[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
THE CALM BEFORE THE STORM: OVERSIGHT OF THE SBA'S DISASTER LOAN PROGRAM
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HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
JULY 8, 2015
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 114-018
Available via the GPO Website: www.fdsys.gov
______
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HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
TOM RICE, South Carolina
CHRIS GIBSON, New York
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
CARLOS CURBELO, Florida
MIKE BOST, Illinois
CRESENT HARDY, Nevada
NYDIA VELAZQUEZ, New York, Ranking Member
YVETTE CLARK, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRENDA LAWRENCE, Michigan
ALMA ADAMS, North Carolina
SETH MOULTON, Massachusetts
MARK TAKAI, Hawaii
Kevin Fitzpatrick, Staff Director
Stephen Dennis, Deputy Staff Director for Policy
Jan Oliver, Deputy Staff Director for Operation
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Steve Chabot................................................ 1
Hon. Nydia Velazquez............................................. 5
WITNESSES
The Honorable Chris Smith, (NJ-04), United States House of
Representatives, Washington, DC................................ 2
Mr. William Shear, Director, Financial Markets and Community
Investment, United States Government Accountability Office,
Washington, DC................................................. 7
Mr. James Rivera, Associate Administrator, Office of Disaster
Assistance, United States Small Business Administration,
Washington, DC................................................. 8
APPENDIX
Prepared Statements:
The Honorable Chris Smith, (NJ-04), United States House of
Representatives, Washington, DC............................ 26
Mr. William Shear, Director, Financial Markets and Community
Investment, United States Government Accountability Office,
Washington, DC............................................. 30
Mr. James Rivera, Associate Administrator, Office of Disaster
Assistance, United States Small Business Administration,
Washington, DC............................................. 53
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
Associated Press - Loans impacting grant money for Sandy
victims.................................................... 58
U.S. Small Business Administration........................... 61
THE CALM BEFORE THE STORM: OVERSIGHT OF THE SBA'S DISASTER LOAN PROGRAM
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WEDNESDAY, JULY 8, 2015
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 11:00 a.m., in Room
2360, Rayburn House Office Building. Hon. Steve Chabot
[chairman of the Committee] presiding.
Present: Representatives Chabot, Luetkemeyer, Hanna,
Gibson, Brat, Radewagen, Knight, Curbelo, Bost, Hardy, Kelly,
Velazquez, Hahn, Payne, Meng, Lawrence, Takai, Clarke, Adams,
and Moulton.
Chairman CHABOT. Good morning. The Committee will come to
order.
Before we begin, I would like to make a very nice
announcement, and that is the fact that before we get started I
want to take a moment to welcome our newest member, Congressman
Trent Kelly, who represents Mississippi's First Congressional
District, and he is joining us on the Small Business Committee.
This will be his first hearing today.
He is certainly no stranger to public service. In addition
to serving Mississippi as a district attorney for the past
number of years, Congressman Kelly is also Colonel Trent Kelly.
I hear he is quickly closing in on 30 years in the Mississippi
Army National Guard, and that is quite a record of service, and
we appreciate your service, Congressman Kelly. Welcome to the
Small Business Committee, and we are happy to have you. And we
are all looking forward to working with you and getting to know
you better and letting you get to know us better, which will be
a wonderful experience I am sure. So, but thank you very much,
and we are real happy to have you.
We will go ahead and move on to one other introduction.
Before I give my opening statement, we are going to go ahead
and introduce another member, a witness we have this morning,
if I can find it. Okay.
We are pleased to recognize this morning our colleague,
Congressman Chris Smith of New Jersey. I have had the pleasure
of serving with Chris on the Foreign Affairs Committee for 19
years now, and for those of you who do not serve on that
Committee, I can tell you that he is one of the hardest working
Members of Congress. A leader on foreign policy, veterans
issues, and a good friend, and I am pleased to welcome him here
today.
We recognize that our colleague has a very busy schedule,
as we all do, and has taken time away from it to testify this
morning, so we will get right to it. Unless anybody has any
pressing questions, there is generally the comity that we do
not--and that is c-o-m-i-t-y, not the other comedy--that we
generally do not ask our colleagues questions. So we will get
to the second panel then.
So without further ado, Mr. Smith, you are recognized for
five minutes.
STATEMENT OF THE HONORABLE CHRIS SMITH, (NJ-04), UNITED STATES
HOUSE OF REPRESENTATIVES
Mr. SMITH. Thank you so very much, Chairman Chabot. And
likewise, a good and extraordinarily effective friend. We do
serve on the Foreign Affairs Committee, as you said, and I have
lost track of the number of times that we have been hand-in-
hand, arm-in-arm, fighting on behalf of victims for human
rights issues. You, as Asia Committee, last year, last
Congress, and Nydia Velazquez, your ranking member, we have
worked very hard. Jacob Ostreicher and some of the other human
rights issues. So it is good to see such good friends serving
in two important positions on behalf of our nation's small
business. So thank you for this opportunity to be here.
You know, I will just note parenthetically, in 1981, my
first assignment was to the Foreign Affairs Committee chaired
by Parren Mitchell and Ranking Member Joe McDade. Small
business. What did I say? Oh, Small Business with Parren
Mitchell and Joe McDade. So I know the good work that you do,
and I appreciate it. We all do.
Let me just say that it has been more than two and a half
years since Super Storm Sandy devastated New York and New
Jersey, and some of my constituents, especially those in hard-
hit Monmouth and Ocean Counties, are still recovering today. It
is not over for them. The nightmare continues.
As many of you are well aware, the federal response was far
from perfect. The Federal Emergency Management Agency (FEMA)
recently reopened all Sandy-related flood claims due to
widespread fraud and a complete lack of oversight over the
National Flood Insurance Program.
Bipartisan delegations, as I think you know--and Nydia, you
were certainly a part of this--from New Jersey and New York,
fought hard to secure critical funding from the U.S. Department
of Housing and Urban Development. Despite huge remaining unmet
needs, HUD chose only to make nearly a billion dollars in Sandy
supplemental funding through the Community Development Block
Grant Disaster Relief Program available to applicants
unaffected by Sandy.
With that in mind, I am here today to shed some light on a
hardship, an emerging problem that really has to be rectified,
now faced by homeowners who were actively encouraged, and in
many cases pressured, to apply for Small Business
Administration Disaster Assistance. They did so not only to
determine their eligibility for home disaster loans, but also
to qualify for additional future relief. Due to a complete lack
of information, however, and disclosure in the loan process,
many Sandy victims now find themselves ineligible--I repeat,
ineligible--for further relief through various grant programs.
To illustrate, and I do have a letter from a constituent of
mine, from Manasquan, who said that they liquidated--it was so
bad, and they wanted to get their home back into a working
order, that they liquidated their retirement savings to pay
down debts taken out to finance their children's college
education, just to qualify for a home disaster loan. This not
only decimated their savings, but also resulted in a
substantial tax penalty of $52,000 for the early retirement
withdrawal. They subsequently applied for relief through New
Jersey's Reconstruction Rehabilitation Elevation and Mitigation
Program (RREM)--that is the HUD program--only to be shocked to
learn--and I mean shocked. When they called my office, they
could not believe that this was happening--of their
ineligibility for a grant reward solely because they had
qualified for and accepted the SBA loan, a circumstance that
they were never informed about during the loan process.
