Small Business Administration
Observations on the Disaster Loan Program Gao ID: GAO-03-721T May 1, 2003This testimony discusses the role of the Small Business Administration's (SBA) Disaster Loan Program in responding to the September 11, 2001, terrorist attacks, general performance measures for the program, and the effects of SBA's program to sell loans to private investors on disaster loans and their borrowers. In reviewing SBA's loan sales program, which includes disaster loans, we identified three areas needing improvement: tracking borrower inquiries and complaints; sales budgeting and accounting which affect the reliability of SBA financial statements and budget information; and reporting on the operational benefits of the loans sales. This testimony focuses on SBA's (1) response to the September 11 terrorist attacks; (2) performance plans and measures for its Disaster Loan program; and (3) loan assets sales program, which involves selling disaster and other loans.
The nature of the September 11 attacks and subsequent government actions presented SBA's Disaster Loan Program with new and difficult challenges. Specifically, small businesses in both the declared disaster areas and around the nation suffered economic injury. SBA sought to respond to the concerns of small businesses in the months following September 11by extending eligibility for economic injury loans nationwide--a marked change from earlier disasters that affected primarily businesses in one geographic location. In addition, SBA modified both the terms and lending practices of its Disaster Loan Program. We found that SBA had adapted its Disaster Loan Program to respond to the needs of September 11 victims but that SBA's performance measures did not provide congressional decisions makers with an accurate description of the program's performance. In addition, some output measures had not kept up with SBA's actual progress in assisting disaster victims. Further we identified features in SBA's description of its Disaster Loan Program in the 2002 and 2003 performance plans that made assessing the agency's progress in attaining its strategic goals difficult. Our review of SBA's five loan sales from August 1999 to January 2002 revealed that 85 percent of the $4.4 billion in loans sold were disaster assistance home and business loans. SBA established some policies to protect borrowers whose loans were sold. In trying to determine how borrowers reacted to having their loans sold, we found that SBA relied on borrower inquiries and complaints to determine whether purchasers of the loans were using prudent loan servicing practices. However, information o n borrowers' reaactions was incomplete because SBA did not have a comprehensive process to capture the inquiries and complaints it recieves. Moreover, we found serious issues in SBA's budgeting and accounting for the loans sold, as well as the remainder of the portfolio. In addition, there were significant unexplained declines in the subsidy allowance for the disaster program. SBA is continuing to work on resolving its accounting and financial reporting problems. Finally, our analysis of the operational benefits from loan sales suggested that some benefits that SBA reported, such as reductions in servicing and workload volume, either had not yet materialized or were overstated.
GAO-03-721T, Small Business Administration: Observations on the Disaster Loan Program
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Testimony:
Before the Committee on Small Business and Entrepreneurship, U.S.
Senate:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 9:30 a.m. EDT Thursday, May 1,
2003:
Small Business Administration:
Observations on the Disaster Loan Program:
Statement of Davi M. D'Agostino
Director, Financial Markets and Community Investment:
GAO-03-721T:
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protection in the United States. It may be reproduced and distributed
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Madam Chair and Members of the Committee:
I am pleased to be with you today at this roundtable to discuss the
role of the Small Business Administration's (SBA) Disaster Loan Program
in responding to the September 11, 2001, terrorist attacks, general
performance measures for the program, and the effects of SBA's program
to sell loans to private investors on disaster loans and their
borrowers. As you know, the effects of the September 11 attacks were
felt not only in New York but also around our country, with the
economic damage occurring in states as far west as California. The
unique nature of the attacks and the government's response required SBA
to make unprecedented efforts to expand its disaster lending coverage
and to be flexible in its efforts to serve those needing assistance.
Notwithstanding SBA's extraordinary performance in responding to the
September 11 attacks, our work showed that the Disaster Loan Program's
performance measures do not fully or adequately reflect SBA's actual
performance. In reviewing SBA's loan sales program, which includes
disaster loans, we identified three areas needing improvement: tracking
borrower inquiries and complaints; sales budgeting and accounting,
which affect the reliability of SBA financial statements and budget
information; and reporting on the operational benefits of the loan
sales.
My remarks today will focus on SBA's (1) response to the September 11
terrorist attacks; (2) performance plans and measures for its Disaster
Loan Program; and (3) loan asset sales program, which involves selling
disaster and other loans.[Footnote 1] My comments are based on our
recent reports on SBA's Disaster Loan Program (Small Business
Administration: Response to September 11 Victims and Performance
Measure for Disaster Lending, GAO-03-385, Jan. 29, 2003) and loan asset
sales program (Small Business Administration: Accounting Anomalies and
Limited Operational Data Make Results of Loan Sales Uncertain, GAO-03-
87, Jan. 3, 2003).[Footnote 2] Both are available on our Web site:
www.gao.gov.
