lenders and SBDCs, in disaster-prone areas. Although SBA officials told us that they made presentations at a 2019 lender conference in Florida, they did not point to similar outreach in other disaster-prone areas. The small business owners and SBDC officials with whom we spoke in Florida, Puerto Rico, Texas, and the U.S. Virgin Islands generally were unaware of the SBA Express Bridge Loan Program. During our February 2019 interview with the Florida Department of Economic Opportunity (which helps administer the state’s bridge loan program), officials stated they were unaware of program specifics and asked if it had started.

Evaluation. SBA officials do not currently plan to evaluate the program or determine why so few loans have been issued. SBA officials explained that the Express Bridge Loan Pilot Program’s performance during the 2019 hurricane season would determine whether SBA would continue or terminate the program after its pilot period. When SBA announced the pilot, SBA stated it planned to evaluate the program using three principal measures: (1) the number of small businesses served, (2) the percentage of loans made that were paid off or down using lower fixed-rate disaster loans versus those held to term, and (3) the default rate on Express Bridge Loans compared to regular SBA Express loans of similar size in the 7(a) portfolio. SBA officials told us they were not planning to conduct an evaluation because only two loans had been made, which the officials believe is not a large enough sample size to conduct a meaningful evaluation of the program.

Although SBA has guaranteed only two loans issued under the Express Bridge Loan Pilot Program, the program received 93 applications. While most of the applications were not completed, they suggest a potentially larger demand for the program than initially indicated by the two completed loans. We discuss demand for bridge loans in more detail in the following section.

SBA has guidelines for evaluating pilot programs. SBA issued a Policy Notice on September 29, 2016, that called for it to evaluate any pilot program. SBA subsequently incorporated this requirement in one of its standard operating procedures.

In addition, our guide for designing evaluations states that an evaluation gives an agency the opportunity to refine the design of a program and provides a useful tool to determine whether program operations have resulted in the desired benefits for participants. We also previously reported that an evaluation can be valuable in determining why goals were not met, and can provide feedback on both program design and execution. Such an evaluation can help determine what program changes might be warranted to achieve the desired impact.

In the absence of loan data, an evaluation could include consideration of feedback from lenders in disaster-prone areas on the pilot or their experiences with other bridge loan programs, such as the Florida program discussed in the following section. According to SBA officials, SBA had not actively solicited lender feedback on the current pilot since it became operational. However, SBA sought feedback from lenders on prior efforts to develop a bridge loan program. SBA officials told us that lenders commented on a prior proposal for a bridge loan pilot (the Immediate Disaster Assistance Program) and indicated that private lenders were not interested in participating in such a pilot because they considered disaster relief to be a governmental responsibility. Additionally, SBA officials told us during our previous work looking at the Immediate Disaster Assistance Program that they performed initial outreach to lenders—such as those who participated in SBA’s Gulf Opportunity Pilot Loan Program in the aftermath of Hurricanes Katrina and Rita—to obtain their reaction to and interest in the program.

The current pilot provides a similar opportunity to obtain feedback from lenders on loan terms that could affect their willingness to participate in this or a potentially redesigned program. For example, one 7(a) lender with whom we spoke did not like the Express Bridge Loan Pilot Program due to the maximum loan amount and the SBA guaranteed percentage.

Without evaluating the pilot program, including assessing potential demand and why so few loans have been made and the sufficiency of its outreach efforts, OCA will have limited information to inform its decision on the future of the pilot, including loan terms it may offer. Additional feedback, such as from lenders, could help SBA determine if design changes are warranted.