As they emphasized in their letter to me, this begs the
question, if they had been fully informed of potential
consequences, would they have taken the SBA loan? And the
answer is a decided no. With more than 32,000 SBA disaster home
loans approved following Sandy, there is no telling how many
homeowners have found themselves in a similar situation. I am
sure that today's witnesses can speak to the pile of papers
presented to the homeowner during the loan closing, and it will
be helpful to hear whether SBA had any discussions with HUD and
their state grantees on this issue.
While HUD provided guidance in July of 2013, allowing
grantees to provide assistance to Sandy victims who had
qualified but declined an SBA loan, they have done nothing to
assist the families who acted in good faith to immediately
begin the rebuilding process.
Last month, I sent a letter to both SBA and HUD requesting
further guidance, specifically permitting CD, BG, DR grantees
to provide grant awards to Sandy victims who previously
accepted an SBA loan, at least for the purposes of paying down
that loan. I also asked that this matter be referred to the
SBA's Office of Inspector General, to determine what action or
inaction led to so many Sandy victims being left in the dark
regarding this critical information.
This very issue should not have been overlooked by SBA, nor
should it have come as a surprise. Following the Gulf
hurricanes in 2005 and Midwest flooding in 2008, SBA's OIG
released a report entitled, and I quote, ``SBA's role in
addressing duplication of benefits between SBA disaster loans
and community development block grants detailing a serious lack
of communication and agreement between federal agencies
regarding the Stafford Act's duplication of benefit
requirements.''
If the Federal Government itself has failed to understand
the implications of these requirements, how can they be counted
on to explain it to disaster survivors? While SBA has taken
steps to improve its coordination with FEMA and HUD, it has
failed to communicate with the survivors it is tasked to
assist. Homeowners considering home disaster loans must be
fully aware of their potential preclusion from further
assistance. In post-storm chaos, these loans were the primary
option for homeowners needing to rebuild. And again, if you did
not rebuild quickly, the water damage got worse. The black mold
got worse. And when there was no sense of what might be offered
in the future, they grabbed the SBA loan, only to find again
they were precluded from any other further grant--not loan, but
grant--in the future. Those who accepted home disaster loans
should not, as I said, be precluded from future HUD assistance.
Sandy victims made great sacrifices to rebuild and recover,
and unfortunately, did so with incomplete or misinformation
through no fault of their own. No two disasters are the same
and the recovery process will vary based on the level of
federal support provided, but we must not continue to ignore
the lessons learned from these terrible experience. It is
egregious that these Sandy victims have been put--what they
have been put through, and they must be provided an equitable
solution. And again, this on top of the National Flood
Insurance problem debacle just begs the question we have got to
get this right.
I would ask that my letter, Mr. Chairman, be included in
the record, as well as an Associated Press article entitled,
``Buyer's remorse: Loans impacting grant money for Sandy
victims,'' that was put over the wire last December.
Chairman CHABOT. Without objection, so ordered.
Mr. SMITH. Appreciate it.
Chairman CHABOT. Thank you very much. And we thank you
greatly, Mr. Smith, for your testimony. You are welcome to
stick around. If you have other obligations, you are welcome to
tend to those as well, and we will be having our next panel in
just a few moments.
Thank you very much, and we will now move to my and the
Ranking Member's opening statements before getting to the
panel.
A natural disaster exposes us to the worst of nature, yet
in some powerful way it brings out oftentimes the best in
people. Communities ban together, neighbors help neighbors, and
volunteers donate their time and energy, all in an effort to
rebuild and to get their lives back together.
In the last decade, America has faced some of its worst
natural disasters with Hurricane Katrina in 2005 and more
recently, Hurricane Sandy in 2012. While these disasters struck
certain areas of the country, every Member on this Committee
has experienced some disaster within their district I am sure,
because these events do not limit themselves to one region, or
one state, or one congressional district.
In my home state of Ohio, we have had our fair share of
devastating tornadoes and severe floods and a number of other
natural disasters. In the aftermath of any disaster, it is
vital that victims are able to rebuild and return to their
normal lives as soon as possible.
While most individuals are aware of the Federal Emergency
Management Agency (FEMA) and its role in disaster assistance
immediately following a disaster, most are unaware that longer
term recovery assistance is provided by the Small Business
Administration (SBA). In this role, the SBA touches more than
just small firms. The SBA helps homeowners and renters and
businesses and nonprofits by providing various long-term
recovery loans. Given this, it is imperative that the SBA's
Disaster Loan Program operate as efficiently and effectively as
possible. On this Committee, we are tasked with evaluating the
SBA's ability to properly respond to the needs of disaster
victims and ensuring that the SBA is prepared to handle
whatever may be next.
It was clear that following Katrina the SBA's procedures
needed change, but several years later, it appears that
challenges still plagued the SBA in responding to Sandy. It is
disheartening that the SBA is still not where we need them to
be. While we certainly do not hope for another catastrophe, we
know it will happen, and this Committee wants to make sure that
the SBA, the Small Business Administration, is ready.
Today, we will discuss just how the SBA is doing in its
mission to provide long-term disaster assistance. Our witnesses
can hopefully shed light on the SBA's efforts. And as I said
before, we appreciate Congressman Smith's addition to that
attempt. And I want to thank our witnesses for taking time out
of their busy schedules to be here, and we will introduce you
very shortly, and we look forward to your testimony. And I will
now yield to the Ranking Member for her opening statement.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
Natural disasters profoundly disrupt our lives and affect
tens of thousands of households every years. These
unanticipated events leave families and small businesses facing
significant costs when rebuilding. Typically, insurance covers
monetary losses, but that is not always the case. Recognizing
the gap in the market, Congress created the SBA Low Interest
Disaster Loan Program in 1953. Over the past 62 years, SBA has
responded to thousands of natural disasters, including several
major storms. One of the worst was Super Story Sandy in 2012.
When Sandy made landfall, the impact was particularly severe in
New York City. The storm destroyed infrastructure, inundated
thousands of homes with floodwater, and disrupted our vibrant
small business community.
For small businesses in particular, the first few weeks
following a natural disaster are a critical period. It is
estimated that 40 percent of impacted businesses failed to
fully recover. One major reason is the lack of capital to
rebuild. As such, it is critical SBA process and disperse
disaster loans quickly to maximize the likelihood small
businesses will survive. Unfortunately, soon after Sandy
struck, it became clear SBA's response was lacking. As
processing delays mounted, the deficiencies in SBA's management
of the Disaster Loan Program demanded a closer look from
Congress.
In early 2013, the committee Democrats released a report on
the application backlog and processing delays. We found small
businesses waited 46 days to get their application processed by
SBA, a threefold increase over previous Atlantic storms. To
make matters worse, SBA had already been heavily criticized for
its slow response to Hurricane Katrina, and made commitments to
process applications in 21 days.
To build on those findings and fully understand the costs
of the delays experienced by Sandy victims, I requested the GAO
report we are focusing on today. GAO identified a number of
reasons for the problems at SBA, including failing to quickly
staff up, underestimating the number of electronic submissions,
and failing to implement Private Disaster Loan Programs signed
into law four years prior.
