Small Business Administration
SBA Followed Appropriate Policies and Procedures for September 11 Disaster Loan Applications
Gao ID: GAO-04-885 August 31, 2004
The Small Business Administration (SBA) played a key role in assisting small businesses affected by the September 11, 2001 terrorist attacks by providing over $1 billion in disaster loans to businesses that sustained physical damage or economic injury. Small businesses in the immediate areas of the attacks and others nationwide that suffered related economic injury were eligible to apply for disaster loans. SBA declined or withdrew about half of these loan applications. SBA's disaster loans are direct federal government loans provided at a subsidized interest rate. In response to concerns that more small businesses impacted by September 11 could have benefited from SBA's disaster loans, GAO conducted a review of its Disaster Loan Program. Specifically, GAO addressed the following questions: (1) Are the disaster program policies consistent with the law and the overall mission of SBA's Disaster Loan Program? (2) What were SBA's underwriting policies and criteria for September 11 Economic Injury Disaster Loans (EIDL) and how did they compare with those applied by nonprofit lenders that were active in New York City after September 11? (3) Did SBA correctly apply its policies and procedures in its disposition of September 11 EIDLs?
SBA's policies and procedures for providing EIDLs are consistent with the Small Business Act: applicants must have suffered substantial economic injury as a result of a declared disaster, and SBA must determine that they are not able to obtain credit elsewhere. The act addresses some loan terms, such as length of maturity, but it does not specify underwriting criteria for SBA to follow. However, SBA's regulations contain underwriting criteria such as assessing an applicant's ability to repay the loan and obtaining collateral. SBA's underwriting requirements for September 11 EIDLs generally followed program guidelines and were similar to those of selected nonprofit organizations in New York City. Small businesses that were eligible to apply for SBA assistance were expected to meet standard requirements for documentation, creditworthiness, repayment ability, collateral, and character. These requirements are generally consistent with best practices published by lending industry experts and guidance issued by federal regulators. Changes made to address the unusual circumstances of the September 11 disaster were to eligibility and loan terms and not to loan underwriting criteria. The three nonprofit organizations in New York City that made September 11 disaster loans had requirements similar to SBA, but the nonprofits had some additional flexibility to address the needs of their small business constituents. GAO found that SBA followed its policies and procedures in making decisions for September 11 EIDLs. All of the files in our random, representative sample of declined or withdrawn applications contained documentation and analysis to support the SBA's determination. GAO's review of this sample also indicated that SBA followed its procedures for processing applications--such as supervisory review and notifying applicants of its decision and their right to have the application reconsidered. GAO's review of a small sample of approved loans also indicated that SBA followed its policies and procedures.
GAO-04-885, Small Business Administration: SBA Followed Appropriate Policies and Procedures for September 11 Disaster Loan Applications
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Report to the Administrator, Small Business Administration:
August 2004:
SMALL BUSINESS ADMINISTRATION:
SBA Followed Appropriate Policies and Procedures for September 11
Disaster Loan Applications:
GAO-04-885:
GAO Highlights:
Highlights of GAO-04-885, a report to the Administrator, Small Business
Administration
Why GAO Did This Study:
The Small Business Administration (SBA) played a key role in assisting
small businesses affected by the September 11, 2001 terrorist attacks
by providing over $1 billion in disaster loans to businesses that
sustained physical damage or economic injury. Small businesses in the
immediate areas of the attacks and others nationwide that suffered
related economic injury were eligible to apply for disaster loans. SBA
declined or withdrew about half of these loan applications. SBA‘s
disaster loans are direct federal government loans provided at a
subsidized interest rate.
In response to concerns that more small businesses impacted by
September 11 could have benefited from SBA‘s disaster loans, GAO
conducted a review of its Disaster Loan Program. Specifically, GAO
addressed the following questions: (1) Are the disaster program
policies consistent with the law and the overall mission of SBA‘s
Disaster Loan Program? (2) What were SBA‘s underwriting policies and
criteria for September 11 Economic Injury Disaster Loans (EIDL) and
how did they compare with those applied by nonprofit lenders that were
active in New York City after September 11? (3) Did SBA correctly apply
its policies and procedures in its disposition of September 11 EIDLs?
GAO makes no recommendations in this report.
What GAO Found:
SBA‘s policies and procedures for providing EIDLs are consistent with
the Small Business Act: applicants must have suffered substantial
economic injury as a result of a declared disaster, and SBA must
determine that they are not able to obtain credit elsewhere. The act
addresses some loan terms, such as length of maturity, but it does not
specify underwriting criteria for SBA to follow. However, SBA‘s
regulations contain underwriting criteria such as assessing an
applicant‘s ability to repay the loan and obtaining collateral.
SBA‘s underwriting requirements for September 11 EIDLs generally
followed program guidelines and were similar to those of selected
nonprofit organizations in New York City. Small businesses that were
eligible to apply for SBA assistance were expected to meet standard
requirements for documentation, creditworthiness, repayment ability,
collateral, and character. These requirements are generally consistent
with best practices published by lending industry experts and guidance
issued by federal regulators. Changes made to address the unusual
circumstances of the September 11 disaster were to eligibility and
loan terms and not to loan underwriting criteria. The three nonprofit
organizations in New York City that made September 11 disaster loans
had requirements similar to SBA, but the nonprofits had some additional
flexibility to address the needs of their small business constituents.
GAO found that SBA followed its policies and procedures in making
decisions for September 11 EIDLs. All of the files in our random,
representative sample of declined or withdrawn applications contained
documentation and analysis to support the SBA‘s determination. GAO‘s
review of this sample also indicated that SBA followed its procedures
for processing applications”such as supervisory review and notifying
applicants of its decision and their right to have the application
reconsidered. GAO‘s review of a small sample of approved loans also
indicated that SBA followed its policies and procedures.
SBA‘s Disposition of Economic Injury Disaster Loan Applications for
September 11:
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[End of section]
Contents:
Letter:
Results in Brief:
Background:
The SBA Disaster Loan Program's Policies and Procedures Are Consistent
with the Law and the Program's Overall Mission:
SBA's Underwriting Criteria Followed Program Guidelines and Best
Practices and Were Similar to Those of Nonprofits Offering Disaster
Loans:
SBA Followed Its Own Policies and Procedures in Making Determinations
on September 11 Economic Injury Disaster Loans:
Observations:
Agency Comments:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Comments From Small Business Administration:
Table:
Table 1: Disposition of Loan Application Sample By SBA Disaster Area
Office:
Figures:
Figure 1: SBA's Underwriting Criteria Compared with Those of Three
Nonprofit Lenders:
Figure 2: Reasons SBA Declined and Withdrew September 11 Loan
Applications in Our Sample:
Figure 3: SBA's Processing Times for Declined and Withdrawn Loan
Application Files in Our Sample:
Abbreviations:
EIDL: Economic Injury Disaster Loan:
FEMA: Federal Emergency Management Agency:
IRS: Internal Revenue Service:
SBA: Small Business Administration:
Letter August 31, 2004:
The Honorable Hector V. Barreto:
Administrator:
Small Business Administration:
Dear Mr. Barreto:
The Small Business Administration (SBA) played a key role in assisting
small businesses affected by the September 11, 2001 terrorist attacks.
SBA provided approximately $1.1 billion in disaster loans to businesses
that were physically damaged or had suffered a substantial economic
injury as a result of the attacks. Small businesses in the declared
disaster areas surrounding the World Trade Center and the Pentagon, as
well as others nationwide that had suffered economic injuries directly
related to the events of September 11, were eligible to apply for
disaster loans. SBA required eligible applicants to document the extent
of their losses and provide enough financial information for SBA to
determine repayment ability. SBA declined or withdrew those loan
applications that its loan officers determined did not meet its
underwriting criteria. SBA's disaster loans are direct federal
government loans provided at a subsidized interest rate.