Interviews with Affected Small Business Owners and Use of Florida’s Bridge Loan Program Indicate Demand for Bridge Financing

The very low level of loans guaranteed under SBA’s bridge loan pilot contrasts with the desire for such loans indicated by our interviewees and the experience of the Florida Small Business Emergency Bridge Loan program. We interviewed small business owners and those who work with small businesses. Almost two-thirds of all the entities (16 of 26) we interviewed and six small business owners told us that businesses needed immediate financial support after a disaster (for example, to help remove debris, make repairs, and replace inventory). Although many businesses ultimately receive insurance payments to help cover losses, the payments may not be received for several months. Representatives from one municipality told us a lot of people, including the city itself, still were awaiting their insurance payments more than a year after the disaster. To help fund their immediate recovery, small business owners with whom we talked often relied on their own savings, credit cards, or other sources of credit. However, these financing sources typically have interest rates higher than those offered by the Express Bridge Loan Pilot Program. In addition, it can take applicants approved for SBA Disaster Loans months to receive funds—time that could determine whether a business remains in operation.

Florida’s Small Business Emergency Bridge Loan program provides small business owners with interim disaster financing, similar to the Express Bridge Loan Pilot Program, but some structural differences exist (see table 2 for a comparison of principal terms and features). In particular, the Florida program uses public funds rather than being funded by financial institutions. Officials of the Florida Department of Economic Opportunity, which administers the program in partnership with the Florida SBDC Network and a third-party fiscal administrator, told us the Florida program is not focused on generating a return on investment. Rather, the program is focused on helping small businesses bridge the gap between the time their businesses incur damages and the time they secure other financial resources. Although SBA officials told us that the State of Florida’s program is not a valid comparison to SBA’s Express Bridge Loan Pilot Program because the loans for SBA’s program are made by private, for-profit lenders, the Florida program demonstrates demand for bridge financing for small business owners.

Officials from the Florida Department of Economic Opportunity stated that when the Governor’s office activates the Florida Small Business Emergency Bridge Loan program, the department uses various outreach media, including social media, public-private partners, and state emergency response to disseminate information about the program. The program’s fiscal administrator and the Florida SBDC Network also circulate information about the program, including by providing hyperlinks to the loan application on their websites. Finally, the program has been in place since 1992, which likely contributed to word-of-mouth about the program.

According to officials of the Florida Department of Economic Opportunity, following Hurricane Irma the program received 1,167 applications, of which 883 were approved, totaling $35 million in disaster bridge financing. Following Hurricane Michael, the program received 742 applications, of which 590 were approved, totaling $34.3 million in disaster bridge financing.

Florida Department of Economic Opportunity officials attributed the wide utilization of the Florida Small Business Emergency Bridge Loan to expedited access to funding and favorable terms. For example, the program offers survivors a zero percent interest rate for the term of the loan, which is generally 1 year. Given the difference in loan terms between Florida’s program and SBA’s pilot program, the demand for SBA’s higher-interest loans may not equal the demand for Florida’s loans. However, in disaster areas in which there is no state bridge loan program, SBA’s pilot program could meet at least some of the need for bridge financing.

Conclusions

Following Hurricanes Harvey, Irma, and Maria in 2017, SBA faced difficulties in delivering its disaster loans due to the magnitude of the storms and resulting infrastructure damage, especially in Puerto Rico and the U.S. Virgin Islands. Nevertheless, SBA accepted about 340,000 applications and approved about 141,000 of them, making more than $7 billion in loans to help business owners, homeowners, renters, and nonprofits recover.

However, the planning documents and guidance to the field that SBA used to guide its response to the 2017 hurricanes did not identify risks and focus on risk assessments or include detailed instructions on how to prepare disaster-specific action plans. And after the 2017 hurricanes, the documents and guidance, including for outreach on disaster loans, has not incorporated lessons learned—particularly as they related to region- specific risks that could hamper the operations of the Disaster Loan Program. By identifying risks and enhancing guidance on actions plans and outreach efforts, SBA can better design its plans for and implementation of disaster response efforts and help ensure staff are adequately prepared to conduct operations in situations such as those encountered in Puerto Rico and the U.S. Virgin Islands. SBA also has not established metrics to measure the success of its outreach efforts. By establishing metrics, such as including questions when surveying disaster loan applicants on their perception of SBA’s outreach efforts, SBA would be better able to determine how well its outreach efforts have informed disaster survivors about the Disaster Loan Program and make adjustments to improve the effectiveness of such efforts.