In 2008, bipartisan reforms were enacted by this Committee
to help the Agency respond to large disasters by bringing in
the private sector to meet loan demand. This included the
Immediate Disaster Assistance Program, the Private Disaster
Loan Program, and the Expedited Disaster Assistance Loan
Program. It is likely one or more of these programs, if
implemented before Sandy made landfall, could have injected
much-needed capital into the community immediately after the
storm. These private loan programs could have also helped free
up SBA resources by handling the small dollar loan volume. SBA
provided GAO with a number of reasons for its failure to timely
process disaster loans following Super Storm Sandy; however,
they were all self-created. Clearly, significant changes need
to be made in SBA's administration of the Disaster Loan
Program. It is unacceptable that Sandy victims have to wait 46
days or longer to get vital funding to rebuild their
businesses.
I look forward to hearing from today's witnesses on the
findings and recommendations contained in GAO's report.
Thank you, Mr. Chairman, and I yield back.
Chairman CHABOT. Thank you very much.
Thank you. The gentlelady yields back.
We would ask our witnesses if they would come on up to the
table, please. We just have two this morning, and I will
introduce them as they are approaching the bench.
Our first witness on the panel this morning will be Bill
Shear, who is the Director of the Financial Markets and
Community Investment team at the Government Accountability
Office. We look forward to your testimony.
And our other witness will be James Rivera, who is the
Associate Administrator for the Office of Disaster Assistance
at the SBA, the Small Business Administration. In this role,
Mr. Rivera is responsible for all aspects of the SBA Disaster
Loan Program. And as I said, we appreciate you both being here
today, and I will very briefly, and you are probably familiar
with them already, but address our five-minute rule, which is
basically you get five minutes to testify. The lighting system
assists you in that somewhat. The yellow light will come on to
let you know you have a minute to wrap up. The red light will
come on and we would ask you to stay within that time if at all
possible. We will give you a little leeway. So, and we also
apply that same five-minute rule to ourselves, so it is
reasonably fair.
So we will begin with you, Mr. Shear. You are recognized
for five minutes.
STATEMENTS OF WILLIAM SHEAR, DIRECTOR, FINANCIAL MARKETS AND
COMMUNITY INVESTMENT, UNITED STATES GOVERNMENT ACCOUNTABILITY
OFFICE; JAMES RIVERA, ASSOCIATE ADMINISTRATOR, OFFICE OF
DISASTER ASSISTANCE, UNITED STATES SMALL BUSINESS
ADMINISTRATION
STATEMENT OF WILLIAM SHEAR
Mr. SHEAR. Thank you.
Chairman Chabot, Ranking Member Velazquez, and members of
the Committee, I am pleased to be here today to discuss the
Small Business Administration's response to Hurricane Sandy,
the costliest Atlantic storm since Hurricane Katrina in 2005.
Sandy made landfall in the United States on the New Jersey
Shore on October 29, 2012. My testimony today is based on
information in our September 2014 report on SBA's response to
Hurricane Sandy, and includes updates on steps SBA has taken to
address two recommendations from that report.
One recommendation related to better planning for high
volumes of loan applications. Another recommendation related to
evaluating lender feedback to inform SBA and Congress about
challenges to implementing a new loan program and determining
if statutory changes might be necessary to aid implementation.
First, with respect to timeliness. Following Hurricane
Sandy, SBA did not meet its timeliness goal of 21 days for
processing business loan applications. From receipt to loan
decision, SBA averaged 45 days to process physical disaster
loans, and 38 days for economic injury loans.
SBA did not expect early receipt of a high volume of loan
applications and delayed increasing staffing, which in turn
increased processing times. As of September 2014, SBA had not
revised its disaster planning documents to reflect the effects
that application volume and timing could have on staffing,
resources, and forecasting models for future disasters. Since
then, SBA has made updates to its disaster playbook.
Second, with respect to loan approval, withdrawal and
cancellation rates compared to previous disasters, the loan
approval rate after Sandy was not consistently higher or lower,
but the application withdrawal and loan cancellation rates,
which were 32 percent and 38 percent, respectively, were
consistently higher than other disasters.
SBA approved 42 percent of business loan applications after
Sandy. For Hurricane Sandy and for previous disasters, SBA
primarily declined business loan applications because of
applicants' lack of repayment ability and the applicants'
credit history.
Third, SBA has not implemented the Guaranteed Disaster Loan
Programs Congress mandated in 2008, including the Immediate
Disaster Assistance Program (IDAP), a bridge loan program in
which private sector lenders would provide disaster victims
with loans up to $25,000. SBA has not conducted a formal
documented evaluation of lender feedback to establish what
implementation challenges the Agency might face and determine
what, if any, statutory changes Congress could consider.
In June 2015, SBA provided us with documentation of
additional outreach performed in October 2014, where lenders
provided specific feedback regarding current statutory
requirements and proposed program requirements. SBA has yet to
adopt a plan for how and whether it will proceed with IDAP
implementation or document the challenges it would face in
implementing the program.
Chairman Chabot and Ranking Member Velazquez, this
concludes my prepared statement. I would be glad to answer any
questions.
Chairman CHABOT. Thank you very much.
Mr. Rivera, you are recognized for five minutes.
STATEMENT OF JAMES RIVERA
Mr. RIVERA. Good morning, Chairman Chabot, Ranking Member
Velazquez, and distinguished members of the Committee. Thank
you for inviting me to discuss SBA's Disaster Loan Program. SBA
appreciates your strong support of the Agency's disaster
operations.
SBA's Office of Disaster Assistance is responsible for
providing affordable, timely, and accessible financial
assistance following a disaster to businesses of all sizes,
private nonprofit organizations, homeowners, and renters. This
financial assistance is available in the form of low-interest
long-term loans, and since SBA's inception, we have approved
almost two million loans for more than $53 billion.
While SBA is not a traditional first responder agency, we
are on the ground immediately following a disaster. SBA's
primary focus is providing disaster loans as part of the
recovery efforts in coordination with other government partners
at all levels.
SBA offers home loans of up to $240,000 to help rebuild
homes and up to $2 million for nonprofit and businesses of all
sizes. SBA also offers Economic Injury Disaster Loans to small
businesses, agricultural cooperatives, and many nonprofit
organizations who have suffered economic injury caused by
disaster. These loans provide needed working capital to a
business or organization until normal operations can resume.
In recent years, we have made many improvements that have
allowed us to better respond to disaster survivors, including
streamlining application forms and implementing a redesigned
electronic loan application, all of which have led to a more
transparent and efficient application process. Over the past
several years, SBA has seen significant increase in its
electronic loan application activity.
In Fiscal Year 2011, 27 percent of SBA disaster
applications were submitted online using ELA, compared to 83
percent this fiscal year. The continued increase in ELA
activity reflects the improvements made by SBA to streamline
its online application and ensure that disaster survivors have
access to program information.
In 2014, SBA launched a new communication plan referred to
as a three-step process. When seeking SBA disaster loan
assistance, we describe the first step as how do you apply for
a loan? The second step describes how we verify your property
and process your loan application. And the third step is how we
close and disburse and fund your loan.
The new strategy ensures that disaster survivors have a
clearer understanding of steps involved when seeking SBA
disaster loan assistance.
SBA made another improvement in its communications with
disaster survivors in 2014 by increasing direct contacts with
potential disaster applicants. SBA contacts all disaster
survivors referred to by the Federal Emergency Management
Agency to SBA by phone within 48 hours and informs them of
disaster loan assistance and various ways to apply.
By increasing the number of direct contacts with potential
disaster loan applicants, SBA helps ensure that disaster
survivors are aware of all available assistance. SBA has
established an accelerated approval process for both home and
business loans. Based on set criteria, the new RAPID approval
process allows us to expedite processing loans, and it has the
potential to ease the stress on SBA's loan processing
resources.