In previous work, we reported that SBA had declined or withdrawn about
half of approximately 24,000 post-September 11 applications for
disaster loans nationwide.[Footnote 1] In response to concerns that
more small businesses impacted by September 11 could have benefited
from these loans, we conducted a review of SBA's Disaster Loan Program.
Specifically, we addressed the following questions: (1) Are the
disaster program policies consistent with the law and the overall
mission of SBA's Disaster Loan Program? (2) What were SBA's
underwriting policies and criteria for September 11 Economic Injury
Disaster Loans (EIDL) and how did they compare with those applied by
nonprofit lenders that were active in New York City after September 11?
(3) Did SBA correctly apply its policies and procedures in its
disposition of September 11 EIDLs?
To determine whether SBA's program policies are consistent with the law
and overall mission of SBA's Disaster Loan Program, we reviewed the law
related to the program as well as SBA's regulations and operating
procedures. To determine SBA's underwriting policies and criteria for
September 11 EIDLs, we analyzed SBA's policies and procedures for
approving, declining, and withdrawing disaster loans, and changes in
its policies and the law made after September 11. We discussed the
provisions of the law and SBA's policies and procedures with SBA
officials. We also analyzed the underwriting policies and procedures of
three selected nonprofit lenders that provided loans to small
businesses in New York after September 11 and discussed the lenders'
policies with officials of the respective organizations. In addition,
we compared SBA's underwriting requirements with best practices for
managing credit risk during the loan-making process of industry and
banking regulators. To determine whether SBA correctly applied its
policies in the disposition of September 11 EIDL applications, we
reviewed a representative random sample of declined and withdrawn
September 11 EIDL application files drawn from all disaster area
offices,[Footnote 2] and a small sample of application files for
approved September 11 loans. The representative sample of declined and
withdrawn files allowed us to project to the universe of about 12,000
declined and withdrawn EIDLs, but the small sample of approved loans
did not allow us to project to the universe of all approved loans, and
we discuss only the disposition of the 27 approved loans we reviewed.
Appendix I contains a detailed description of our scope and
methodology. We conducted our work between May 2003 and June 2004 in
Atlanta, GA; New York, NY; and Washington, D.C. in accordance with
generally accepted government auditing standards.
Results in Brief:
The SBA Disaster Loan Program's policies and procedures are consistent
with the law and the program's overall mission of helping businesses,
among others, recover from disasters.[Footnote 3] The Small Business
Act authorizes SBA to make low-interest loans to small businesses that
have suffered a substantial economic injury as the result of a
disaster.[Footnote 4] The act states that no loan for economic injury
shall be extended unless SBA finds that the applicant is not able to
obtain credit elsewhere, but it does not specifically address
underwriting criteria. For example, the act does not specify that EIDLs
must be of such sound value or so secured as to provide reasonable
assurance of repayment, as it does for SBA's general business loans.
Additionally, the act does not specifically address the issue of
collateral for EIDLs, whereas it specifies that SBA not require
collateral for physical disaster business loans of $10,000 or less.
However, SBA's regulations for its Disaster Loan Program do specify
underwriting criteria for EIDLs. Under its disaster program
regulations, SBA generally requires collateral for EIDLs over $5,000,
but it will not decline a loan if an applicant lacks adequate
collateral if there is a reasonable assurance that the applicant can
repay the loan.
SBA's underwriting policies and criteria for September 11 EIDLs
generally followed program guidelines, although notable exceptions were
made for this disaster, and were generally similar to those of the
selected nonprofit organizations we reviewed. Applicants eligible for
SBA's program were expected to meet established requirements for
documentation, creditworthiness, repayment ability, collateral, and,
as determined by SBA, appropriate character.[Footnote 5] These
requirements are generally consistent with best practices published by
lending industry experts and guidance issued by federal regulators.
With the Defense Appropriations Act of 2002, Congress increased the
statutory loan limit and the deferral periods for repayment and SBA
increased business size standards for eligible borrowers.[Footnote 6]
The maximum loan amount was increased from $1.5 million to $10 million,
and SBA's standard 4-month deferral period was increased to 2 years for
borrowers in the immediate areas of the disaster. Also, SBA took action
so that businesses nationwide--not just those in the immediate area of
the disaster--were able to apply for EIDLs if they had suffered
economic injury as a result of the terrorist attacks and subsequent
federal actions, such as closing airports.[Footnote 7] In addition,
applicants in the expanded area were required to provide a statement
linking their economic injury claims to the September 11 disaster. The
three nonprofit organizations that we selected for comparison generally
provided financial and technical assistance to businesses in New York
City that suffered losses as a result of September 11. All of these
organizations had requirements that were similar to SBA's for
documentation, creditworthiness, and repayment ability. Unlike SBA, all
had limited requirements for collateral, and none used character as a
factor in determining eligibility for assistance.
Our review of a representative sample of declined and withdrawn
September 11 EIDLs and a small sample of approved loans indicated that
SBA followed its own policies and procedures in making determinations
on these loan applications. We reviewed a sample of 99 declined and
withdrawn loan application files to determine whether SBA made its
determinations correctly. For all of the 99 files, SBA's policies and
procedures justified its decisions to decline or withdraw the
applications. SBA's primary reason for declining September 11 loan
applications overall was its determination that the applicant lacked
repayment ability. In making such determinations, SBA looked at whether
the applicants had the cash flow to make payments on the loan based on
their pre-disaster financial performance. The primary reason SBA
withdrew loan applications was the applicant's failure to file and pay
federal income tax for 1 or more years. Outside the designated
September 11 disaster area, the primary reason SBA declined
applications was the applicants' failure to establish a direct link
between the events of September 11 or related federal actions and the
applicants' business downturn. In all of the 99 files, we found that
SBA had notified the applicants in writing of its reasons for declining
or withdrawing loan applications, problems with the applications and
the means of correcting any deficiencies, and each applicant's right to
have the loan application reconsidered by SBA. Our review of a small
sample of 27 approved loan application files indicated that SBA also
followed its policies and procedures in approving these loans. SBA had
denied or withdrawn 8 of these 27 applications prior to approving them.
For these eight approved loans, the applicants addressed deficiencies
identified by SBA, such as failure to file for federal income taxes.
We provided a draft of this report to SBA and received written comments
from the Associate Administrator For Disaster Assistance. SBA's letter
is reprinted in appendix II. SBA agreed with the findings in this
report.
Background:
When a disaster occurs, staff from SBA's Disaster Loan Program, the
Federal Emergency Management Agency (FEMA), and other government
agencies work together to assess the damage to the affected area and
aid household and business disaster victims. Either the President or
the SBA Administrator may issue a disaster declaration. When the
President issues a disaster declaration, FEMA specifies the immediate
disaster area and SBA determines which contiguous counties are eligible
for federal assistance.[Footnote 8] When SBA issues a disaster
declaration, it specifies the immediate disaster area and any
contiguous counties that are eligible for assistance. Unlike FEMA,
which can provide some grants to residents in the area of a disaster,
SBA provides loans to households and businesses affected by disasters.
Once a disaster is declared, officials from one of SBA's four Disaster
Area Offices--located in California, Georgia, New York, and Texas--
arrive at the disaster site and begin assisting victims. These
officials provide information about the disaster loan process,
distribute loan applications, and assist victims, if requested, in
completing applications. In response to the September 11 terrorist
attacks, SBA disaster program officials from around the country
provided assistance to the New York Disaster Area Office, which was the
office primarily responsible for providing assistance.