SBA also can improve its Express Bridge Loan Pilot Program, which offers small businesses the opportunity to quickly receive funding after disasters. The success of a Florida program offering a similar product and our own work suggest considerable demand for bridge loans. SBA has no plans to evaluate the program because it has issued so few loans. While SBA does not have the information needed to conduct a loan performance evaluation, it has the opportunity to conduct an evaluation of the pilot program’s design and implementation. Such an evaluation could help determine why so few loans were issued, what role program design and internal and external outreach may have played, and what, if any, changes to the pilot might be warranted. By evaluating the Express Bridge Loan Pilot Program, including obtaining lender feedback, OCA will be able to make an informed decision about the program’s future.

Recommendations for Executive Action

We are making the following five recommendations to SBA: The Associate Administrator for the Office of Disaster Assistance should identify and document risks associated with its disaster response and plans to mitigate these risks in its disaster planning documentation. (Recommendation 1)

The Associate Administrator for the Office of Disaster Assistance should identify the key elements of a disaster action plan and provide additional guidance to staff on how to incorporate these elements into future action plans. (Recommendation 2)

The Associate Administrator for the Office of Disaster Assistance should update its outreach plan to include information on region-specific risks or challenges, such as those encountered after the 2017 hurricanes. (Recommendation 3)

The Associate Administrator for the Office of Disaster Assistance should establish metrics to measure the success of its outreach efforts during the response to a disaster. (Recommendation 4)

The Associate Administrator for the Office of Capital Access should evaluate the implementation of the Express Bridge Loan Pilot Program to determine why so few loans have been made and if any design changes may be warranted before the end of the pilot. Such an evaluation could include assessing SBA’s outreach efforts and seeking feedback from lenders. (Recommendation 5)

Agency Comments and Our Evaluation

We provided a draft of this report to SBA for review and comment. In written comments, which are reproduced in appendix III, SBA stated that overall it agreed with the report’s recommendations and provided comments, as summarized below.

SBA described actions it planned to take to address the first four recommendations, which if implemented as planned would address them.

For the first recommendation to identify and document risks—and plans to mitigate those risks—in its disaster planning documents, SBA noted that ODA would work with SBA’s Office of Continuous Operations and Risk Management, which updates and publishes the annual Disaster Preparedness and Recovery Plan, to identify and document known risks associated with SBA’s disaster response and implement a risk-informed approach to its direct response and recovery operations. SBA expected that its fiscal year 2021 plan would include this information.

For the second recommendation to identify the key elements of a disaster action plan and provide related guidance to staff, SBA agreed and noted that ODA would develop the key elements of and templates for a disaster action plan, provide guidance to Field Operations Centers, and coordinate with the Office of Continuous Operations and Risk Management on including the information in appendixes to the Disaster Preparedness and Recovery Plan.

For the third recommendation to update its outreach plan to include information on region-specific risks or challenges, SBA agreed and stated that ODA would update its outreach plan to include risks and challenges experienced during the 2017 hurricane season.

For the fourth recommendation to establish metrics to measure its disaster outreach efforts, SBA agreed and noted that it would explore potential new metrics to measure the effectiveness of its outreach efforts, such as adding a question about the efforts to the annual American Customer Satisfaction Index survey.

For the fifth recommendation to evaluate the implementation of the Express Bridge Loan Pilot Program to determine why so few loans have been made and if any design changes may be warranted before the end of the pilot (which could include assessing SBA’s outreach efforts and seeking feedback from lenders), SBA described some actions it planned to take in response to the recommendation that would partially address it. The agency also commented on some of our findings, which we discuss below. We maintain our recommendation.

In its comments, SBA noted it would seek feedback from SBA Express Lenders during the upcoming spring National Association of Government Guaranteed Lenders conference on their interest and participation in the pilot. SBA also noted that it would provide ODA with information and a set of frequently asked questions about the pilot program that ODA could distribute to small business owners at Business Recovery Centers. Although beginning to seek lender feedback and improving its internal outreach are good first steps, SBA would still need to conduct an evaluation to determine if any design changes were warranted to fully address the recommendation.