In coordination with the launch of the new RAPID approval
process, SBA implemented a second regulatory change, which
raised the unsecured loan limit under presidential disaster
declarations from $14,000 to $25,000 on home and business
physical loans, and from $5,000 to $25,000 on economic injury
disaster loans for all declarations. The increased unsecured
loan limit allows SBA to disburse more funds to disaster
survivors faster, which helps speed up the recovery of
businesses that offer critical services in communities that are
in greater need of limited funds.
SBA has also established two separate tracks to process
home and business loans in order to expedite loan processing.
Earlier this month, we released an updated SOP (standard
operating procedure) which is a complete rewrite and brings a
back-to-basics approach of SBA disaster loan-making process.
The refreshed SOP removed redundancies and streamlined the
process for loan-making and disbursements by adding more
flexible underwriting and guiding SBA staff to help businesses
and homeowners. These changes should improve the overall
customer experience for disaster survivors.
In response to Super Stormy Sandy, SBA approved more than
$2.4 billion in disaster loans to help nearly 37,000
homeowners, renters, businesses, and nonprofit organizations
recover and rebuild from disaster devastation. SBA responded to
the needs of residents and business owners by deploying 695
disaster assistance workers and field inspectors to staff 248
disaster recovery centers located throughout the East Coast,
during which time the SBA had more than 152,000 contacts in the
field. Additionally, SBA's disaster customer service call
center in Buffalo, New York, responded to over 212,000 calls
with minimal wait times.
In closing, I appreciate the opportunity to update the
Committee on SBA's Office of Disaster Assistance, and I look
forward to answering any questions. Thank you.
Chairman CHABOT. Thank you.
I ask Ranking Member Velazquez----
Ms. VELAZQUEZ. To go first?
Chairman CHABOT.--to go first.
Thank you, Mr. Chairman.
Mr. Rivera, SBA officials have stated that they will not
begin regulatory work on the Private Disaster Loan Program or
the expedited Disaster Assistance Program until IDAP is fully
implemented. So my question to you is, is there anything in the
Small Business Disaster Response and Loan Improvements as of
2008 that says IDAP needs to be implemented before SBA can work
on the others?
Mr. RIVERA. No, ma'am. There is not anything that stops us
from executing these other programs.
Ms. VELAZQUEZ. Are you aware that the act required the
administrator to issue rules for both of these programs within
one year? If so, why has SBA ignored its legal mandate?
Mr. RIVERA. So my understanding--you know, this guarantee
loan program, we work in conjunction between the Office of
Disaster Assistance and the Office of Capital Access. It is a
guaranteed loan program with preferred lenders and with bank
lenders from that perspective. The thought process behind this
was to first pilot and implement the IDAP program for the
immediate program, and see how that worked within the lending
community. And then after that, you know, after we would take
that process through, we would go to the other two programs.
We have promulgated----
Ms. VELAZQUEZ. You are not answering my question. My
question is why have you not begun the regulatory work on the
Private Disaster Loan Program or expedited it. I understand
that you are saying that IDAP--that you will not do that until
IDAP is fully implemented.
My question to you is, in 2008, we passed legislation
signed by the president, that gave the administrator one year
to implement the program, more so when Congress in 2012,
provided $3 million for a pilot program. What happened to that
money? What did you do?
Mr. RIVERA. So the money part, I mean, it is not
appropriated to a specific program from that perspective. You
know, to be honest with you, Congresswoman, I do not know why
the other two regulatory programs were not implemented. What I
can do is I can check back with the Office of Capital Access,
and we can get back to you for the record.
Ms. VELAZQUEZ. Well, I guess you knew you were coming here,
and you knew that I would be asking those questions because
those are basic fundamental questions. Do you understand what
it means for small businesses in lower Manhattan when Con
Edison's plant blew up and there was no electricity, no power?
Do you know how many children and mothers crossed the
Williamsburg Bridge to come into Williamsburg to get groceries
that they were not able to get because businesses had to shut
down? Do you know what it means for small businesses to get
access to $25,000 to keep their doors open?
Mr. RIVERA. Yes, ma'am. We are well aware of the----
Ms. VELAZQUEZ. And that is why you have not implemented
those programs? These are the tools that we provided you right
after Katrina. That was a real disaster that required a
monumental response and we failed the people. And again, this
time, we provided the vehicles and mechanism.
Mr. Shear, is there is any explanation as to why this
regulation and this program have not been implemented?
Mr. SHEAR. I can only make observations because I cannot
get behind the minds of people at SBA. There was very little
question in mine or others' minds when we had a sit-down with
SBA, actually, on March 1, 2010, that there was a conscientious
effort to at least establish IDAP, and that the others would
probably follow shortly after that. And there seemed to be a
concerted effort that was working across office lines at SBA
involving the Office of Disaster Assistance, the Office of
Capital Access, and the Office of Disaster Planning, which had
been created by the 2008 Act. When we came in this time, there
just seemed to be a complete lack of focus on IDAP or any of
these programs.
And in terms of observations, it just seems from our
standpoint there was less coordinated effort among these three
offices to try to push forward on IDAP or any of these. So
these are observations I can make but I do not really have a
good explanation for why, in a sense, the ball was dropped in
developing these programs and in developing IDAP as the first
program.
Ms. VELAZQUEZ. Mr. Rivera, the GAO report on Sandy's
response said that SBA did not respond as anticipated because
it was challenged by an unexpectedly high volume of loan
applications that it received early in its response to the
disaster and other technological challenges. How is it possible
for the SBA to have this kind of managerial and structural
mishaps in light of the lessons learned from Katrina?
Chairman CHABOT. Before the question is answered, just let
me let you know what is going on. Mr. Hanna has yielded his
five minutes.
Ms. VELAZQUEZ. I thank the gentleman.
Chairman CHABOT. So she will proceed with that. There are
four minutes of it left.
Mr. RIVERA. Okay. Thank you.
So Hurricane Sandy, we are transparent with GAO and with
the Inspector General. We provided the information to them.
What happened in Hurricane Sandy is we had developed the
electronic loan application where people can apply on line.
There are two traditional bell curves. There is a paper
bell curve or paper intake curve on how applications are
received. That usually happens between week five and week
eight, and then there is the new norm, which is the ELA curve,
which happens between week one and week four. So what happened
in Sandy is we did not anticipate getting 20,000 applications
in that first four weeks through the electronic loan
application queue. We have course corrected. We have done
changes to our processes. Our preprocessing department now can
handle that type of activity. Our current activity in the
electronic loan application side is up over 80 percent. So we
have adjusted.
Every disaster is different. Every disaster is unique. We
have never had this type of engagement from an electronic loan
application perspective, so that was the big lesson learned. I
mean, we have been real transparent.
Ms. VELAZQUEZ. Sir, did you run any simulations?
Mr. RIVERA. We have run simulations.
Ms. VELAZQUEZ. Because that is part of the disaster
preparedness.
Mr. RIVERA. Yes. So we have run simulations. We run
simulations all the time. On an annual basis we have, like,
last year we did a mock earthquake in Oakland, California. What
we have been able to do--staffing was not an issue. So if you
go back to Katrina, we had three issues. We had space,
staffing, and the computer system. Those three issues were not
in place when Super Storm Sandy hit. What happened, we had
sufficient staff. We just did not bring them on quick enough
because we did not anticipate this new intake curve that the
ELA has caused us by getting these additional 20,000
applications in week one to week three. Usually, that is when
we are bringing staff onboard. We peaked at 2,500 staff. Our
staffing strategy has core staff of 1,000. We have 2,000
reservists, so we had plenty of staff in reserve. Our mistake,
in hindsight----
Ms. VELAZQUEZ. Let me ask you, we are in the middle of the
hurricane season; right?