Summary:
The nature of the September 11 attacks and subsequent government
actions presented SBA's Disaster Loan Program with new and difficult
challenges. Specifically, small businesses in both the declared
disaster areas and around the nation suffered economic injury. SBA
sought to respond to the concerns of small businesses in the months
following September 11 by extending eligibility for economic injury
loans nationwide--a marked change from earlier disasters that affected
primarily businesses in one geographic location. In addition, SBA
modified both the terms and lending practices of its Disaster Loan
Program--for example, by reducing the amount of documentation some
borrowers needed to provide. Congress supported these efforts with
supplemental appropriations that allowed SBA to offer larger loans to a
relatively broad population of victims. By the end of fiscal year 2002,
the agency had worked with individuals and businesses in all 50 states,
the District of Columbia, and the U.S. territories, approving 9,700
loans totaling $966 million.
We found that SBA had adapted its Disaster Loan Program to respond to
the needs of September 11 victims but that SBA's performance measures
did not provide congressional decision makers with an accurate
description of the program's performance. For example, two of SBA's six
performance measures assessed only one discrete step in the loan
application and disbursement processes--the application process. In
addition, some output measures[Footnote 3] had not kept up with SBA's
actual progress in assisting disaster victims. Further, we identified
features in SBA's description of its Disaster Loan Program in the 2002
and 2003 performance plans that made assessing the agency's progress in
attaining its strategic goals difficult. For example, although SBA
guidance recommended that program goals be outcome oriented, SBA's 2003
performance goal was output oriented.
Our review of SBA's five loan sales from August 1999 to January 2002
revealed that 85 percent of the $4.4 billion in loans sold were
disaster assistance home and business loans. SBA established some
policies to protect borrowers whose loans were sold. For example,
disaster loans less than 2 years old were not sold because they
typically required more servicing and sometimes had to be increased to
cover exigencies, such as revised physical damage estimates. In trying
to determine how borrowers reacted to having their loans sold, we found
that SBA relied on borrower inquiries and complaints to determine
whether purchasers of the loans were using prudent loan servicing
practices. However, information on borrowers' reactions was incomplete
because SBA did not have a comprehensive process to capture the
inquiries and complaints it receives. Moreover, we found serious issues
in SBA's budgeting and accounting for the loans sold, as well as the
remainder of the portfolio. For example, SBA incorrectly calculated the
accounting losses on the loan sales and lacked reliable financial data
to determine the overall financial impact of the sales. In addition,
there were significant unexplained declines in the subsidy allowance
for the disaster program. We discussed these issues with SBA's auditor
who subsequently withdrew its "clean" financial statement audit
opinions for fiscal years 2000 and 2001 and disclaimed an opinion for
2002. SBA is continuing to work on resolving its accounting and
financial reporting problems. Finally, our analysis of the operational
benefits from loan sales suggested that some benefits that SBA
reported, such as reductions in servicing and workload volume, either
had not yet materialized or were overstated.
Background:
When disasters such as floods, tornadoes, or earthquakes strike,
federal, state, and local government agencies coordinate to provide
assistance to disaster victims. SBA, through its Disaster Loan Program,
is part of this effort. SBA provides loans to households and businesses
without credit available elsewhere at a maximum rate of 4 percent and
up to a 30-year term. For households or businesses with credit
available elsewhere, SBA provides loans at a maximum rate of 8 percent
and, for businesses, up to a 3-year term. Business loans are available
up to $1.5 mill[Footnote 4]ion, loans for physical damage to homes are
available up to $200,000, and loans for the repair or replacement of
personal property are available up to $40,000.
Like other federal programs, SBA's Disaster Loan Program follows
performance measurement guidelines under the Government Performance and
Results Act (GPRA) of 1993.[Footnote 5] GPRA requires agencies to set
multiyear strategic goals in their strategic plans and corresponding
annual goals in their performance plans, measure performance toward the
achievement of those goals, and report on their progress in their
annual performance reports.[Footnote 6] Annual performance plans are
sent to Congress soon after the transmittal of the President's budget
and provide a direct linkage between an agency's long-term goals and
mission and day-to-day activities. Related annual performance reports
describe the degree to which performance goals have been met. Guidance
from the Office of Management and Budget (OMB) indicates that
performance plans should include measures of outcomes--intended
results--when the outcomes can be achieved during the fiscal year
covered by the plan. Otherwise, the guidance recognizes that the
performance plans will predominantly include measures of outputs
(program activities) rather than outcomes.
