Small Business Administration:

Observations on the Disaster Loan Program

GAO-03-721T: Published: May 1, 2003. Publicly Released: May 1, 2003.

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Davi M. Dagostino
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This 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.

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