Depending on the nature of the disaster, SBA can provide businesses
hurt by a disaster with fixed-rate, low-interest loans to address
physical property damage and economic injuries.[Footnote 9] These low-
interest loans are subsidized by taxpayers through federal
appropriations, and if the loans are not repaid, the subsidy cost for
disaster loans increases. SBA provides loans to cover physical damage
to both small and large businesses, enabling them to repair or replace
damaged real property, machinery, equipment, fixtures, and inventory
to begin restoring the property to its pre-disaster condition. SBA
provides EIDLs only to eligible small businesses, allowing them to
meet necessary financial obligations that could have been met if the
disaster had not occurred and to maintain necessary working capital
during the period that business activities are affected by the
disaster. For most disasters, SBA has primarily assisted businesses
with physical disaster loans. However, given the nationwide economic
impact resulting from the terrorist attacks of September 11, 2001,
EIDLs became SBA's primary form of assistance. Of the approximately
24,000 September 11 disaster loan applications, SBA approved about
11,000, totaling $1.1 billion. Over 10,000 of these loans, amounting to
$1 billion, were for EIDLs.
Under its statutory authority to provide economic injury disaster loans
to small businesses, SBA has established policies and procedures for
determining whether an applicant qualifies for a loan and the likely
viability of the loan, using pre-disaster financial information from
the applicant. SBA loan officers determine whether applicants meet
agency criteria. SBA loan officers may determine that applicants do not
meet these criteria for one or more of the following reasons:
* lack of repayment ability;
* unsatisfactory history on an existing or previous SBA loan;
* unsatisfactory history on a federal obligation, such as taxes;
* unsatisfactory credit history;
* unsatisfactory debt payment history;
* economic injury not substantiated;
* business activity not eligible;
* not a small business;
* credit available elsewhere (for instance, from a commercial financial
institution);
* recovery available from other sources, such as an insurance
settlement;
* failure to maintain required flood insurance on an SBA loan;
* not a qualified business;
* refusal to pledge collateral;
* no direct link established between the business downturn and the
disaster (for September 11 EIDLs only); and:
* outstanding judgment for a federal debt.
When SBA does not receive all the required information or documentation
from an applicant, it withdraws the loan application. SBA also
withdraws applications when the Internal Revenue Service (IRS) has no
record that the applicant has filed income tax returns for 1 or more
years[Footnote 10] or because of an unresolved character issue (for
example, an applicant's criminal activity). Additionally, an applicant
may request that SBA withdraw its application. After SBA declines or
withdraws an application, the applicant has 6 months to request
reconsideration. SBA explains its reason(s) for not approving the loan
and the process for reapplying in correspondence to the applicants.
In addition to SBA, several nonprofit organizations (nonprofits) in New
York City offered economic relief to small businesses in the area
affected by the events of September 11. The nonprofits that we
contacted to discuss their September 11 programs typically provide
economic and technical support to small, entrepreneurial, and
nontraditional businesses such as street vendors and taxi drivers, in
New York City and generally receive funding from private and public
sources. Funding for their September 11 programs came from these
sources as well as from federal grants allocated to support such
programs. All three nonprofits received grants from the September 11TH
Fund and raised additional capital with the help of private banks and
partner organizations.[Footnote 11] Two of the three nonprofits
reported that they provided both grants and loans to small businesses,
but all provided working capital loans to help businesses meet short-
term obligations such as rents, salaries, and accounts payable. These
working capital loans were expected to help businesses weather expected
recovery periods of between 3 and 6 months. One nonprofit offered only
low-interest working capital loans of up to $150,000, while another
reported providing $900,000 in grants and $3.1 million in low-interest
loans. The third nonprofit reported providing $7.1 million in grants
and no-interest loans, $12.4 million in low-interest loans, and $4
million in wage subsidies.
Small businesses in New York were also assisted by $3.5 billion in
Community Development Block Grant funding appropriated by Congress.
Congress earmarked at least $500 million of this funding to compensate
small businesses, nonprofits, and individuals for their economic
losses. This assistance included grants to compensate small businesses
for some of their losses, as well as payments to attract and retain
small businesses in an effort to revitalize the affected
areas.[Footnote 12]
The SBA Disaster Loan Program's Policies and Procedures Are Consistent
with the Law and the Program's Overall Mission:
SBA's policies and procedures for providing EIDLs are consistent with
the Small Business Act. The agency's policies and procedures are
consistent with the two requirements specific to EIDLs. These
requirements are that applicants must have suffered a substantial
economic injury as a result of a covered disaster and that SBA must
find that the applicant is not able to obtain credit elsewhere. The act
addresses some loan terms, such as length of maturity, but it does not
specify underwriting criteria for SBA to follow. However, SBA's
regulations do contain underwriting requirements such as assessing an
applicant's ability to repay the loan, credit history, and the
availability of collateral, as well as other requirements.
The Small Business Act Provides Little Specific Guidance on How SBA
Should Manage Its Disaster Loan Program, Particularly in Providing
EIDLs:
The law provides for SBA to make loans to small business concerns that
have suffered a substantial economic injury as a result of a covered
disaster, provided that SBA finds that an applicant is not able to
obtain credit elsewhere.[Footnote 13] Although the law does not define
substantial economic injury for EIDLs, SBA's regulations define it as
economic harm to a business concern that results in its inability to
meet its obligations as they mature or to pay its ordinary and
necessary operating expenses. SBA may provide an EIDL if it determines
that an applicant has suffered a substantial economic injury resulting
from a disaster described in the act. For EIDLs, the act describes four
disaster scenarios: (i) a major disaster, declared by the President of
the United States; (ii) a natural disaster, as determined by the
Secretary of Agriculture; (iii) a disaster declared by SBA; and (iv) if
no disaster was declared under scenarios (i) through (iii),
certification to SBA by the Governor of a State that eligible concerns
have suffered economic injury as a result of a disaster and are in need
of financial assistance which is not available on reasonable terms in
the stricken area.[Footnote 14]
Although the act specifies some terms for EIDLs, it does not specify
underwriting requirements. For example, the law states that the loans
should not exceed $1,500,000, unless the applicant is a major source of
employment in the impacted area or have more than a 30-year maturity
period.[Footnote 15] It also provides some specific interest rate
requirements, based on the year of the disaster. However, it does not
specify underwriting criteria for EIDLs. The act does not specify that
EIDLs should be of sound value or secured to provide reasonable
assurance of repayment, as it does for SBA's general business loans.
Additionally, the act does not specifically address the issue of
collateral for EIDLs, whereas it specifies that SBA not require
collateral for physical disaster business loans in the amount of
$10,000 or less.
SBA's Regulations Specify Underwriting Criteria and Other Requirements
for Disaster Loan Applicants:
SBA's regulations for EIDLs contain underwriting criteria that require,
among other things, a reasonable assurance of repayment, satisfactory
credit and character, and generally, collateral.[Footnote 16] The
regulations state that SBA must have reasonable assurance that all
disaster loan applicants can repay their loans from their personal or
business cash flow. The regulations also state that SBA is prohibited
from lending to businesses with an associate who is incarcerated, on
probation, on parole, or who has been indicted for a felony or a crime
of moral turpitude.[Footnote 17] The regulations do not elaborate on
satisfactory credit, however, as discussed later, SBA's policies and
procedures address these issues. For EIDLs greater than $5,000, SBA
regulations require that applicants provide collateral, although SBA
will not decline a loan if the applicant lacks a particular amount of
collateral, as long as it has reasonable assurance that the applicant
can repay the loan. However, SBA may decline or cancel a loan where the
applicant refuses to pledge available collateral when requested by SBA.