SBA stated it did not currently have adequate data to evaluate the effectiveness of the program because only two loans had been funded. It also noted that while there were more than 90 incomplete applications for the Express Bridge Loan Pilot Program, the agency had concluded that there were not sufficient data to suggest the applications were actual attempts to originate loans and that lenders likely started the loans in error. In the draft report, we acknowledged only two loans had been issued and included SBA’s views about why other applications were not completed. As we note in the report, in the absence of loan data an evaluation instead could focus on the pilot’s design and implementation, and include feedback from lenders. Therefore, we maintain that SBA can and should evaluate the pilot program.

SBA noted it previously sought feedback from lenders on the Immediate Disaster Assistance Program (a prior proposal for a bridge loan program) and at that time, there was very little lender interest in the program. The draft report included this information and noted that the current pilot provides a similar opportunity to solicit lender feedback, including on loan terms. In response to this, SBA stated that making significant changes to the size and guarantee on the pilot loans based on lender feedback would affect the subsidy for the program. However, SBA will not know how lenders feel about the current pilot or what types of changes they might recommend until it seeks lender feedback. Lenders could call for changes to the program that were minor but still would improve their willingness to participate. In addition, if lender feedback suggested that the program would not work without significant changes and additional subsidy, such information could inform future actions to address borrower demand for bridge loans.

SBA also stated that it did not believe our comparison of the Express Bridge Loan Pilot Program to the Florida Small Business Emergency Bridge Loan was appropriate. SBA stated the Florida program provides direct loans in contrast to SBA’s limited guarantee to lenders, and had been in existence since 1992 and was well known (versus a 2017 program start and less knowledge about SBA’s program). We highlighted both differences in the draft report. SBA also stated the Florida program has a larger pool of eligible applicants because it is not limited to Presidentially declared disasters or delivered only by certain lenders, as is the case with the SBA program. However, we note that the SBA program is available nationwide and the Florida program is limited to the state. In summary, SBA stated in its comments that the characteristics of the Florida program contributed to the demand for the program. We acknowledged this in the draft report, stating that given the differences between the programs, the demand for SBA’s loans may not be equivalent to the demand for Florida’s loans. Despite the program differences, we continue to believe that including a discussion of the Florida Small Business Emergency Bridge Loan program in the report was appropriate because its use indicates demand for bridge financing. In disaster areas in other states with no state bridge loan program, SBA’s pilot program, with changes determined to be appropriate, could meet at least some of the demand for bridge financing identified by people we interviewed.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees and the Administrator of SBA. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, 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 report. Major contributors to this report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine the Small Business Administration’s (SBA) (1) planning for and initial response to Hurricanes Harvey, Irma, and Maria (hereinafter referred to as the 2017 hurricanes); (2) loan application and review process (including changes since Hurricane Katrina in 2005), timeliness, and approval rates; and (3) implementation of the Express Bridge Loan Pilot Program. We focused our review on Florida, Texas, Puerto Rico, and the U.S. Virgin Islands—the states and territories most directly affected by the 2017 hurricanes.

For all of our objectives, we visited two areas each in Florida, Texas, and the U.S. Virgin Islands, and three areas in Puerto Rico. We selected these areas based on the high numbers of approved homeowner and business disaster loans, high population, geographic diversity, presence of a Small Business Development Center (SBDC), and presence of an SBA district office. To help ensure geographic diversity, we selected locations from different metropolitan statistical areas in each state and Puerto Rico. In each location, we conducted a group interview with small business owners who applied for a disaster loan with SBA to learn about their experiences applying for a loan and working with SBA while their loan was processed and funds disbursed, and their need for bridge financing. These small businesses were recruited by representatives of the local SBDC and were selected to represent a range of outcomes (approved, denied, and withdrawn applications). Overall, we interviewed 24 small business owners across the nine areas we visited.