In 1999, SBA began a loan asset sales program, at the direction of OMB,
to reduce the amount of debt the agency owned and serviced. OMB is
interested in increasing loan asset sales in order to improve the
management of loan assets and to transfer loan servicing
responsibilities to the private sector. Our review focused on SBA's
first five loan sales through January 2002 in which 110,000 loans with
an outstanding balance of $4.4 billion were sold. Approximately 85
percent of the dollar volume of loans SBA sold were disaster assistance
loans made directly by SBA, most of which have below-market borrower
interest rates. The remaining 15 percent were mostly defaulted 7(a)
loans, made by SBA's lending partners (primarily banks).
SBA Expanded and Changed the Terms of Its Disaster Loan Program in
Response to the September 11 Attacks:
In the weeks and months following the terrorist attacks, SBA and
Congress faced the challenge of responding to the lingering effects of
the attacks and subsequent federal actions on small businesses
throughout the country. SBA responded first in Lower Manhattan, then
expanded its response as additional parts of the New York City and
Pentagon areas were designated disaster areas. Ultimately, SBA helped
small businesses around the country with disaster lending. In response
to the concerns expressed by small businesses, SBA and Congress
modified the program, expanding eligibility for economic injury loans
to small businesses around the country, providing translators for
applicants, modifying the size standards for small businesses,
expediting the loan approval and disbursement processes, and providing
larger loans.
SBA's Response Covered Small Businesses Nationwide:
SBA's response to the terrorist attacks began on September 11, when SBA
officials arrived in Lower Manhattan to begin coordinating the agency's
efforts. The initial disaster area in New York City and New Jersey
eventually expanded to include additional counties in Connecticut,
Massachusetts, New Jersey, New York, and Pennsylvania. Maryland,
Virginia, and parts of the District of Columbia were also declared
disaster areas for SBA purposes. As the United States began to deploy
military personnel in response to the terrorist attacks, small
businesses nationwide affected by the loss of employees called up as
military reservists were eligible to apply for a disaster loan under
the Military Reservist Economic Injury Disaster Loan (EIDL)
program.[Footnote 7] Small businesses across the nation that were
adversely affected by the lingering effects of the attacks and
subsequent government action, such as airport closings and the
precipitous drop in tourism, were also eligible to receive disaster
loans under SBA's Expanded EIDL program. In essence, the entire country
was deemed a disaster area.
More than half the loans went to small businesses outside the area of
the attack sites in New York City and at the Pentagon, with businesses
in Florida and California receiving the second and third largest share
of loans (see fig. 1). Loans ranged from $300 to $1.5 million, with
$50,000 as the most frequently disbursed amount (11 percent of all
loans). Businesses outside the immediate sites of the attacks generally
received slightly more than those close by, in part because they did
not have access to the resources available in New York City. The loans
were spread among industries, with no single type of business
accounting for most of the funds (see fig. 2). The manufacturing sector
received the most funds, followed by professional, scientific, and
technical services; transportation and warehousing; wholesale trade;
and accommodation and food services.
Figure 1: Geographic Distribution of SBA September 11 Loan
Disbursements:
[See PDF for image]
[End of figure]
Figure 2: SBA September 11 Business Loan Disbursements, By Industry:
[See PDF for image]
[End of figure]
SBA and Congress Modified the Disaster Loan Program in Response to
Complaints from Small Businesses:
In the months after the terrorist attacks, small business owners
affected by the terrorist attacks presented a number of concerns to
Congress about SBA's Disaster Loan Program. SBA officials regarded
these comments as valuable feedback and worked with Congress to make
several modifications to the program for September 11 victims:
* First, in October 2001, SBA issued regulations to make economic
injury disaster loans available to small businesses nationwide, an
unprecedented change to the Disaster Loan Program, according to SBA
officials. SBA's Expanded EIDL program enabled businesses outside the
declared disaster areas to apply for loans to cover "ordinary and
necessary" operating expenses that could not be met because of the
attacks or related actions of the federal government between September
11 and October 22, 2001.
* Second, SBA printed informational packets in languages such as
Spanish and Chinese; provided multilingual staff at its offices who
could speak Mandarin Chinese, Croatian, Arabic, and Spanish; and was
prepared to send employees with additional language capabilities to New
York City.
* Third, in February 2002, SBA modified the size standards for all
September 11 loan applicants, allowing borrowers to take advantage of
recent inflation-based adjustments.[Footnote 8] In addition, in March
2002, SBA increased the size threshold for travel agencies adversely
affected by the attacks from $1 million in annual revenues to $3
million.
* Fourth, to expedite loan processing, loan officers streamlined their
needs analysis, calculating economic injury loans using the applicant's
annual sales and gross margin. By the end of fiscal year 2002, SBA was
processing September 11 business loans, on average, in 13 days compared
with 16 days for disaster assistance business loans processed in fiscal
year 2001. To further expedite disbursement to those in the World Trade
Center and Pentagon disaster areas, SBA decreased the amount of
documentation needed to disburse up to $50,000.