SBA regulations also specify eligibility requirements for the types of
businesses that may obtain an EIDL. The regulations exclude the
following types of small businesses:
* businesses engaged in lending, speculation, or investment;
* nonprofits and charities;
* consumer or marketing cooperatives;
* businesses deriving more than one-third of gross annual revenue from
gambling activities;
* loan packagers that earn more than one-third of gross annual revenue
from packaging SBA loans;
* businesses principally engaged in teaching, counseling or
indoctrinating religion or religious beliefs; and:
* businesses primarily engaged in political or lobbying
activities.[Footnote 18]
SBA amended its regulations in October 2001, expanding eligibility to
small businesses outside the declared disaster area, applicable only to
September 11 EIDLs. SBA made this change in recognition that the
September 11 disaster had a widespread economic impact, beyond the
boundaries of the declared disaster areas in New York and Virginia.
Under the new section of the regulations, SBA agreed to provide EIDLs
to businesses outside of the declared disaster area if they could show
that they suffered a substantial economic injury as a direct result of
the destruction at the World Trade Center or the damage to the
Pentagon, or any related federal actions (such as the suspension of air
travel) taken between September 11, 2001, and October 22,
2001.[Footnote 19] The regulations specify that loss of anticipated
profits or a drop in sales is not considered substantial economic
injury for purposes of an EIDL under these provisions.[Footnote 20]
Other than this change to expand EIDL eligibility nationwide, SBA's
general regulatory requirements for disaster loans, which we discuss
more fully later in this report, applied to September 11 EIDLs.
SBA's Underwriting Criteria Followed Program Guidelines and Best
Practices and Were Similar to Those of Nonprofits Offering Disaster
Loans:
SBA's underwriting policies and criteria for September 11 EIDLs
generally followed established guidelines, even with the exceptions
that were made for this disaster, and were similar to those of selected
nonprofits in New York City. Small businesses that were eligible to
apply for SBA loans were expected to meet standard requirements for
documentation, creditworthiness, repayment ability, collateral, and
appropriate character, as determined by SBA.[Footnote 21] We found that
SBA's lending activities followed best practices for private lending,
as set out by industry experts. As we reported previously,[Footnote 22]
modifications to SBA's Disaster Loan Program were made to address the
unusual circumstances surrounding the September 11 disaster and to
respond to the concerns of affected small businesses. However, the
changes that were made were to eligibility and terms, not to loan
underwriting criteria. Finally, the three nonprofits that we reviewed
had requirements that were similar to SBA's for documentation,
creditworthiness, and repayment ability, but their requirements
differed for collateral and appropriate character.
SBA EIDL Requirements for September 11 Generally Followed Program
Guidelines:
SBA used the same requirements for September 11 EIDLs as it would for
any other disaster. In accordance with the guidelines of the Disaster
Loan Program, SBA required small business applicants to provide the
following:
* personal financial statements for all principals with at least 20
percent interest in the business and each general partner;
* business tax records for the 3 most recent tax years and 1 year of
personal tax records;
* balance sheets and operating statements dated within 90 days of
application; and:
* monthly sales figures beginning 3 years before the disaster and
continuing through the most current month available.
Applicants were also required to undergo the standard credit analysis
required for the EIDL program. Since EIDLs are available only to small
businesses unable to obtain credit elsewhere, SBA administers its own
test to determine whether applicants are able to qualify for private
funds under reasonable terms and conditions, or if the applicant has
the financial capacity to recover without federal assistance. September
11 loan applications were processed using SBA's "credit elsewhere"
test, a combination of two formulas that looks at cash flow for debt
servicing and available net worth. Loan officers then used information
provided in the credit reports, balance sheets, and tax records to
determine repayment ability, based primarily on pre-disaster financial
performance. SBA required that EIDLs of more than $5,000 be secured by
personal guaranties from all business principals and by the "best
available collateral."[Footnote 23] SBA officials stated that the best
available collateral typically would be business or personal real
estate, since real estate is the only asset that will likely maintain
its value over the life of a 30-year SBA loan.[Footnote 24] In some
cases, SBA accepted other business property as collateral for smaller
September 11 EIDLs, if it was the best available, according to SBA
officials.
Finally, Disaster Loan Program guidelines require that SBA make a
character determination on all loan applicants in order to determine
eligibility for federal loans. By statute, SBA is required to deny
loans to persons convicted during the past year of a felony committed
during a riot or civil disorder and in connection with another declared
disaster.[Footnote 25] SBA uses specific program guidelines to make a
character determination on each loan applicant who has a prior arrest,
indictment, or conviction or is on parole or probation. Applicants are
required to provide information on any previous arrests or convictions.
SBA's Program Policies Were Generally Consistent with Good Lending
Practices:
SBA's guidelines for its Disaster Loan Program generally coincide with
best practices published by lending industry experts and guidance
issued by federal regulators. As stated previously, modifications that
were made specifically for the September 11 disaster did not affect the
administration of the program or underwriting criteria for EIDLs made
to small businesses nationwide. Disaster Loan Program requirements
include specific and clearly stated criteria and processes for
analyzing credit and determining repayment ability. Operating
procedures for the program also detail internal control and supervisory
review directives.
According to experts, "a cornerstone of safe and sound banking is the
design and implementation of written policies and procedures related to
identifying, measuring, monitoring, and controlling credit risk. Such
policies should be clearly defined, consistent with prudent banking
practices and relevant regulatory requirements, and adequate for the
nature and complexity of the bank's activities."[Footnote 26] Further,
in order to be effective, credit policies must be communicated
throughout the organization, implemented through appropriate
procedures, and monitored and periodically revised to take into account
changing internal and external circumstances. We compared SBA's
policies and procedures with industry best practices and regulatory
guidance for extending credit. SBA's policies and procedures for its
Disaster Loan Program in general and EIDLs in particular are presented
in SBA's standard operating procedures and related program memoranda.
Underwriting criteria are clearly defined, with specific formulas for
SBA's loan officers to use in evaluating credit risk for each loan
applicant. Industry standards also specify the importance of a
comprehensive analysis of a borrower' s ability to repay the loan and
requiring a borrower to pledge collateral. SBA's requirements for loan
guaranties and collateral and its analysis of applicants' cash flow to
determine repayment ability are in line with industry guidance on
mitigating lender risk in individual credit transactions. Modifications
that were made to eligibility and terms for September 11 EIDLs were
communicated throughout the agency in program memoranda. SBA provided
applications for the expanded program nationwide through its resource
partners.[Footnote 27] Our review of September 11 loan files also
indicated that SBA complied with its procedures for supervisory review
of all loan decisions.
Congress and SBA Approved Modifications in Key Areas of the Disaster
Program:
With the Defense Appropriations Act of 2002, Congress approved notable
modifications for this disaster that changed the terms for September 11
EIDLs for small businesses. These included increasing the maximum loan
limit from $1.5 million to $10 million and raising the maximum
repayment deferral period.[Footnote 28] SBA's policy of a 4-month
deferral period was increased to 2 years, by legislation, for
businesses in the immediate areas of the disaster. EIDLs granted in the
immediate areas of the disaster also did not accrue interest during the
2-year deferral period.
By regulation, borrowers in the immediate disaster areas receiving
economic injury loans also had 2 years from the date of approval to
apply for additional funds or a modified loan, and borrowers in the
expanded area had 1 year.[Footnote 29] Borrowers would thus have
sufficient time to assess additional disaster-related damage that had
not been detected or reported at the time of the initial application.
Under its regulatory authority, SBA expanded eligibility for the
September 11 disaster to businesses nationwide that were directly
affected by the terrorist attacks and subsequent federal actions such
as airport closures that resulted in business disruptions across the
country.[Footnote 30] The expanded program also addressed the needs of
small businesses that depended on other businesses and industries whose
operations were suspended or disrupted because of the disaster.