Mr. RIVERA. Yes, ma'am.
Ms. VELAZQUEZ. So God forbid something happens. Tell me
what steps are you taking right now that will position you to
respond efficiently and timely.
Mr. RIVERA. So that is what we have been doing the last
couple of years. We have been very aggressive.
Ms. VELAZQUEZ. That is what I heard right after Katrina and
right after we provided all the tools that you needed. When we
conducted hearing after hearing and we heard what problems you
were facing that would not allow for the agency to respond
adequately, we provided those tools, and today, it has not been
implemented.
Mr. RIVERA. Different issues in Katrina versus Sandy. Like
I said before, Katrina was about not having a reserve force. We
have 2,000 reservists. We have a contract that will bring on
additional FTEs if we need additional full-time equivalents. We
did not have space. We had 366 spaces in the Office of Disaster
Assistance prior to Katrina hitting. We now have 2,100 seats.
We have 1,750 seats in our Fort Worth processing center. We
have another 300 seats in Sacrament in a surge capacity. The
third is we could not get enough people on the system at the
time. When Katrina hit, our Disaster Credit Management System
was a year in. Now that system is pretty mature. We are 10
years in. We could not get more than 800 concurrent users on
the system. So think about this. You have 4,500 employees. We
had to go to three shifts in order--in Katrina, in order to
meet the capacity. Today, we can go to 10,000 concurrent users,
and we test that every two years, and my annual report to
Congress shows all the developments we have done from that
perspective. Sandy was a completely different issue in that as
the intake curve on the ELA side was much quicker. And we did
not anticipate it. We acknowledge that. We provided that to
GAO. We provided that to IGDAP.
Ms. VELAZQUEZ. Do you know what the problem is? The problem
is credibility. It is credibility.
Mr. RIVERA. You are absolutely right. We are only as good
as our last disaster.
Ms. VELAZQUEZ. And lack of trust from the American people.
Mr. RIVERA. Well, I do not know how you want----
Ms. VELAZQUEZ. Right after we passed the legislation, you
came back and told us that you were ready and all the systems
were in place, when, in fact, they are not all in place but
two. You promised that the processing would take only 21 days.
You know, people shut their doors forever. You know and I know
that when disaster strikes and we do not provide the assistance
they need in the first three, four weeks, they are going to
shut their doors forever.
Mr. RIVERA. We understand everything you have just said,
Congresswoman. I mean, we clearly take that to heart. We are
working very hard and very diligently, and we appreciate all
the input we have gotten from GAO and the Inspector General's
office, and we have done a lot of process improvements
internally.
Ms. VELAZQUEZ. So this is my ask.
Mr. RIVERA. Okay.
Ms. VELAZQUEZ. I want a letter from the administrator to
this committee as to when these assistance programs, the
Expedited Disaster System Program, the Private Disaster Loan
Program, will be up and running. That is the law and that is
the mandate.
Chairman CHABOT. And I would join the Ranking Member in
that request/demand.
So, and the Ranking Member's time has expired. We thank her
for her questions. Now I will turn to myself for five minutes.
Mr. Rivera, I assume that you are familiar with the
National Response Framework, which superseded the National
Response Plan in 2008.
I note that you are nodding in the affirmative.
Mr. RIVERA. Yes, sir, I am.
Chairman CHABOT. Okay. In 2012, when Hurricane Sandy
struck, are you aware of how the National Response Framework
defined a catastrophic incident?
Mr. RIVERA. We currently do not have a specific definition.
Chairman CHABOT. Well, then let me stop you there and refer
to the definition as it is defined in the framework. It was
defined as any natural or manmade incident, including terrorism
that results in extraordinary levels of mass casualties,
damage, or disruption, severely affecting the population,
infrastructure, environment, economy, national morale, and/or
government function.
Now, given that definition, understanding that the SBA did
not label Hurricane Sandy--did not label Hurricane Sandy a
catastrophic incident when it occurred under Section 12081 of
the Small Business Disaster Response and Loan Improvement Act
of 2008--given that definition of a catastrophic incident, it
seems to me that Hurricane Sandy sure would have qualified. Do
you agree or disagree?
Mr. RIVERA. Chairman, the way we define disasters is by
major and minor. I mean, it was a presidential declaration, so
we defined it as a major.
Chairman CHABOT. Well, I read the definition to you. You
heard me read the definition; correct?
Mr. RIVERA. Yes, sir. I did.
Chairman CHABOT. Okay. Now, you apparently felt that it did
not apply, and that was the framework. It was still in effect
during this time. So does it not seem like a disaster of the
magnitude of Hurricane Sandy, and the Ranking Member saw this
stuff firsthand. I am all the way over in Cincinnati, so we did
not see it like she saw it. She saw it. Does it not seem like
that level of disaster would fit within that definition?
Mr. RIVERA. So from my perspective----
Chairman CHABOT. That should be a yes or no answer. I mean,
do you not agree?
Mr. RIVERA. So from my perspective, we treat every disaster
survivor----
Chairman CHABOT. From your perspective, yes or no? It is a
fairly simple question.
Mr. RIVERA. We do not have that specific definition within
the SBA. I understand it is in the National Disaster Recovery
Plan.
Chairman CHABOT. It is required under the law. I read the
law to you. You nodded in the affirmative that the National
Response Framework had superseded the National Response Plan of
2008, and you were aware of that. And I am not here to
criticize you individually for this, but what we are trying to
do is make sure the SBA is following the law in aiding American
citizens who so desperately during one of these catastrophic
events needs their assistance. And we are not trying to
embarrass anybody; we are just trying to make sure that you
cannot go back and undo or redo what you did not do or did do
back then, but you sure as heck can follow in the future.
But just answer me, as one human being to another, does not
that definition which I read to you, does that not sound like
Hurricane Sandy?
Mr. RIVERA. That is the definition that is in the National
Disaster Recovery Framework. Yes, sir.
Chairman CHABOT. Okay. And that sounds like what happened;
right? I mean, as far as Sandy.
Mr. RIVERA. Yes, sir. It was a presidential declaration,
and it was major.
Chairman CHABOT. All right. Thank you very much. I
appreciate your response.
Mr. Shear, let me turn to you. Or did you want to say
something about what I was just saying? You looked like you
were kind of chomping at the bit.
Mr. SHEAR. No, go ahead. Please.
Chairman CHABOT. We are doing okay? All right, good. All
right.
If the SBA could fix one thing before the next big
disaster, what would GAO place at the top of the list? If you
need two things, I am okay with that, too. But what is the most
important thing that you think the SBA needs to fix to get
ready for the next big one before it hits?
Mr. SHEAR. I am going to stick to our two recommendations
here. It needs an approach that when there is a disaster of the
magnitude of Sandy or worse, to be able to scale up. We have
gotten some material from SBA that indicates they have updated
their playbook. We are not quite sure yet, and I have talked to
James about how we have to be convinced connecting the dots,
that the changes made to the playbook and the disaster planning
documents actually would lead to better preparedness. So I
would say that is one area where we are not quite sure how much
progress the Agency has made in preparing for the next disaster
along this magnitude of Sandy or worse. So that is the first
one.