* Fifth, in January 2002, Congress approved supplemental appropriations
for SBA of $150 million, raised the maximum loan amount from $1.5
million to $10 million, and deferred payments and interest for 2
years.[Footnote 9] Congress also created the Supplemental Terrorist
Activity Relief (STAR) program to provide assistance to small
businesses affected by the terrorist attacks through SBA's 7(a) loan
guaranty program, which is not part of the Disaster Loan Program. Under
the STAR program, SBA reduced the fee charged to lenders on new 7(a)
loans from 0.50 percent of the outstanding balance of the guaranteed
portion of the loan to 0.25 percent. As of the end of fiscal year 2002,
SBA had guaranteed about 4,700 STAR loans for $1.8 billion.
Some small businesses affected by the terrorist attacks maintained that
SBA's underwriting criteria--for example, collateral requirements--
were too restrictive. They testified that SBA had withdrawn their
applications because they would not use their homes as collateral. They
argued that it was too risky to use their homes as collateral,
especially since the survival of their businesses was uncertain. SBA,
however, did not change its underwriting criteria for September 11
victims. SBA officials said that the agency makes every effort to
approve each application by applying more lenient credit standards than
private lenders. However, the officials said that they adhered to their
credit standards to minimize losses and program costs.
SBA data indicate that the 52 percent rate for withdrawing and
declining September 11-related loan applications was not out of line
when compared with other disasters or with private lenders. The primary
reasons SBA identified for withdrawing September 11 loan applications
was a lack of Internal Revenue Service (IRS) records to corroborate
applicants' income, and applicants' failure to provide additional
information SBA had requested. SBA officials said that the most common
reasons for declining September 11 loan applications were inability to
repay the loan and unsatisfactory credit. According to SBA, these were
also the primary reasons for withdrawing or declining nearly two-thirds
of all SBA disaster loan applications in fiscal year 2001.
SBA officials believed that many of the complaints about the disaster
program resulted from the mismatch between victims' expectations of
SBA's disaster program and the nature of the program. SBA officials
told us that they tried to minimize public confusion about the nature
of the assistance available from SBA by working closely with the media
and public officials to provide accurate information about the Disaster
Loan Program.
SBA's Disaster Program Performance Measures Do Not Capture the Scope of
the Agency's Efforts:
The six performance indicators SBA currently uses to measure the
Disaster Loan Program are:
* field presence within 3 days of a declaration,[Footnote 10]
* loans processed within 21 days,
* customer satisfaction rate,
* homes restored to predisaster condition,
* businesses restored to predisaster condition, and
* initial loan disbursement within 5 days of receiving closing
documents.
We identified several problems with these measures. For example,
several are output measures that did not reflect the actual progress
being made. Some are proxies that did not accurately represent what was
being measured. There is a lack of measures for intermediate or end
outcomes, and features in SBA's description of the Disaster Loan
Program in its performance plans made assessing the program difficult.
Several of the limitations we found had been identified in previous GAO
or SBA Inspector General reports and had not been corrected.[Footnote
11]
Three Output Measures Do Not Capture Progress:
Officials from SBA's Disaster Area Offices (DAO) questioned whether the
three output measures--establishing a field presence within 3 days of a
disaster declaration, processing loan applications within 21 days, and
disbursing initial loan amounts within 5 days of receiving the closing
documents--were appropriate indicators of timely service to disaster
victims since they did not, for example, capture recent program
improvements. SBA has had a 98 percent success rate in meeting the
target for establishing a field presence each fiscal year since 1998.
Officials from the area offices said that improvements in planning,
interagency coordination, and technology enabled them to have staff on
site within 1 day of a disaster declaration. According to DAO staff,
delays in establishing a field presence generally occurred because SBA
was waiting for decisions from state officials.
SBA data and comments from DAO officials suggested that the second
output measure--processing loan applications within 21 days of receipt-
-did not reflect improvements in past performance. For example, SBA
aimed for an 80 percent success rate for fiscal year 2001, but the
actual time required for processing averaged 13 days in fiscal year
2001 and fell to 12 days in fiscal year 2002. The average time required
to process the September 11 business loans was also about 13 days. DAO
officials attributed their faster processing times to several
agencywide improvements.
DAO staff also suggested that another measure--the 5-day target for
making initial disbursements once closing documents are received--did
not reflect past performance and was a low threshold. Before 2002, SBA
had an internal goal of ordering disbursements within 3 days of
receiving closing documents. When SBA included this measure in the
performance plan, the disbursement target was increased to 5 days to
accommodate weekends and holidays, because SBA's system for tracking
disaster loan processing could not distinguish between workdays and
other days. Accustomed to the stricter 3-day standard, staff were able
to meet the 5-day standard with ease.
