Small Business Administration: Continued Attention Needed to Address Reforms to the Disaster Loan Program
Released: 2010-05-19T00:00:00

Letter

Background

SBA’s Office of Disaster Assistance (ODA) responds to disasters and administers the Disaster Loan Program. A Presidential disaster declaration puts into motion long-term federal recovery programs, such as the Disaster Loan Program, but SBA is not a “first responder” after a disaster. Rather, local government emergency services assume that role with help from state and volunteer agencies. For catastrophic disasters, and if a governor requests it, federal resources can be mobilized through the U.S. Department of Homeland Security’s Federal Emergency Management Agency (FEMA). SBA typically responds to a disaster within 3 days by sending ODA field staff to the affected area to begin providing public information about SBA’s services.

Once a disaster is declared, SBA by law is authorized to make two types of disaster loans: (1) physical disaster loans, and (2) economic injury disaster loans. Physical disaster loans are for the permanent rebuilding and replacement of uninsured or underinsured disaster-damaged property, including personal residences and businesses of any size. That is, SBA provides loans to cover repair costs that FEMA or other insurance has not already fully compensated or covered. Economic injury disaster loans provide small businesses, including agricultural cooperatives and private nonprofit organizations, with necessary working capital until normal operations can resume.

The Act comprises 26 provisions with substantive requirements for SBA; some with specific deadlines and some needing appropriations, and includes requirements that SBA must meet for disaster planning and response, disaster lending, and reporting. For instance, the Act includes provisions to improve SBA’s coordination with FEMA, require that the agency conduct biennial disaster simulations, create a comprehensive disaster response plan, and improve communication with the public when disaster assistance is made available. It includes requirements to improve ODA’s infrastructure, appoint an official to oversee the disaster planning and responsibilities of the agency, and establish reporting requirements for various reports to Congress. The Act also creates new programs, such as the Immediate Disaster Assistance Program that would provide small dollar loans immediately following a disaster and the Expedited Disaster Assistance Loan Program that would provide expedited disaster assistance to businesses.

SBA Continues to Make Progress in Addressing the Act’s Provisions, but Has Not Yet Established Milestones for Implementing Remaining Requirements

As of May 2010, SBA fully addressed requirements for 15 of 26 provisions of the Act; partially addressed 6; and took no action on 5 that are not applicable at this time (see fig. 1). For the 15 provisions SBA fully addressed, the agency’s actions included putting in place a secondary facility in Sacramento, California to process loans when the main facility in Fort Worth, Texas is unavailable, making improvements to DCMS to track and follow up with applicants, and expanding its disaster reserve staff from about 300 to more than 2,000 individuals. According to SBA and our review, 5 provisions require no action at this time because they are discretionary or additional appropriations are needed before SBA can satisfy the Act’s requirements.

When we issued our report in July 2009, SBA had fully addressed 13 of 26 provisions. Since then, SBA has fully addressed two additional provisions. As we recommended and the Act requires, SBA issued an updated DRP. SBA also issued regulations on coordinating with FEMA to ensure that disaster assistance applications are submitted in a timely manner. In addition, SBA must revise the regulations annually and report on the revisions when submitting its annual report to Congress. The ments associated with the provision on FEMA coordination annual require will help SBA, FEMA, and Congress to determine whether the regulations are effective.

SBA still has to take additional steps to completely address 6 provisions. For example, SBA officials told us that the agency has taken additional steps to address the marketing and outreach provision, including that they (1) began an ongoing dialogue with the SBDC state directors in the Gulf Coast about disseminating disaster planning and preparation informatio 2) in the five most hurricane-prone states before the hurricane season, ( detailed an SBA employee who works with the SBDCs to the Offic Entrepreneurial Development to help the agency develop a strategic approach for its disaster role, and (3) issued some public service announcements tailored to specific regions. In our 2009 report, we recommended that SBA should fulfill the region-specific marketing and outreach requirement, including making this information readily av to regional entities prior to the likely occurrence of a disaster. However, the steps recently taken by SBA have not been discussed in public documents or venues, such as in the DRP or on the SBA Web site, which would make the information more transparent and easily accessible to public and Congress. As we reported in 2009, we consistently heard fro regional entities, such as SBDCs and emergency management groups, e need for more up-front information on SBA’s Disaster Loan about th Program and their expected roles and responsibilities in disaster response efforts.