In dealing with the whole issue of electronic applications,
back in Katrina we recommended expanded availability of
electronic applications for victims of disasters. So there are
advantages to that, but the advantages can dissipate real
quickly if SBA cannot scale up to really serve those victims.
The second part, and this is the part where I really have
to be the most critical based on our evaluation here, I think
SBA really, since 2010, when it looked like there was going to
be movement--it might have been slow movement, but movement
toward establishing IDAP and then the other two programs--is
that it seems like the ball was completely dropped within the
Agency; that there was not this concerted effort, and to the
degree there was one at the time, it completely fell apart. And
it is not just that these programs like IDAP could help serve
victims. I hate to call a disaster an opportunity, but it is an
opportunity and we supported starting with a pilot. It is an
opportunity to see how well such a program or programs could
work when the next major disaster or the next catastrophic
disaster occurs. So those are really the two big things.
Chairman CHABOT. Thank you very much. My time has expired.
Ms. Hahn, the gentlelady from California, is recognized for
five minutes.
Ms. HAHN. Thank you, Mr. Chairman, ranking member.
I am going to ask this question to Mr. Shear. So just
listening to all of this, and being on the Small Business
Committee and kind of understanding the core mission of SBA, it
is really about small businesses, and since a long time ago SBA
was involved in direct lending to businesses, so it sort of
made sense that in the event of a disaster SBA would be doing
these direct loans to families, homeowners, renters. But given
the fact that SBA is not anymore involved in direct lending,
and sort of listening to all this, do we think SBA is really
the right agency in the aftermath of a disaster to be the
agency that is handling these loan applications and these
loans? Would FEMA be better equipped maybe to handle this kind
of financial help to homeowners, renters, families after a
disaster? I am just asking.
Mr. SHEAR. You are asking a really good question, and I
wish I had a really good answer to give you. We have not
evaluated that. I will just say generally that when SBA cannot
do a better job with its whole portfolio, including the direct
business loans, and when there is a call by Congress in
response to what has happened to the victims of disasters--
small businesses and others, the homeowners--to improve things,
it puts the Congress in a very difficult position. FEMA many
times, I do not direct FEMA work but our team's body of work
shows that FEMA has certain challenges in terms of its
responsiveness. But at the same token, SBA is putting you in a
difficult situation, especially when it seems to have trouble
standing up new programs, or at least trying to stand up new
programs that Congress calls for. It just seems like SBA is
especially challenged in this way.
Ms. HAHN. Right. I am new around here, but just listening
to all this, it does not seem like that is the core mission of
SBA, particularly since they, again, have not been involved in
direct lending for decades now.
Mr. SHEAR. Let me just make reference--at the request of
this Committee, we are doing a general management review at
SBA, and we are trying to look at how can SBA be better at what
it does across the board.
Ms. HAHN. Right.
Mr. SHEAR. And it is one that there are certain challenges
that are created.
Ms. HAHN. Right. It just seems like it is only in the event
of a disaster that we are asking SBA to begin processing
applications for loans. Again, to folks that are not business,
it is families, renters, homeowners. That is not what they do
regularly, so I was just curious if this might be better served
in another agency.
But Mr. Rivera, until that task is given to another agency,
I am curious to know, particularly since I come from an
earthquake region in California, and maybe you can explain to
me, in the event of a hurricane or it seems like there's
warning. It seems like we are following the weather and we sort
of know when landfall is and what kind of category it is, I am
assuming, but maybe you can tell me, is that when you begin
hiring the reserves? And then how does that translate to we
still have not figured out when earthquakes are coming. They
happen very fast, and I am a little concerned that you only ran
a model for Oakland, which is a very different city than, say,
Los Angeles. And what is your scenario in terms of an
earthquake, in terms of ramping up quickly staff processing
applications for a major city like Los Angeles?
Mr. RIVERA. So we had the smaller earthquake back in--last
year in Napa. That was a small disaster. Well, it is not small
if it is your business or if it is your home, but we loaned $39
million. The Oakland exercise was just one of many exercises.
We have exercised Seattle. We have exercised Los Angeles. In
1994, we provided $4 billion to disaster survivors in the Los
Angeles community. But you are right. That is the intangible we
have. Most disasters tend to be seasonal.
Ms. HAHN. And do you ramp up staff when there is a warning
of a hurricane?
Mr. RIVERA. So what we do is we----
Chairman CHABOT. The gentleman's time is expired, but you
can answer the question.
Mr. RIVERA. We have a staffing strategy. It is something we
have developed in the last four or five years. Basically, we
have a core staff of 1,000 employees that work year round,
currently between 800 and 1,000. We have 2,000 reservists we
call on a quarterly basis. We ask them if they are available,
if they are not available. If they are not available, we call
them and we ask them why they are not available. But we have
this reserve force in place. We are continuing to train. We are
continuing to keep everybody prepared from that perspective. We
do not have funding to keep 5,000 people at one time on the
rolls, but at the same time, this staffing strategy seems to be
a pretty successful model from that perspective.
Chairman CHABOT. The gentlelady's time is expired.
The gentlelady from American Samoa, Ms. Radewagen, who is
the Chairman of the Subcommittee on Health and Technology is
recognized for five minutes.
Ms. RADEWAGEN. Thank you, Mr. Chairman. I want to thank
both you and Ranking Member Velazquez for holding this
important hearing today to discuss SBA's Disaster Loan Program.
My questions are for Mr. Rivera.
Following the killer tsunami of 2009 in American Samoa that
took over 200 lives, and other natural disasters in the U.S.
territories, what were your biggest takeaways regarding how the
SBA can improve the disaster loan program concerning the U.S.
insular areas?
Mr. RIVERA. So as you mentioned, we do provide disaster
loan assistance in the South Pacific, particularly in Guam and
American Samoa and Palau and some of the islands in that area.
So the biggest challenge we have when we are dealing in the
South Pacific used to be the communication between having an
operation in Texas which processes and disburses all of our
loans in the Fort Worth, Texas office, in relation to the time
zone difference that we have between the South Pacific, which
is a day ahead, compared to the Texas operation. But it seems,
we had a small disaster earlier this year in Palau that seemed
to have worked pretty effectively where we were able to match
the time zone differences and we shifted our staff to be able
to cover the normal day that exists out in the South Pacific in
relation to our process and disbursement centers in Fort Worth,
Texas.
Ms. RADEWAGEN. What is the average rate of approved versus
submitted loans from all past disasters?
Mr. RIVERA. So generally, we run about 50 percent. From our
perspective, we try to make every loan possible. We are much
more aggressive. Our disaster credit box is much more
aggressive than a private sector bank, but we do not want to
provide a loan to somebody that does not have the ability to
repay or has adverse credit. In presidential declarations, we
do have the opportunity to refer these individuals back to the
Federal Emergency Management Agency, and they are generally
able to get a grant of up to $30,000 for unmet needs, and that
is a better fit if they are able to get a grant versus having
to have to repay a loan. But to answer your question, we run
about 50 percent on average.
Ms. RADEWAGEN. What are some of the reasons applications
are not approved and processed?