In commenting on a draft of our report, SBA indicated that the output
measures were established based on what was determined to be a
reasonable level of service in an average year, taking into account the
amount of resources required. Because disasters cannot be predicted,
officials did not think it would be feasible to adjust production
levels based on a single year's performance. Even with some program
improvements, they believed it would be very difficult and costly to
maintain such levels during periods of multiple major disasters.
Although SBA acknowledged that a basis for modifying some output
measures might exist, the officials believed that the modifications
should be based on an average level of projected activity that takes
into consideration some permanent improvements that have been made to
the program.
Two "Outcome" Measures Actually Assessed Outputs:
SBA officials indicated that three measures--number of homes restored
to predisaster condition, number of businesses restored to predisaster
condition, and customer satisfaction--were used to assess the effect,
or outcomes of lending to disaster victims. But these "outcome"
measures also had limitations. First, while the restoration of homes
and businesses was a stated outcome in SBA's strategic and performance
plans, SBA did not actually measure the number of homes and businesses
restored. Instead, SBA reported on the number of home loans approved as
a proxy measure for the number of homes restored to predisaster
condition. However, these measures assessed what are actually program
outputs (loans approved) rather than stated outcomes (homes and
businesses restored). Such proxy measures, then, were likely to have
overestimated the number of homes and businesses restored because
borrowers might cancel the loan. According to SBA, about 10 percent of
the loans approved for September 11 victims were cancelled by
borrowers. Third, these indicators used annual figures that were
affected by factors outside of SBA's control, such as the number of
disasters that occurred during a given fiscal year. A more useful
indicator would be the percentage of homes and businesses receiving
loans that were restored each year to pre-disaster conditions.
To measure customer satisfaction, SBA used the results of its survey of
successful loan applicants. (SBA also used this survey to evaluate the
impact of the program.) But the survey methodology had significant
limitations. For example, it measured the satisfaction of only a
portion of the customers that the disaster loan program serves. Every
DAO director we interviewed indicated that all disaster victims were
SBA customers and that a broader population should be surveyed. In
2001, we and the SBA Inspector General made the same suggestion to SBA.
As we indicated then, the survey method SBA had been using was likely
to produce positively skewed responses. SBA headquarters officials
indicated that they were resistant to surveying those who were denied
loans because they presumed that the applicants' responses would be
negative.
Some Measures Did Not Assess Intermediate or End Outcomes:
Recommendations from SBA's Inspector General, and guidance from us and
within SBA, have encouraged the use of outcome measures for this
program. But we found that only one of the performance measures SBA was
using--customer satisfaction--had the potential to assess a stated
outcome of the Disaster Loan Program. The other intended outcomes,
which could have been measured annually or biannually, such as jobs
retained or housing restored, were not measured.
In addition, SBA had stopped using intermediate outcome measures it had
used in the past--loan currency and delinquency rates--to assess the
quality of disaster loans. It also had not measured another potential
intermediate outcome from the underwriting process--having appropriate
insurance. As one DAO official suggested, having coverage such as flood
insurance potentially reduces the number of loans required in some
disaster-prone areas. As we have reported previously, such insurance
can reduce disaster assistance costs and could reduce the effect of a
disaster on its victims.[Footnote 12]
SBA headquarters staff said that while they recognized some of these
shortcomings, they had limited ability to develop and use better
outcome measures. The staff indicated that the very nature of disaster
lending was unpredictable, making it difficult to set performance
targets for intermediate or end outcomes. One SBA official said that
the agency is reluctant to measure and report intermediate or end
outcomes that are outside its control. Other DAO officials indicated
that conducting some end outcome measurement methodologies would be
expensive--for instance, on-site inspections of a sample of homes and
businesses to assess restoration.
We made two recommendations designed to help SBA improve its
performance measures for disaster lending. First, we recommended that
SBA revise the performance measures to include more outcome measures;
assess more significant outputs, such as service to applicants or loan
underwriting; report achievements that can be compared over several
years, such as percentages; and include performance targets that
encourage process improvement rather than maintaining past levels of
performance. Second, we recommended that SBA revise and expand its
current research to improve its measures and evaluate program impact.
To improve its current measures, we suggested that SBA conduct
research, such as surveying DAO staff and reviewing relevant literature
to identify new outcome measures that could be tested. To evaluate its
program impact, SBA needs to ensure that its survey covers all disaster
loan applicants and to employ other methods, such as periodic analyses
of regional statistics, to assess the economic impact of the program on
local communities. SBA generally agreed with our recommendations and
said it is addressing our concerns. As of this month, SBA had
distributed a customer service survey to help evaluate the Disaster
Loan Program's impact and was developing a broader survey. We will
follow up with SBA regarding the status of their efforts.