Businesses in the expanded areas were required to provide an economic
injury statement. Applicants needed to make a direct link between the
economic downturn affecting their business and the events of the
disaster in order to qualify for loans under the expanded
program.[Footnote 31]
SBA made other accommodations for September 11 applicants, including
increasing the size limits for eligible businesses, expediting loan
processing, and providing translators to help non-English speaking
applicants. As we noted in a previous report, small business owners had
complained to Congress about some facets of the Disaster Loan
Program.[Footnote 32] These complaints prompted SBA and the Congress to
modify the program. First, because of the immediate and devastating
effect on the travel industry nationwide, SBA increased the business
size standards for travel agencies and certain other travel-related
businesses.[Footnote 33] Applications that were pending or had been
previously declined or withdrawn solely on the basis of the size of the
business were automatically reconsidered, and SBA adjusted the size
determination date to the application acceptance date instead of the
date of the disaster. For travel agencies and other travel businesses,
the size standard was increased from $1 million to $3 million in annual
receipts, allowing larger businesses to qualify. Second, in an effort
to improve efficiency in processing the large number of EIDL requests
for September 11, particularly under the expanded program, SBA
developed an expedited process for reviewing loan applications. Under
the expedited process, applicants that did not qualify based on
eligibility criteria or pre-disaster credit and repayment issues were
declined early in the review process. Loan officers were required to
inform these applicants about the abbreviated process, and applicants
could ask to be reconsidered and could submit additional documentation
to justify their request. According to SBA officials, expedited
processing also allowed it to provide quick loan approval to businesses
within the declared disaster area in operation at the time of
application up to a maximum amount of $200,000 and those that were not
in operation because of the events of September 11, up to $350,000.
Expedited processing allowed businesses outside of the declared
disaster area meeting certain basic requirements to receive quick
approval for loan amounts up to $50,000.[Footnote 34] Third, in direct
response to complaints from small business owners in New York City with
limited proficiency in English, SBA made efforts to provide loan
application documents in languages other than English, including
Spanish and Asian languages, and to provide multilingual personnel at
New York City application centers. One SBA small business development
center representative told us that although this initiative was
positive, interpreters who were not familiar with business and
financial jargon still faced limitations in communicating adequately
with some small business owners.
Nonprofit Lenders in New York City Had Similar Requirements for
Disaster Loans:
Three nonprofits in New York City that made September 11 disaster loans
had requirements similar to SBA's, but the programs had some additional
flexibility to address the needs of their small business constituents
(fig. 1). One of the nonprofits reported ineligibility for SBA loans or
not meeting SBA's requirements as one of its own criteria for
application acceptance. Another reported that its program was geared,
in particular, toward small businesses that had not qualified for
significant loans from SBA or other recovery loan programs. The
existence of these nonprofit lenders provided alternative economic
injury assistance to small businesses in New York City.
Figure 1: SBA's Underwriting Criteria Compared with Those of Three
Nonprofit Lenders:
[See PDF for image]
[End of figure]
Like SBA, the nonprofits we spoke with had requirements for
documentation, creditworthiness, and repayment ability. All three
nonprofits required that applicants provide business financial
statements, business and personal tax records, credit reports, and a
number of other documents. One nonprofit requested, among other
documents, corporate bank statements, a business plan, insurance
statements, and receipts and invoices for expenses related to September
11. The same nonprofit required that applicants commit to remaining in
New York City and asked for a current executed commercial lease.
Another nonprofit said that commitment to rebuilding in the area was a
factor in the decisionmaking process but did not include this factor in
its eligibility requirements. Like SBA, the nonprofits used credit
reports and business financial statements to determine an applicant's
level of past debt, management of past credit, and likelihood of
repaying the disaster loan.[Footnote 35] All of the nonprofits reported
that credit and repayment histories played an important role in the
decisionmaking process, but two of the nonprofits emphasized that
applicants were not declined solely on the basis of the information
provided in credit reports. One nonprofit considered the direct impact
of the disaster on a business's ability to manage its recent credit,
and another reported that it made allowances for special circumstances
such as illness and divorce if applicants provided documentation and
could show a pattern of good faith efforts to address delinquencies.
Unlike SBA, all of the nonprofits had limited requirements for
collateral and reported that collateral was only requested on a case-
by-case basis. One nonprofit reported that collateral was not required,
but was accepted in lieu of a guaranty or cosigner for applicants who
had been approved with less than satisfactory pre-disaster credit. In
such cases, collateral would be accepted, even if it was not enough to
secure the entire loan and would be considered "psychological
collateral." Another nonprofit reported that collateral was typically
required when a business had a limited operating history or highly
unpredictable and inconsistent cash flow, and offered unsecured loans
up to $250,000. The third nonprofit reported that business collateral
was required on a case-by-case basis but provided no further details.
Two of the nonprofits indicated that they required personal guaranties,
with one specifying that owners with 20 percent or more interest in the
business would need to provide some guarantee. The third nonprofit
indicated that it also determined whether to ask for personal
guaranties on a case-by-case basis.
None of the nonprofits had a requirement similar to SBA's for
appropriate character for their September 11 programs. One of the
nonprofits indicated that an applicant's character was called into
question if a written or verbal account was inconsistent with the
documentation provided.
SBA Followed Its Own Policies and Procedures in Making Determinations
on September 11 Economic Injury Disaster Loans:
In our review of SBA's September 11 EIDL application files, we found
that SBA followed its own policies and procedures in determining
whether to provide loans to prospective borrowers. Our review of a
representative random sample of applications SBA declined or withdrew
showed that all of the 99 files contained the documentation and
analysis needed to support the determination. We also found that SBA
followed its procedures for processing loan applications, such as
conducting supervisory reviews of loan decisions, and made its
determinations and notified applicants in a timely manner. Our review
of a small random sample of approved loans also indicated that SBA
followed its policies and procedures in granting loans.
SBA Followed Its Policies and Procedures in Declining and Withdrawing
its September 11 Economic Injury Disaster Loan Applications:
In all of the 99 loan files we reviewed in our representative random
sample, SBA correctly declined 70 and withdrew 29 of the applications.
Overall, SBA declined September 11 loan applications primarily because
it determined that the applicants were unlikely to be able to repay the
loan. While SBA can cite several reasons for declining a loan, it gave
lack of ability to repay as at least one of the reasons for declining
38 of the 70 declined loan applications that we reviewed. In these
cases, SBA concluded that the applicants' income was insufficient to
repay a disaster loan, given existing debts and expenses, based on the
analysis that loan officers conducted using financial information
provided by the applicant. Our analysis of the universe of September 11
EIDLs revealed that SBA declined 4,513 applications, or more than half
of all declined applications for lack of repayment ability. For the 34
declined Expanded EIDL applications in our sample, SBA declined 18
applications, or about half, because the applicants failed to establish
a direct link between their business downturn and the events of
September 11 or related federal actions, as SBA required of applicants
outside of the declared disaster areas. In the universe of Expanded
EIDLs, SBA declined 4,186 applications and 1,975 were declined for this
reason. For example, a small business in an airport that lost revenue
during the period in which air travel was suspended would have been
eligible for an SBA September 11 Expanded EIDL. However, a business
that simply showed losses after September 11 would not be eligible for
a loan.