According to SBA officials, the agency has not yet completely addressed some provisions because to do so, the agency would have to make extensive changes to current programs or implement new programs––suc as the Immediate and Expedited Disaster Assistance Programs––to satisf y requirements of the Act. These programs, which require participation of private lenders, would be designed to provide businesses with access to short-term loans while they are waiting for long-term assistance. A s we reported in 2009, SBA plans to conduct pilots of these programs before fully implementing them. SBA officials recently told us they have established a cross-functional work group jointly chaired by officia ODA and the Office of Capital Access to address these requirements and develop the pilots. ODA officials said they drafted regulations and received subsidy and administrative cost funding in the 2010 budget to allow them to pilot test about 600 loans under the Immediate Disaster Assistance Program (section 12084). Additionally, SBA officials told us that they performed initial outreach to lenders—such as those who have participated in their Gulf Opportunity Pilot Loan Program—to obtain their reaction to and interest in the programs. They believe such outreach wi help SBA identify and address any issues that may arise and determine the viability of the loa have the pilot for the Immediate Disaster Assistance Program in place by September 2010. n programs. SBA officials told us that their goal is to The Act establishes multiple new reporting requirements and while SBA has addressed most of these, the agency has not met some statutory deadlines. For example, as required by the Act and as we recommended, the agency issued its first annual report on disaster assistance in November 2009 but the report was due in November 2008. Specifically, Act requires that SBA report annually on the total number of SBA disa staff, major changes to the Disaster Loan Program (such as changes to technology or staff responsibilities), a description of the number and dollar amount of disaster loans made during the year, and SBA’s plans for preparing and responding to possible future disasters. In 2009, we reported that failure to produce annual reports on schedule can lead to a lack of transparency about the agency’s progress in reforming the program. The agency has had limited success in meeting nine additional ster provisions in the Act that have deadlines associated with them. The agency also has not developed a plan with expected time frames for addressing the remaining requirements. Not having an implementation plan in place for addressing the remaining requirements can lead to a lac of transparency about the agency’s Disaster Loan Program, capacity to reform the program and program improvements, as well as its ability to e adequately prepare for and respond to disasters. In our 2009 report, w recommended that SBA develop an implementation plan and include milestone dates for completing implementation and any major program, resource, or other challenges the agency faces as it continues efforts to address requirements of the Act. Recently, SBA officials told us th would provide a plan or report that addressing the Act’s requirements.

SBA’s Response Followi 2008 Disasters Aligned with Some DRP Components, but Its Responses to Disaster Victims’ Feedback on the Application Pr Be Improved

SBA’s initial response following the 2008 Midwest floods and Hurricane Ike aligned with major components of its DRP, such as infrastructu human capital, information technology, and communications. For example, according to SBA, following both disasters the agency used its organizational infrastructure and key staff in each of its core functions to provide disaster assistance. ODA also utilized available operational and technological support, and communications and outreach, to help ensure that the agency would be able to provide timely financial assistance to the disaster victims. Additionally, individuals affected by both disasters with what whom we spoke considered the agency’s overall performance some positive, but believed the disaster loan process could be improved.

In May 2008, floods devastated 85 counties in Iowa (one of several states n affected) and in September 2008, Hurricane Ike devastated 50 counties i Texas. SBA and SBDC officials, state and local representatives, private- entity officials, and business owners in Iowa and Texas told us that in days immediately following the disasters, ODA staff reported to the affected areas and began providing needed disaster assistance. Th individuals also said that SBA staff provided outreach and public information about the Disaster Loan Program; distributed application information; assigned knowledgeable customer service representatives to various Disaster and Business Recovery Centers; and helped applicants by ese answering questions, providing guidance, and offering one-on-one help–– as outlined in SBA’s DRP. In addition, our review of SBA’s 2008 Disaste r Loan Program Customer Satisfaction Survey also showed that respond were somewhat satisfied with the assistance SBA provided during othe recent disasters.

However, both the individuals we interviewed and survey results indicated areas for improvement and opportunities to increase satisfaction. For example, individuals we interviewed and survey responses pointed to concerns about the amount of paperwork required to complete SBA’s disaster loan application and the timeliness of loan disbursements. Also, some business owners said they had to provide copies of 3 years of feder income tax returns, although they had signed an Internal Revenue Service (IRS) form 8821—Tax Information Authorization—which allows SBA to get tax return information directly from IRS. To address these concerns, the individuals we interviewed suggested several changes to the program, such as eliminating the requirement that business loan applicants provide copies of IRS tax records; providing partial disbursements earlier in the process; using bridge loans to help ensure disaster victims receive timely assistance; and involving SBA, SBDCs, and state and local officials in joint pre-planning and disaster preparedness efforts.

Although SBA officials told us they have been improving the application ion, process, they had not documented the improvement efforts. In addit we found that while SBA conducts an annual customer satisfac the agency does not appear to incorporate this feedback mechanism int its formal efforts to continually improve the application process. Furthermore, SBA does not appear to have a formal process for addressing identified problem areas and using the information gained to improve the experience of future applicants. By establishing such a process to address identified problem areas, SBA could better demonstrate its commitment to improving the Disaster Loan Prog Because the agency has missed opportunities to further improve its Disaster Loan Program, and in particular improve the application p for future applicants, we recommended in our July 2009 report that SBA develop and implement a process to address identified problems in the disaster loan application process. In response to our recommendation, SBA cited ongoing efforts since 2005, such as the electronic loan application, and said the agency has plans to continue its improvement efforts and make them an ongoing priority. However, SBA has not provided information to us on how it would implement a formal process to address identified problem areas in the disaster loan application process. ram. rocess As you know, we have reported on a variety of issues related to the federal government’s response to the 2005 Gulf Coast hurricanes. As part of this committee’s efforts to assess the level and success of federal efforts to help Gulf Coast small businesses recover from the 2005 hurricanes, we are conducting work at your request that focuses on small business recovery efforts in four states impacted by Hurricanes Katrina and Rita: Alabama, Louisiana, Mississippi, and Texas. This summer, we will report to this committee on: (1) assistance small businesses in the Gulf Coast received from the SBA, the Department of Housing and Urban Development, and the Economic Development Administration; (2) federal contract funds received by small businesses; and (3) the small business economy in the Gulf Coast region.

Madam Chair, this concludes my prepared statement. I would be pleased to respond to any questions you or other Members of the Committee may have.

GAO Contacts and 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. Individuals making key contributions to this testimony include Kay Kuhlman, Assistant Director; Beth Faraguna, Alexandra Martin-Arseneau, Marc Molino, Linda Rego and Barbara Roesmann.

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