SBA's Performance Plans Had Limitations:
We identified several features of the description of the Disaster Loan
Program in the 2002 and 2003 performance plans that make it difficult
to assess whether SBA is making progress in attaining its strategic
goal. First, between 2002 and 2003, the program's performance goal
changed from an outcome-oriented goal (helping families recover from
disasters) to an output-oriented goal (streamlining disaster lending)
without the required explanation. GPRA requires agencies to explain why
they change performance goals, and OMB generally recommends that
agencies use goals that are outcome-oriented.
Second, the 2002 and 2003 performance plans do not define the linkages
between each program output and each intermediate or end outcome. The
plans do not explain how the outputs (disaster loans) are related to
the performance indicators (field presence, customer satisfaction, and
application processing time frames). Third, the plans do not explain
how the performance measures or indicators are related to either
program outcomes or outputs. Fourth, performance indicators are added
to or dropped from the plans without explanation, making it difficult
to understand how and if SBA expects to improve or sustain its loan
processing performance.
The performance plans also contain incomplete or inaccurate information
on some performance indicators. For example, despite OMB and SBA
guidance, validation and verification information on field presence and
loan processing measures is omitted, making it difficult to assess the
quality of performance data. In addition, the 2003 performance plan
indicates that data on the number of homes restored to predisaster
condition are based on on-site inspections of homes. However, SBA
officials indicated that they use a proxy measure--the number of
original home loans approved--as the actual source of data for homes
restored to predisaster condition.
We recommended revising the section of the performance plan that covers
the Disaster Loan Program to establish direct linkages between each
output and outcome and the associated performance measure; accurately
describe proxy measures as either outcome or output measures;
accurately describe the validation and verification of performance
measures; and explain additions, deletions, or changes from the
previous year's goals and measures. SBA also agreed with this
recommendation. SBA informed us this month that it has undertaken a
long-term review of the strategic plan with the aim of revising the
performance goals and measures and linking performance to the new plans
and goals. We will monitor SBA's progress in implementing this
initiative.
Loan Assets Sales Affect Disaster Loan Borrowers and the Loan Program:
A large portion--85 percent in the first 5 sales--of the loans sold are
disaster loans previously serviced by SBA. SBA's program to sell
disaster loans that it makes directly to borrowers and subsequently
services results in private investors owning and servicing the loans
over their remaining terms. It was difficult for us to determine the
reaction of borrowers whose loans were sold because of incomplete
records at SBA. We identified numerous errors in SBA's accounting for
the loan sales, including unexplained declines in SBA's loss allowance
account for disaster loans. Until corrected, these errors mean that
SBA's subsidy estimates and reestimates for the disaster loan program
cannot be relied upon. The operational benefits from selling loans that
SBA has claimed may be overstated.
Information on How Selling Disaster Loans Affects Borrowers Is
Incomplete:
SBA built in some safeguards to protect borrowers when their loans are
sold. But, because SBA's process for documenting and tracking borrower
inquiries and complaints has weaknesses, we could not determine how
many borrowers had actually contacted SBA with complaints or concerns
about the loan sales.
Borrowers have little control over what happens to their loans if SBA
decides to sell them. However, SBA has some policies intended to
protect the integrity of the programs that provided the loans. SBA's
programs, including servicing disaster loans after they are made, are
designed to help the borrower recover from a disaster. To protect this
public policy goal, SBA's loan sales agreements with purchasers require
certification that the investors are qualified to purchase and service
the loans and will follow prudent loan servicing practices. The loan
sales agreement also prevents purchasers from unilaterally changing the
terms and conditions of the loans. In addition, SBA does not sell some
disaster loans, including those issued to borrowers currently residing
in a federally declared disaster area and those that are less than 2
years old. According to SBA, more servicing is typically required in
the first 2 years of a disaster loan--such as changes due to revised
physical damage estimates.
Nevertheless, we were not able to validate the way in which borrowers
reacted to the loan sales because SBA could not provide a reliable
estimate or information on the number of borrowers who had contacted
them about their sold loans. Complete and reliable information on
borrower complaints is important because SBA officials told us that
when a borrower complained about a servicing action they contacted
purchasers to collect additional information and determine whether a
purchaser was breaching the borrower protections. One reason why SBA's
tracking system is ineffective is that borrowers with questions or
complaints can call or write to several different SBA offices, or to a
representative of Congress. Some SBA field office officials told us
that SBA does not provide them with clear guidance on how to respond to
or document such complaints. Officials from seven district offices,
three servicing centers, and two disaster area offices told us that
they had received calls and letters from borrowers who had concerns
about loans that had been sold. But the methods for documenting
inquiries and complaints varied across offices, except for
congressional letters, which were consistently forwarded to SBA
headquarters. In August 2001, SBA began providing a toll-free number
for borrowers to call with questions or complaints about loan sales.