SBA withdrew loan files primarily because the applicants had not filed
federal income tax returns. Of the 29 withdrawn loan applications in
our sample, SBA withdrew 16 for this reason. Following its usual
procedures, SBA requested the most recent 3 years of business tax
records and 1 year of personal tax records directly from IRS. According
to a senior SBA official, SBA has a special arrangement with IRS for
obtaining federal tax documentation for disaster loan applicants. IRS
dedicates staff to processing these requests, and the IRS staff work
the same hours as the SBA loan officers in order to provide the needed
information as the loans are processed. IRS provides SBA with
transcripts of available returns or a notification that no records
could be found. SBA withdraws an application if IRS has no record of
the applicant's tax return for at least a year and will also generally
withdraw an application when missing or incomplete information prevents
the loan officer from making a determination. Figure 2 provides
additional information on the reasons SBA declined and withdrew loan
applications in our sample. Our analysis of the universe of September
11 EIDLs revealed that SBA withdrew 1,294 applications, or about 38
percent of all withdrawn applications, because IRS had no record of tax
returns for the applicants for 1 or more years.
Figure 2: Reasons SBA Declined and Withdrew September 11 Loan
Applications in Our Sample:
[See PDF for image]
Note: SBA may decline or withdraw a loan application for more than one
reason. The bars represent the frequency with which the decline and
withdrawal codes were cited in the loan applications we reviewed.
[End of figure]
We found technical errors in 2 of the 99 files we reviewed, although
the facts presented in the application files showed that SBA would not
have granted the loan, even if the errors had not been made. SBA
declined one application because the applicant owed federal income
taxes and lacked repayment ability, even though the applicant was a
nonprofit and therefore ineligible for an EIDL. SBA notified another
applicant that it was declining the application for policy reasons
because the applicant was a subsidiary of a foreign company and had no
revenues in the United States. According to an SBA official, SBA's
policies and procedures suggest that the application could have also
been declined for lack of repayment ability.
SBA Followed Its Procedures for Processing Declined and Withdrawn Loan
Applications:
In our review of declined and withdrawn loan files, we found that SBA
followed its policies and procedures for conducting supervisory reviews
of loan decisions and notifying applicants of the decisions and that
the agency generally processed applications in a timely manner. In all
of the 99 declined and withdrawn files that we reviewed, an SBA
supervisory loan officer signed the loan officer's report, which
documents how the loan officers came to the decision on the
application.[Footnote 36] On many of the loan officer's reports, the
supervisory loan officer made some notations assessing the loan
officer's analysis of the application. Additionally, all of the files
contained correspondence to the applicant documenting SBA's decision
that clearly described SBA's reasons for declining or withdrawing the
application, the deficiencies in the application and additional
documentation required (if applicable), and the applicant's right to
have the application reconsidered. We also found that SBA generally
processed the loan applications in a timely manner, as defined in SBA
procedures. At the time SBA processed the September 11 loans, its
benchmark was to process loan applications within 21 days. For most of
the files that we reviewed, SBA made a decision within 14 days of the
application date (fig. 3).[Footnote 37] Our analysis of the universe of
all September 11 EIDLs found that SBA processed declined files in an
average of 11 days and withdrew files in an average of 13 days.
Figure 3: SBA's Processing Times for Declined and Withdrawn Loan
Application Files in Our Sample:
[See PDF for image]
[End of figure]
SBA Also Followed Its Own Procedures for Approving September 11 Loans:
Based on our review of a small sample of loan files, SBA also followed
its own policies and procedures in approving September 11 disaster
loans.[Footnote 38] However, this sample was not representative and
cannot be projected to the universe of September 11 EIDLs. In our
review of 27 approved loan files, we found that they contained all of
the financial documentation and underwriting analysis required to
approve the loans, according to SBA's policies and procedures. However,
we did find an error in one of the approved loan files. In this case,
an applicant had stated on his application that he was the sole
proprietor of his business and not a U. S. citizen. Under these
circumstances, SBA was supposed to request that the applicant provide
proof that he was a non-citizen national or qualified alien.[Footnote
39] Based on evidence in the file, the applicant had not provided proof
of his alien status. As with our review of the declined and withdrawn
files, the approved loans all showed evidence of supervisory review.
Of the 27 approved loan files we reviewed, SBA had initially declined
or withdrawn eight. In these eight files, applicants had deficiencies
similar to those of the declined or withdrawn loan files we reviewed
but were able to address the deficiencies and reapply. For example, the
applicants whose files had been withdrawn because of income tax issues
reapplied after filing and paying federal income taxes, allowing SBA to
approve the loans. In one of the approved loan files we reviewed, SBA
withdrew the application for failure to file for federal income taxes.
After the applicant filed federal tax returns, SBA then declined the
application for lack of repayment ability and unsatisfactory history on
a federal obligation, or failure to pay federal income taxes. After
setting up a payment plan with the IRS and reducing expenses, the
applicant reapplied and SBA approved the loan. In another approved loan
file, SBA initially declined the application because the applicant had
not substantiated the economic injury. Based on SBA's analysis of the
applicant's documentation, the business would be able to meet its
financial obligations without a loan. However, the applicant provided
further documentation to show that it had lost contracts because of the
September 11 disaster and that the loss of business would have a
negative effect on the firm over time. The additional documentation
allowed SBA to approve the loan.
Observations:
Although SBA is not required to maintain specific underwriting criteria
for its Disaster Loan Program under the provisions of the Small
Business Act, we think that SBA's policies are generally consistent
with good lending policies as reflected in industry best practices and
regulatory guidance, and, when properly applied, should help maintain
the integrity of the program. SBA's underwriting procedures evaluate
applicants' credit risk and analyze their ability to repay the loan.
These procedures, along with requiring collateral to secure the loans,
help ensure that SBA fulfills its mission in providing loans that will
assist small businesses in recovering from disasters. By assessing
repayment ability, SBA can more effectively use its resources to assist
small businesses that are more likely to be able to repay the loan,
thus limiting the loan program's cost to the government, and therefore
the taxpayer.
Agency Comments:
We provided a draft of this report to SBA and received written comments
from the Associate Administrator For Disaster Assistance. SBA's letter
is reprinted in appendix II. SBA agreed with the findings presented in
this report. In addition, SBA provided technical comments, which we
incorporated into this report as appropriate.
We will provide this report to appropriate congressional committees. In
addition, this report will be available at no charge on our web site at
[Hyperlink, http://www.gao.gov].
Please contact me at (202) 512-8678 or [Hyperlink, dagostinod@gao.gov]
or Katie Harris, Assistant Director at (202) 512-8415 or [Hyperlink,
harrism@gao.gov] if you or your staff have any questions about this
report. Key contributors to this report were Bernice Benta, Gwenetta
Blackwell-Greer, Diane Brooks, Jackie Garza, Fred Jimenez, and Carl
Ramirez.
Sincerely yours,
Signed by:
Davi M. D'Agostino:
Director, Financial Markets and Community Investment:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
To determine whether Economic Injury Disaster Loan (EIDL) program
policies are consistent with the law and overall mission of SBA's
Disaster Loan Program, we reviewed the Small Business Act and SBA's
related regulations. We determined what the provisions of the law
require of SBA in its operation of the program as well as SBA's
regulations and operating procedures. We discussed our views on the
laws, regulations, and operating procedures with appropriate SBA
officials.
To compare SBA's underwriting policies and criteria for September 11
EIDLs with nonprofit lenders active in New York City after the
disaster, we reviewed SBA's policies and criteria for approving,
declining, and withdrawing disaster loans, and amendments made after
September 11. We also compared SBA's underwriting requirements with
industry best practices and banking regulators' guidance for managing
credit risk during the lending process. We spoke with officials of
nonprofit organizations (nonprofits) that provided loans to small
businesses in New York City after September 11,[Footnote 40] and
reviewed their underwriting policies and criteria. We requested
specific information on their loan programs to answer questions
regarding (1) eligibility requirements for each nonprofits' program,
(2) type of documentation that was required to accompany a loan
application, (3) actual limits and terms associated with available
loans, and (4) factors that each nonprofit considered in making the
decision to approve or decline an application. We reviewed this
information within each of the four categories and compared it with
SBA's EIDL policies and criteria applicable to post-September 11
lending.