In addition to small business owners, we met with officials from the SBDC and the local SBA district office responsible for each of the areas we visited. We also met with officials from seven local governments that oversaw eight of the areas we visited—either from a mayor’s office or economic development office. Lastly, we interviewed officials from six chambers of commerce or business associations, one in every area except one. While the results of these interviews are not generalizable to all areas affected by the 2017 hurricanes, they provided insight into the experiences of small businesses and local communities with the SBA Disaster Loan Program. In addition to the site visit interviews, we interviewed officials from SBA’s Office of Disaster Assistance, including officials from both Field Operations Centers and the Processing and Disbursement Center, to discuss the Disaster Loan Program and SBA’s response to the 2017 hurricanes.

For our analysis of open-ended responses from these interviews, we used a software program designed for analyzing qualitative information. For each open-ended response, we coded, organized, and analyzed responses under a number of relevant themes. Specifically, team members independently reviewed a segment of the interview transcripts to code the responses to identify themes. Once each analyst had completed coding his or her respective sections, the documents were merged into a master file that was reviewed by the engagement’s methodologist. Possible alternative categorizations of the material were discussed and resolved jointly. This code-based method constituted our primary approach to validating the results of our analysis. All categorizations were sourced to the original interviews through the use of the qualitative analysis software.

To evaluate SBA’s planning for and initial response to the 2017 hurricanes, we reviewed SBA planning documents in effect for the hurricanes—SBA’s 2017 Disaster Preparedness and Recovery Plan and its 2014 Disaster Playbook—as well as the targeted action plans SBA created for each of the hurricanes and summaries of exercises SBA conducted. We also reviewed the Office of Disaster Assistance’s after- action report following Hurricanes Harvey, Irma, and Maria; SBA’s 2017 and 2018 Staffing Strategies; models SBA used to guide its response; and reports issued by the SBA Office of Inspector General (OIG). We used these sources to identify challenges SBA faced planning for and responding to the 2017 hurricanes, including those it faced responding to Hurricane Maria in Puerto Rico and the U.S. Virgin Islands and with its hiring.

We reviewed SBA data on hiring and compared SBA’s staffing modeling efforts to the actual staff activated after the 2017 hurricanes. We determined that these data were sufficiently reliable for the purposes of discussing SBA’s staffing after the 2017 hurricanes by interviewing knowledgeable officials about the data. We compared SBA’s planning efforts against federal internal control standards for identifying, analyzing, and responding to risks, and against Federal Emergency Management Agency guidance on disaster planning. To examine SBA outreach on disaster loans after the 2017 hurricanes, we reviewed marketing and outreach plans from 2012 and 2018 and a sample of outreach materials SBA used during its response to Hurricanes Harvey, Irma, and Maria. We compared SBA’s outreach efforts against federal internal control standards for internal communication and against key consumer education practices.

To evaluate SBA’s loan application and review process, we reviewed prior GAO and SBA OIG reports on SBA’s Disaster Loan Program to help identify changes SBA made since Hurricane Katrina in 2005. We also analyzed summary data from SBA’s Disaster Credit Management System for applications submitted between August 31, 2017, and September 24, 2018. The August date corresponds to the date SBA received the first applications from the 2017 hurricanes and the September date to the one-year anniversary of Hurricane Maria, the last of the three 2017 hurricanes. SBA completed processing more than 99 percent of the applications for each hurricane during the period covered by our data. Because the hurricanes occurred in quick succession and SBA treated them as one event, we compared the combined data for the 2017 hurricanes to those from Hurricane Sandy and the combined data for Hurricanes Katrina, Rita, and Wilma, which SBA also treated as one event. We determined these data were sufficiently reliable for describing characteristics associated with SBA’s processing of applications by reviewing related documentation, interviewing knowledgeable agency officials, and reviewing related internal controls. We used the results from our thematic qualitative analysis and interviews with SBA officials to identify challenges associated with applying for or processing applications following the 2017 hurricanes.