Borrowers were informed about the toll-free number in a letter telling
them how to contact the new owner of their loan. However, field office
staff did not receive any guidance regarding the purpose and use of the
toll-free number.
Though we were unable to determine how many borrowers have contacted
SBA about their sold loans, we reviewed 133 of the 155 written
inquiries and complaints documented at headquarters, along with SBA's
written responses, to identify the types of questions and problems
borrowers may have when their loans are sold. Our analysis showed that
almost half (65) were inquiries and concerns about their loans being
sold, requests to buy their own loans, or pleas not to have their loans
sold. However, 47 of the borrowers complained about a purchaser's
servicing action. For example, some letters involved disagreements or
frustration with servicing decisions, such as refusing to subordinate
or release collateral,[Footnote 13] or imposing a fee to complete a
servicing action such as subordination. Another 18 letters were from
borrowers who wanted to defer payments or change the amount of their
monthly payments because of financial problems, and felt they were not
getting appropriate treatment from the purchasers of their loans.
To address these weaknesses in the loan sales program, we recommended
that SBA develop procedures for documenting and processing inquiries
and complaints from borrowers, and then provide guidance to the field
offices about implementing them. SBA reported to Congress in March 2003
that it would soon issue a procedural notice to its field offices
providing a uniform process for handling borrower inquiries and
complaints. SBA stated that it also intends to establish an e-mail
account for use by all employees to record and forward borrower
comments to the asset sales team at headquarters, establish a database
to track borrower comments, and enhance a tracking system used for
residential borrower inquiries at a servicing center. We will follow up
with SBA to monitor its implementation of our recommendations.
SBA's Accounting for Loan Sales and the Remaining Portfolio Was Flawed:
During our review, we found errors that we believe could have
significantly affected the reported results in the budget and financial
statements for fiscal years 2000 and 2001. Because of errors we
identified, SBA's auditor withdrew its clean audit opinions for those
years and issued disclaimers of opinion. Moreover, because of these and
other financial management issues, the auditor has disclaimed an
opinion on SBA's financial statements for 2002. Although this
roundtable is not intended to explore the intricacies of accounting, I
will briefly comment on our findings, which are fully discussed in the
report and testimony cited previously.[Footnote 14]
SBA incorrectly calculated the accounting losses on the loan sales and
lacked reliable financial data to determine the overall financial
impact of the sales. Further, because SBA did not analyze the effect of
loan sales on its remaining portfolio, its reestimates of loan program
costs for the budget and financial statements cannot be relied upon. In
addition, SBA could not explain significant declines in its loss
allowance account for disaster loans. Until SBA corrects these errors
and determines the cause of the precipitous decline in the loss
allowance account, the subsidy estimates and reestimates for the
disaster loan program cannot be relied on. These errors and the lack of
key analyses also mean that congressional decision makers are not
receiving accurate financial data to make informed decisions about
SBA's budget and the level of appropriations the agency should receive.
We recommended that, before doing more loan asset sales, SBA correct
the accounting and budgeting errors and misstatements. And that SBA's
Inspector General, with SBA's independent auditors, should assess the
impact of the identified errors and determine if the prior audit
opinions need to be revised. SBA is working to respond to these
recommendations and, as we noted above, the auditor has withdrawn the
previously issued clean audit opinions because they could not be relied
upon. We will be monitoring SBA's continuing efforts to resolve these
issues.
Loan Sales Have Reduced SBA's Loan Servicing Volume, but Other
Operational Benefits May Be Overstated:
SBA reported that loan asset sales had benefited the agency's
operations by reducing loan servicing, and that this reduction in loan
servicing volume should help allocate resources to other areas
necessary to achieving SBA's mission and help the agency to manage its
loan portfolio more effectively. Though we found that loan servicing
volume had declined for SBA disaster home loan centers, the effect on
regular business loans was less clear. Furthermore, despite these
reductions in loan servicing volumes, SBA had not yet redeployed staff
to more mission-critical activities, such as lender oversight and
business outreach. We found that loan sales have mostly reduced the
servicing workloads for disaster assistance loans. They have had less
impact on servicing workloads for 7(a) business loans, because lenders
did not always consent to sell these loans. Because the reduction in
loan servicing has involved disaster assistance loans, it was unclear
to what extent loan sales would help the agency realign its workforce
in the district offices that primarily serve small businesses.
SBA has also reported that the loan sales have prompted borrowers to
pay their loans in full, revealed inconsistencies in the application of
the agency's servicing procedures, and highlighted weaknesses in its
information system. We found some support to show that the loan sales
had produced portfolio management efficiencies. But we also found that
some of the benefits SBA had reported began before the loan sales
program, or could have been caused by other factors. For example,
borrowers of disaster loans who refinanced their homes while lower
interest rates were available often paid off their disaster loans, even
though their disaster loans had low interest rates.