To determine whether SBA correctly applied its policies in the
disposition of September 11 EIDL applications, we reviewed a
representative random sample of declined and withdrawn September 11
EIDL application files across all disaster area offices, and a small
sample of loan application files for approved September 11 EIDLs. We
developed a data collection instrument containing key factors we
identified in SBA's standard operating procedures and reviewed each
loan application file to determine whether there was evidence that the
appropriate policies and criteria had been applied in determining the
disposition of each application. The representative sample of declined
and withdrawn files allowed us to project to the universe of about
12,000 declined and withdrawn EIDLs. The small sample of approved loans
did not allow us to project to the universe of all approved loans, and
we discuss the disposition only of the files that we reviewed.
We sampled from the original population of all 24,041 September 11
disaster loan applications.[Footnote 41] We selected a probability
sample using a design that was stratified by SBA's four disaster area
offices and whether or not the loan application was declined or
withdrawn. We also selected a smaller simple random sample from among
all of the accepted loan applications, as a check to see how the loan
files differed from those withdrawn or declined. We assessed the
reliability of SBA's database, the Automated Loan Control System, and
found it acceptable for our purposes. Additional details about our
sampling methodology follow.
The sampling unit was the paper copy of a loan application file. The
sample sizes were estimated at the 95 percent level of confidence for a
desired precision of 6 percent. The sample size was estimated using a
formula appropriate for estimating an attribute in a stratified
design.[Footnote 42] Within the universe, some older application files
had already been shredded. Under SBA's procedures, declined and
withdrawn files that have been inactive for 2 years may be shredded. To
account for this, the sample size was increased slightly within each of
the eight strata, in case one of these files appeared in the random
sample. However, none of the files in our sample had been shredded--SBA
was able to provide us with all of the files we requested. Between the
eight strata, a sample size of 103 was proportionally allocated and
then selected. The strata allocation and final disposition of the
sample are shown in Table 1.
Table 1: Disposition of Loan Application Sample By SBA Disaster Area
Office:
Stratum: New York - Declined;
Sample: 44;
Out of Scope Files: 2;
Adjusted Sample: 42.
Stratum: New York - Withdrawn;
Sample: 21;
Out of Scope Files: 2;
Adjusted Sample: 19.
Stratum: Georgia - Declined;
Sample: 13;
Out of Scope Files: 0;
Adjusted Sample: 13.
Stratum: Georgia - Withdrawn;
Sample: 4;
Out of Scope Files: 0;
Adjusted Sample: 4.
Stratum: Texas - Declined;
Sample: 5;
Out of Scope Files: 0;
Adjusted Sample: 5.
Stratum: Texas - Withdrawn;
Sample: 2;
Out of Scope Files: 0;
Adjusted Sample: 2.
Stratum: California - Declined;
Sample: 10;
Out of Scope Files: 0;
Adjusted Sample: 10.
Stratum: California - Withdrawn;
Sample: 4;
Out of Scope Files: 0;
Adjusted Sample: 4.
Total:
Sample: 103;
Out of Scope Files: 4;
Adjusted Sample: 99.
Source: GAO.
[End of table]
In our loan application file reviews, we found that 4 of the 103 loan
application files sampled were physical injury disaster loans files,
not EIDL applications, and we excluded them as out of our study's
scope. In the entire original population of 13,171 declined or
withdrawn applications, we found 808 corresponding out of scope
records. In addition, there were 223 files that SBA indicated had been
shredded. Therefore, the final study population that we analyzed and to
which our data collection instrument sample is projected is 12,140.
Our confidence in the precision of the results from this sample is
expressed in 95-percent confidence intervals. The 95-percent confidence
intervals are expected to include the actual results for 95 percent of
the samples of this type. We calculated confidence intervals for our
study results using methods that are appropriate for probability
samples of this type. For all of the percentages presented in this
report, we are 95-percent confident that the results would have
obtained, had we studied the entire population, are within plus or
minus 6 or fewer percentage points of our results, unless otherwise
noted.
We located and reviewed all 99 declined or withdrawn sampled files. We
also reviewed 27 of the 30 approved loans in our nonprobability sample.
SBA reported that three of the files in our sample were not readily
available because the loans had been paid in full by the borrower, and
the loan files had been placed in storage. To ensure accuracy of our
file reviews, two GAO analysts reviewed each of the loan files. Based
on the reviews of documentation in the files, we entered information
into an automated data collection instrument. We also conducted basic
checks on the programming and analysis of the file review data.
We conducted our work in Atlanta, GA; New York, NY; and Washington,
D.C., between May 2003 and June 2004 in accordance with generally
accepted government auditing standards.
[End of section]
Appendix II: Comments From Small Business Administration:
SMALL BUSINESS ADMINISTRATION:
WASHINGTON D.C. 20416:
JUL 29 2004:
Davi M. D'Agostino:
Director:
Financial Markets and Community Investment:
United States Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Ms. D'Agostino:
We appreciate the recognition in this report of the exceptional
performance of the U.S. Small Business Administration (SBA) in our
underwriting practices and procedures in response to the September 11,
2001, terrorist attacks.
SBA disaster loans are the primary form of Federal assistance for non-
farm, private sector disaster losses. For this reason, the disaster
loan program is the only form of SBA assistance not limited to small
businesses. By providing disaster assistance through low interest loans
which are repaid to the Treasury, SBA's disaster loan program helps
reduce Federal disaster costs compared to other forms of assistance,
such as grants.
Because SBA utilizes taxpayer funds to lend to disaster victims, it is
our responsibility as a creditor to establish a reasonable assurance
that all disaster loans can and will be repaid. Accordingly, our
decisions are based on a balance between our role as a provider of
disaster assistance and our responsibility to protect the government's
interest as a creditor. In assessing the ability of each business to
repay a disaster loan, we look at the business' pre-disaster
performance based on financial data from the applicant and Federal tax
returns. By using these financial records to establish normal pre-
disaster performance, we avoid penalizing a business because of the
adverse economic impact of the disaster itself.
Be assured, the SBA was committed to assisting small businesses with
their working capital losses that were a direct impact of the tragic
events of September 11. SBA worked hard to approve each application and
we incurred risks private lenders cannot. Nevertheless, in lending
taxpayer funds, we must adhere to fundamental credit standards.
We appreciate the opportunity to provide clarifying comments and have
included our specific requests for clarification and/or changes within
the attachment herein.
Sincerely,
Signed for:
Herbert L. Mitchell:
Associate Administrator For Disaster Assistance:
Attachment:
(250143):
FOOTNOTES
[1] GAO, Small Business Administration: Response to September 11
Victims and Performance Measures for Disaster Lending, GAO-03-385
(Washington D.C.: Jan. 29, 2003).
[2] SBA's four disaster area offices are located in California,
Georgia, New York, and Texas, and serve the entire continental United
States and U.S. territories.
[3] SBA's Office of Disaster Assistance defines its mission as helping
people recover from disasters and rebuild their lives by providing
affordable, timely, and accessible financial assistance to homeowners,
renters, and businesses. This report addresses only economic injury
disaster loans SBA provided to businesses, although SBA also provides
loans to businesses for physical damage from disasters.
[4] Although the Small Business Act does not define substantial
economic injury for EIDLs, SBA regulations define it as economic harm
to a business concern that results in its inability to meet its
obligations as they mature or pay its ordinary and necessary operating
expenses. 13 C.F.R. §123.300 (a) (1) (2003).
[5] By statute, SBA is required to deny assistance to persons convicted
during the past year of committing a felony during and in connection
with a riot or civil disorder. Pub. L. No. 90-448 § 1106(e) (1968).