Mr. RIVERA. Primary reasons are two. One is lack of
repayment ability, and the second one is adverse credit. Even
though we tend to be very aggressive--for example, we score the
entire portfolio when it comes in. Eighty percent of our loans
are to homeowners and 20 percent are to businesses. But if you
have a really low FICO score--back in Katrina, we took 400,000
individuals through the entire process. Since then, we
bifurcate the process where we have the lower credit scores
that are not going to have repayment ability under our
traditional cash flow analysis. We go ahead and decline them
and refer them back to the grant program.
Ms. RADEWAGEN. I see.
Do you find that any of those reasons are specific to
American Samoa or other United States territories?
Mr. RIVERA. So the quality of credit, obviously, there is a
little bit of regionality, but generally speaking, we have--the
statistics are very similar across the country in relation to
American Samoa.
Ms. RADEWAGEN. Thank you, Mr. Chairman. I yield back.
Chairman CHABOT. Thank you very much. The gentlelady yields
back.
The gentlelady from New York, Ms. Clarke, is recognized for
five minutes.
Ms. CLARKE. I thank you, Mr. Chairman. And I thank Ranking
Member Velazquez. And I would like to thank our witnesses for
their testimonies today.
One of the most damaging consequences of climate change is
the increased frequency and veracity of natural disasters.
Super Storm Sandy was a brutal reminder of this fact. Losses
due to Super Storm Sandy topped $75 billion in damages to
infrastructure, homes, businesses, and communities across the
eastern seaboard, not including the unfathomable loss of life
incurred by the storm.
We do not know where or when the next super storm will
occur; only that a storm of that magnitude will inevitably hit
the United States again. Therefore, it is critical that the
disaster response and assistance programs are some of the most
important and significant programs that we can focus on and
vulnerable and distressed Americans require that we get this
right. We must ensure that these programs run efficiently and
effectively and not compound their hardships.
So I want to circle back to some of the questions raised--
well, the main question raised by Congressman Smith, which is a
matter of financial transparency. And part of the challenge
during a crisis like this is that when people are distressed,
they are looking for any help that they can receive. Is there
somewhere within the application process that borrowers are
informed of restrictions or prohibitions on the use of these
funds, and that accepting these funds would trigger a
prohibition on victims receiving federal grant funding? Because
I get the impression, particularly when people are under
stress, that if one vehicle is moving faster than say another,
they are just going to go with that vehicle in order to
survive, in order to recover. If, however, they do not realize
that at some point in time they are not going to be able to
apply to another agency or another entity for support, that may
govern their behavior. Is there something that specifically
within the process, in bold letters, in red ink, indicates to
individuals that if you do this, you will forfeit future
opportunities to make you whole?
I am sorry, that is to Mr. Rivera.
Mr. RIVERA. Okay, thank you.
So we follow the Stafford Act sequence of delivery, which
is a FEMA grant, SBA loans, and any supplemental assistance
behind it. To answer your question, 90 percent of the
applications were processed when the HUD supplemental came
through, so we were 90 percent into Super Storm Sandy when the
HUD funds started becoming available. Since Katrina, the
ranking member mentioned we have a memorandum of understanding
between us and HUD similar to the way we have a memorandum of
understanding between SBA and FEMA. So there is a lot of
transparency between the federal agencies from that
perspective.
Ms. CLARKE. I am talking about the individuals, the
borrowers.
Mr. RIVERA. So the individuals. So what we have done since
Super Storm Sandy, we heard a lot of individuals that did not
want a loan; they wanted a grant. But we what we have done is
we have gone in and we have highlighted and bolded, as you
suggested----
Ms. CLARKE. You are saying since the storm.
Mr. RIVERA. Since then.
Ms. CLARKE. So there are a whole bunch of folks out there,
and I have a constituency that was badly hit. And what I am
trying to say to you is that it is only human when you have
mold growing in your home, you are being told that you are
going to have to elevate your home, that the first vehicle that
offers you some relief, that you are going to take it. But if
within your documentation you indicate to individuals doing
this will, in other words, make you ineligible for other
opportunities, and people know that upfront, then people can
make informed choices.
Mr. RIVERA. Yes, ma'am. We understand. And what we have
done is we do have that information prior to Super Storm Sandy.
Ms. CLARKE. Post?
Mr. RIVERA. Post, we did have that information, but
apparently it was not as clear enough as we could have made it,
so we have made it even clearer from a duplication of benefits
perspective. If you have an SBA loan, that is a sequence of
delivery. That is the option you have to take the loan versus
if there is a grant opportunity behind it.
Ms. CLARKE. I think that we really need to sort that out,
sir.
Mr. RIVERA. Okay.
Ms. CLARKE. I mean, the average American in a crisis
situation is not thinking Stafford Act. They are just not. And
I think that is a bit much to ask that they do. They are
thinking how do I keep my elderly well, how do I keep my
children secure, how do I get my life back together? And
oftentimes, the SBA is the most visible entity on the ground.
You have got a lot of folks out there with jackets on saying,
``We can help you.'' But they do not follow up with, ``But if
you take our help, here are what some of the implications can
be for you.'' And I think that is critical, that level of
transparency.
Chairman CHABOT. The gentlelady's time is expired.
Ms. CLARKE. Thank you, Mr. Chairman.
Chairman CHABOT. You are welcome.
And if you want to make a response?
Mr. RIVERA. Yes, ma'am. We understand. And as I have
mentioned, we will--and we can work with your office, too, if
you want to see what we have done to show the transparency and
how if we provide you a loan, you know, the statute basically
says we have to provide the assistance from that perspective.
Chairman CHABOT. Mr. Shear, did you have something to say
there?
Mr. SHEAR. No.
Chairman CHABOT. Okay, thank you very much.
Okay. The gentlelady's time has expired.
The gentleman from Nevada, Mr. Hardy, who is the Chairman
of the Subcommittee on Investigations, Oversight, and
Regulations is recognized for five minutes.
Mr. HARDY. Thank you, Mr. Chairman, Ms. Velazquez, I
appreciate the opportunity to discuss this today.
Mr. Rivera, it was mentioned in Mr. Shear's testimony that
the initial backlog of loan applications was due to the SBA not
anticipating the loans were to come in such a rapid response.
Did we not take into account that there are 83 percent of all
American adults utilize the Internet?
Mr. RIVERA. Yes, sir, we did. And if I can explain. Eighty
percent of our loans were to homeowners. We have this generic
goal, self-imposed goal of 21 days. We processed those in 24
days, so we had 85,000 applications, 80 percent of them were
homeowners. We did that in 24 days.
What happened is that generally the home track comes in
first and then the businesses apply subsequent to the
homeowners coming in. So we have bifurcated our process now
where we have a separate home track from front to end and a
separate business track from front to end. And I strongly
believe that is going to alleviate any sort of pressure points
when we have businesses--because we are the Small Business
Administration, we need to be sure that we service those
businesses. They will be serviced first in, first out on the
business track, at the same time we are addressing the home
track with the home loan officers, with the home inspectors,
with the business inspectors, with the business. So by
bifurcating that process, we believe that that is going to be--
that will relieve that 40 day clock down and we will be able to
really manage it within the 21 days.
Mr. HARDY. Mr. Rivera, Congress passed the Small Business
Disaster Response Loan Improvement Act in 2008. The SBA was
expected to implement all the provisions required in a timely
manner. Can you explain why the three provisions have not been
fully implemented over seven years later? In my opinion, that
is far too long to take to implement those.