To provide Congress and SBA with a better understanding of the impact
of loan sales on SBA's operations, we recommended that SBA conduct a
more comprehensive evaluation of the loan sales' impact on the agency
and the cost savings from the sales. SBA recently stated that it will
conduct such an evaluation.[Footnote 15] We will follow up with SBA as
it addresses our recommendation.
Madam Chair, Members of the Committee, this concludes my prepared
statement. I would be happy to answer any questions at this time.
Contacts and Acknowledgments:
For information on this statement, please contact Davi D'Agostino,
Director, Financial Markets and Community Investment, at (202) 512-8678
or Katie Harris, Assistant Director, at (202) 512-8415. You may also
reach them by e-mail at dagostinod@gao.gov or harrism@gao.gov. Other
individuals who made key contributions to this testimony or related
work include Dan Blair, Kristy Brown, Linda Calbom, Marcia Carlsen,
Emily Chalmers, Patricia Donahue, Julia Duquette, David Eisenstadt, and
Kay Kuhlman.
FOOTNOTES
[1] For information on assistance provided to small businesses in the
Lower Manhattan area after September 11 by SBA and other government
agencies, please see U.S. General Accounting Office, September 11:
Small Business Assistance Provided in Lower Manhattan in Response to
the Terrorist Attacks, GAO-03-88 (Washington, D.C.: Nov. 1, 2002).
[2] Also see April 29, 2003, testimony before the Subcommittee on
Government Efficiency and Financial Management, Committee on Government
Reform, U.S. House of Representatives. U.S. General Accounting Office,
Small Business Administration: Loan Accounting and Other Financial
Management Issues Impair Accountability, GAO-03-676T (Washington,
D.C.: Apr. 29, 2003).
[3] According to Office of Management and Budget (OMB) guidance,
outputs are the level of activity that can be produced or provided over
a given period of time or by a specific date. Outcomes are the intended
results, effects, or consequences that occur from carrying out program
activities. OMB, Preparation and Submission of Strategic Plans, Annual
Performance Plans, and Program Performance Reports, Circular No. A-11,
Part 6. (Washington, D.C: June 2002).
[4] Even if a business receives a loan to cover both physical damage
and economic injury, the total loan amount generally cannot exceed $1.5
million.
[5] P.L. 103-62, GPRA 1993.
[6] OMB provides guidance on developing these plans in "Preparation and
Submission of Strategic Plans, Annual Performance Plans, and Annual
Program Performance Reports," Circular No. A-11, Part 6 (Washington,
D.C: June 2002).
[7] The Military Reservist EIDL program is available to small
businesses whenever the government calls military reservists to duty,
not just during federally declared disasters.
[8] In January 2002, SBA increased the revenue-based thresholds for
determining the size of businesses by the rate of inflation. In
February 2002, SBA retroactively applied the inflation-adjusted size
standards to all businesses applying for September 11 loans, allowing
more businesses to seek assistance.
[9] Emergency Supplemental Appropriations for Recovery and Response to
Terrorist Attacks on the United States Act, 2002 P.L. 107-117
(Emergency Supplemental Act of 2002).
[10] Federal assistance, including all types of SBA disaster loans, is
available once the President declares that a major disaster or
emergency situation exists. Governors may request a disaster
declaration from SBA if damage is minor or moderate and a declaration
from the Department of Agriculture if losses are confined to
agricultural production. SBA offers only economic injury loans in these
last two situations.
[11] See U.S. General Accounting Office, Managing for Results:
Opportunities for Continued Improvement in Agencies Performance Plans,
GAO/GGD-99-215 (Washington, D.C.: July 20, 1999); Small Business
Administration: Status of Achieving Key Outcomes and Addressing Major
Management Challenges, GAO-01-792 (Washington, D.C.: June 22, 2001);
and Final Audit Report--Results Act Performance Measurement for the
Disaster Assistance Program, Small Business Administration, Office of
the Inspector General, Audit Report 1-06 (Feb. 15, 2001).
[12] U.S. General Accounting Office, Disaster Assistance: Information
on Federal Costs and Approaches for Reducing Them, GAO/T-RECD-98-139
(Washington, D.C.: Mar. 26, 1998).
[13] "Subordination" occurs when a lender allows a new or existing loan
to take a superior lien to another loan. For example, a borrower with
an SBA disaster home loan may want SBA or a lender to subordinate the
disaster loan to a new or refinanced home mortgage.
[14] GAO-03-87 and GAO-03-676T.
[15] Hector V. Barreto, Administrator, Small Business Administration,
Letter to The Honorable Susan Collins, Chair, Committee on Government
Affairs, U.S. House of Representatives, March 7, 2003.