According to SBA officials, SBA uses specific program guidelines to
make a character determination on each loan applicant with a prior
arrest or conviction. SBA's procedure is documented in the Standard
Operating Procedure 50-30.
[6] See Pub. L. No. 107-117 §§ 202, 203, 115 Stat. 2297 (Jan. 10,
2002).
[7] The Small Business Administration promulgated regulations dealing
specifically with EIDLs relating to the September 11, 2001, terrorist
attacks. See 13 C.F.R. Part 123, Subpart G (2003).
[8] According to SBA officials, most requests for disaster declarations
come from the governor of the affected state, who can ask for a
presidential disaster declaration or an SBA administrative declaration,
depending on the severity of the disaster. A presidential declaration
makes many federal programs available, including SBA loans; an SBA
declaration makes only SBA loans available.
[9] For physical and economic injury disaster loans made after October
1, 1982, to businesses that cannot obtain credit elsewhere, the maximum
interest rate is 4 percent per annum. For businesses with credit
available elsewhere, SBA provides loans for physical damage at a
maximum rate of 8 percent with a 3-year term; economic injury loans are
not available to businesses with credit available elsewhere. See 15
U.S.C. § 636(c)(5) (2000 & Supp. 2003).
[10] In processing loan files, SBA requests 3 years of an applicant's
business federal tax transcripts and 1 year of the principal's personal
federal tax returns directly from the IRS.
[11] The September 11TH Fund was established on the day of the
terrorist attacks by The New York Community Trust and United Way of New
York City. Grants from the fund enable cash assistance, counseling, and
other services to individuals and families, small businesses, and
community organizations affected by the disaster. The fund, which
continues to operate, makes grants directly to nonprofit organizations
and agencies with the expertise to meet a wide range of needs in a
timely manner, as well as those that were directly affected by the
disaster.
[12] We have discussed federal assistance in response to the September
11 terrorist attacks in several other reports. See GAO, September 11:
Small Business Assistance Provided in Lower Manhattan in Response to
the Terrorist Attacks, GAO-03-88 (Washington, D.C.: Nov. 1, 2002); GAO,
Disaster Assistance: Information on FEMA's Post 9/11 Public Assistance
to the New York City Area, GAO-03-926 (Washington, D.C.: Aug. 29,
2003); and GAO, September 11: Overview of Federal Disaster Assistance
to the New York City Area, GAO-04-72 (Washington, D.C.: Oct. 31, 2003).
[13] The law excludes agricultural enterprises from eligibility to
receive a disaster loan.
[14] 15 U.S.C. § 636(b)(2)(A)-(D).
[15] Under certain circumstances, SBA may suspend payment of principal
and interest for up to 5 years. As discussed elsewhere in this report,
Congress increased the limitation on loan amounts and provided a
deferral of the repayment period for loans resulting from the September
11, 2001 attacks.
[16] 13 C.F.R. §§ 123.6, 123.11 (2003).
[17] 13 C.F.R. § 120.110(n) (2003).
[18] 13 C.F.R. § §123.301. Also, SBA EIDL assistance may not be
provided to the following business concerns: concerns with a principal
convicted, during the past year, of a felony during and in connection
with a riot or civil disorder or other declared disaster; concerns with
a principal presently incarcerated, or on probation or parole following
conviction of a serious criminal offense; concerns engaged in illegal
activities; government-owned entities (except for a business owned or
controlled by a Native American tribe); concerns which present live
performances of a prurient sexual nature or which derive more than de
minimus gross revenue through the sale of products or services, or the
presentation of any depictions or displays of a prurient sexual nature;
concerns with a principal who owns more than 50 percent of the business
and who is more than 60 days late on a child support order, unless the
principal divests all interest in the business. See ID. and 12 U.S.C. §
633(e), (f) (2000).
[19] 13 C.F.R. § 123.600.
[20] 13 C.F.R. § 123.601(a)(2).
[21] According to SBA officials, SBA follows the requirements of the
Office of Management and Budget Circular A-129, Managing Federal Credit
Programs, which, among other issues, prescribes policies and procedures
for extending credit such as screening applicants, documenting loans,
and collateral requirements.
[22] GAO-03-385.
[23] Personal guaranties were not required for sole proprietorships,
because the sole proprietor is individually obligated under the note.
[24] 30 years is the maximum term for an SBA disaster loan.
[25] P. L. No. 90-448 § 1106(e) (1968).
[26] Principles for the Management of Credit Risk: Basel Committee on
Banking Supervision, September 2000.
[27] Some of SBA's resource partners are Small Business Development
Centers (SBDC).
[28] The $10 million loan limit also included loans to businesses with
joint economic injury and physical disaster claims.
[29] 13 C.F.R. § 123.20 and 13 C.F.R. § 123.606.
[30] 66 Fed. Reg. 53329 (Oct. 22, 2001).
[31] SBA developed standard eligibility criteria and a sample question
and answer form for the Expanded EIDL Program to help loan officers
determine whether businesses qualified for loans. The criteria stated
that a general decline in business since September 11 was not in itself
enough to establish eligibility. The downturn had to be the direct
result of the destruction of the World Trade Center, damage to the
Pentagon, or related federal actions. The program did not cover a
decline in revenue due to public reaction in the wake of the disaster.
[32] GAO-03-385, see pages 10-15 and appendix III.
[33] 67 Fed. Reg. 11874 (Mar.15, 2002).
[34] Basic requirements were adequate repayment ability, satisfactory
credit, and a verifiable federal tax return showing that the business
had operated for at least 12 months.
[35] Personal credit reports are available from one of three credit-
reporting bureaus in the United States--Equifax, Experian, and
TransUnion. A typical consumer credit report provides an overall credit
rating, credit history detail, and records of any bankruptcies, liens,
and judgments filed against an individual. Besides requesting personal
credit reports for each principal of an applicant business, SBA also
requested business credit reports from Dun & Bradstreet, which provide
information on company structure, an overall business credit rating,
and records of any bankruptcies, liens, and judgments.
[36] In addition to supervisory reviews of loan decisions, SBA also
conducts an annual quality assurance review in each of its area offices
to assess whether loan officers are following SBA's policies and
procedures in making loan decisions. SBA reviews a randomly chosen
sample of loan files as a part of this review.
[37] In a previous report, GAO-03-385, we found that SBA's average time
for processing September 11 business loans was about 13 days. Thus, SBA
was exceeding its own performance measure. We recommended that, to
better demonstrate its program performance, SBA revise performance
measures related to the disaster program. SBA has made several
appropriate changes to its measures, as reported in its fiscal year
2003--2008 strategic plan, but it has not substantially changed its
performance goal for processing EIDL applications. For example, its
goal for fiscal year 2004 is to process 85 percent of EIDL applications
within 20 days.
[38] SBA's Office of Inspector General (OIG) is conducting a more
extensive review of approved September 11 loans to determine whether
the loans were underwritten, disbursed, and administered according to
SBA's standard operating procedures. The OIG is also reviewing a sample
of loans that have already defaulted.
[39] SBA instituted this procedure to comply with Pub. L. 104-193,
Title IV of the Personal Responsibility and Work Opportunity
Reconciliation Act of 1996,which prohibits providing a federal public
benefit to persons who are not United States citizens, non-citizen
nationals, or qualified aliens.
[40] These nonprofits were identified during our previous work on
assistance provided to small businesses in New York City after
September 11. See GAO-03-88, pp. 21-24.
[41] The number of applications in SBA's universe of September 11
disaster loans was as of January 30, 2004, when SBA provided us with
the data.
[42] Cochran, William, Sampling Techniques: Third Edition (New York,
New York: John Wiley and Sons, 1977).
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