To evaluate SBA’s implementation of the Express Bridge Loan Pilot Program, we reviewed Federal Register notices and a program guide SBA published about the program. We interviewed SBA officials from its Office of Capital Access about their implementation of the program, and officials from three lenders to discuss their perspectives on and awareness of the program. We selected one lender because it had made loans under the pilot program, another because it had begun the most applications for the program, and the third because it was a 7(a) lender located in a state affected by Hurricane Florence or Michael. We chose those hurricanes because they occurred about 1 year after SBA began its pilot (in September and October 2018, respectively), allowing time for SBA to fully launch the pilot. We also interviewed officials from the Florida Department of Economic Opportunity to discuss the Florida Small Business Emergency Bridge Loan Program, which it helps administer. We compared SBA’s plans to evaluate the Express Bridge Loan Pilot Program against guidance for designing evaluations.

We conducted this performance audit from September 2018 to February 2020 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.

Appendix II: Withdrawal and Cancellation Rates for 2017 and Prior Hurricanes

This appendix presents withdrawal and cancellation rates for disaster loan applications the Small Business Administration (SBA) accepted after Hurricanes Harvey, Irma, and Maria (the 2017 hurricanes), after Hurricane Sandy in 2012, and after Hurricanes Katrina, Wilma, and Rita (the 2005 Gulf Coast hurricanes).

Withdrawal and Cancellation Rates for 2017 Hurricanes Were Lower Than for Previous Hurricanes

Withdrawal Rates

For the 2017 hurricanes, withdrawal rates were generally comparable for each type of disaster loan, as shown in figure 15.

Of the disaster loan applications SBA accepted for Hurricanes Harvey, Irma, and Maria, about 52,000 were withdrawn from consideration by SBA or the applicant. Of these, approximately 32,000 were withdrawn by SBA, and the rest were withdrawn at the applicant’s request. The leading reason for an SBA withdrawal was a lack of contact with the applicant to discuss disaster damages (inability to verify losses). Other common SBA-initiated reasons for withdrawals were the Internal Revenue Service having no record of the applicant filing taxes in the required time period and an applicant’s failure to provide requested additional information. The main reason for withdrawal by applicant was a change of plans.

Applicants who withdrew their applications or had applications withdrawn by SBA could request that SBA reaccept their application. Nearly half (48 percent) of the approximately 52,000 withdrawn applications were submitted for reacceptance. Of those, 67 percent were approved, 20 percent were declined, and 13 percent were withdrawn again.

As shown in figure 16, the overall withdrawal rate for the 2017 hurricanes was lower than that for Hurricane Sandy and the combined rate for the 2005 Gulf Coast hurricanes. Across each of the disasters, home disaster loan applications had the lowest withdrawal rates while nonprofit applications had the highest withdrawal rates.

Among the 2017 hurricanes, Hurricane Harvey had the most cancelled disaster loans (10,945) with an overall cancellation rate of 25 percent (see fig. 17).

More than half (56 percent) of the cancelled loans were due to the borrower’s decision, including receiving sufficient support from other sources and reluctance to incur additional debt. Of the loans SBA cancelled, the most common reasons included the borrower’s failure to complete and return all loan closing documents and an adverse change in the borrower’s credit or financial condition that required a referral to the Federal Emergency Management Agency’s Individuals and Household Program.

As shown in figure 18, the overall cancellation rate for the 2017 hurricanes was lower than that for Hurricane Sandy and the combined rate for the 2005 Gulf Coast hurricanes.

Appendix III: Comments from the U.S. Small Business Administration

Appendix IV: GAO Contact and Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact name above, Paige Smith (Assistant Director), Daniel Newman (Analyst in Charge), Laura Gibbons, Marshall Hamlett, Marc Molino, Patrick Netherclift, Barbara Roesmann, Jessica Sandler, Cynthia Saunders, and Nina Thomas-Diggs made significant contributions to this report.