Mr. RIVERA. So the Disaster Guarantee Loan Programs, as I
mentioned previously, we have--and we thank Bill Shear and GAO
for providing us with one of the recommendations, which is
something that we thought--which we responded to but we will
continue to work with GAO to get the responses clear--the
process, the methodology was to first look at IDAP and see how
IDAP works.
So recently, we met back in October 2014. There is a trade
association called the National Association of Government
Guaranteed Lenders (NAGGL). They are basically the 7(a)
lenders. We met with 27 banks, three CDCs, and three lender-
service providers, and we asked what else do we need to do in
order for you guys to play in the disaster scenario? Because we
have done everything from an SBA perspective. Our systems,
between our disaster system and the eTrans system where we fund
our loans on the Cap Access side, that has been put. We
promulgated regs back in 2010 as Mr. Shear mentioned earlier.
We just cannot get the lenders to take the level of risk to
provide this IDAP type of mechanism. There are issues
regarding, you know, from the lender's perspective. And we can
provide you with what the NAGGL response was on the board from
that perspective.
Ms. VELAZQUEZ. Would the gentleman yield just for a second?
So you met with 7(a) lenders and all kinds of lenders. And
when did you learn that they were not receptive?
Mr. RIVERA. So this has been an ongoing conversation we
have had with the lenders since the statute was passed. As a
result of the GAO report----
Ms. VELAZQUEZ. And so what did you do with that
information? Did you send a letter to us to let us know that
you were confronting those----
Mr. RIVERA. Yes. My understanding is we provided a letter
to GAO as part of our response.
Ms. VELAZQUEZ. No, no, no. We passed legislation here. We
wrote the law. So if there are--if we need to make some
adjustment or some fixes or change regulation, we do it here.
But if you do not share that type of information with us, how
do you expect Congress to act?
Mr. RIVERA. Okay. We can----
Ms. VELAZQUEZ. Thank you. And I yield back.
Mr. HARDY. Thank you.
Mr. Shear, in your opinion, if those three other
implementations you had recommended had been in place prior to
Sandy, do you think it would have made a lot of difference?
Mr. SHEAR. I will answer it in two ways.
Mr. HARDY. Okay.
Mr. SHEAR. The first part, and we focused on IDAP just
because the agency came forward with us first in basically 2010
and said they were going to develop a pilot on IDAP. It is the
easiest one to implement. We can do it quickly was the
argument. The idea of a pilot, we always supported it, and a
thoughtful pilot, it could serve victims of really major,
catastrophic disasters. And so it could provide those benefits.
But even a relatively small pilot program would help inform how
programs of this nature can be useful and what types of
adjustments might be necessary to make those programs useful on
a more permanent basis. So that was the major opportunity that
was given up.
Part of the reason to have a pilot is to see how well
something works, and no pilot of any one of these three
programs has occurred. So the answer is it could have been very
helpful, but the opportunity lost was there was nothing in
place to see how helpful it could have been.
Chairman CHABOT. The gentleman's time is expired.
The gentlelady from North Carolina, Ms. Adams, is
recognized for five minutes, and she is the Ranking Member of
the Investigations, Oversight, and Regulations Subcommittee.
Ms. ADAMS. Thank you, Mr. Chairman, and thank you Ranking
Member Velazquez for holding this important hearing. And
gentlemen, thank you for your testimony.
Disaster relief is critically important, as we have heard,
to residents who lose literally everything as a result of a
natural disaster. In my home state of North Carolina, many
residents living on the Outer Banks were faced with limited
routes on and off some of our most popular islands as a result
of the impact of Hurricane Sandy. But in addition to homeowners
who were impacted, there are many individuals who are business
owners who are impacted as well and who worked hard to start
their businesses and to expand them, only to have to rebuild
them after the storm.
Mr. Rivera, my question to you is, according to the
bipartisan task force for Hurricane Sandy, many applications
for SBA Disaster Loan Programs were required to use their
residence as collateral. What percentage of business owners
used their personal residences as collateral to obtain the SBA
Disaster Loan in response to Hurricane Sandy? And how does that
percentage compare to other disasters?
Mr. RIVERA. I do not know the statistics for North Carolina
in relation to how many residences we take as collateral when
we have a business loan, but our policy is when we have a
business loan, we take best available collateral, and if you
are one-to-one, we do not pursue the residence as collateral
from that perspective. We have changed our SOP where we have
loosened up our guidelines where we are just not making the
residence as collateral as the primary source of collateral. If
there is sufficient business assets to get you to a reasonable
place where we are collateralized, we will use the business
assets and bypass the residence.
Ms. ADAMS. So in the event that a business owner uses their
personal residence as collateral and they defaulted, what
options are provided for those persons?
Mr. RIVERA. So looking back, it is a little bit harder for
us to forgive any collateral that we have in place, but I mean,
we can obviously have that discussion on a case-by-case basis
and see what the situation is with each individual disaster
survivor.
Ms. ADAMS. Okay. Mr. Rivera, would you describe the general
process by which a business owner must apply for an SBA
disaster loan, how that compares to the process business owners
had to take for Hurricane Sandy?
Mr. RIVERA. So our current process, it is the same across
the board. What we do is we provide the electronic loan
application. It is a two-page application, front and back. It
is very similar to a credit card application. It is SBA Form 5.
We ask that you fill it out. We ask that you complete the IRS
release form. We do not ask for copies of tax returns. We ask
for a copy of a tax transcript that enables us to get copies of
the tax transcripts from the IRS directly. And then we also ask
that they provide us with any sort of personal information that
they have, like a personal financial statement, so forth and so
on. But we do provide * we have a call center that is open up
in Buffalo, New York. For example, this year, we have taken
about 125,000 phone calls and this has been a low year from a
disaster perspective. And we provide on-the-ground support when
there is a disaster recovery center to meet face-to-face. We
also use our resource partners, our SBDCs, our WBCs, and our
SCORE partners that help us on the ground that can help with
any additional requests we have as far as any additional
documentation that we need.
Ms. ADAMS. So the earlier question that I asked regarding
the numbers in North Carolina, if you could provide those for
me I would appreciate it.
Mr. RIVERA. Yes, ma'am. I will.
Ms. ADAMS. Thank you.
Mr. Chairman, I yield back.
Mr. Chairman, I yield back.
Chairman CHABOT. Thank you very much. The gentlelady yields
back.
The gentleman from New Jersey, Mr. Payne, is recognized for
five minutes.
Mr. PAYNE. Thank you, Mr. Chairman. And to our ranking
member, I appreciate all her hard work over the years on this
Committee.
Mr. Rivera, just to follow up on something my colleague,
the gentlelady from New York, Ms. Clarke, brought up. In my
information in preparing for this Committee hearing, there was
an Associated Press article from December 14, 2014, called
``Buyer's remorse: Loans impacting grant money for Sandy
victims.'' And it talks about a homeowner that applied for your
loan and got the loan, and subsequently, the loan repayment
cost was a bit much for her and she was looking to possibly
apply for some grants from some other area of FEMA, what have
you, and was then told that, well, since you took that loan,
you are ineligible. And I think that is the point that the
gentlelady from New York was making, is that, you know, until
it came down to it and she looked for other avenues, she did
not realize that that disqualified her for any other type of
help. So I think what we are asking is you need to make that
clear to these loan applicants up front that this potentially
disqualifies you from any other grants that you could possibly
receive. I think that is the clearest way to make it--people do
not understand that when they take this loan, it disqualifies
them or they are not capable of accessing other governmental
programs. Okay?
Mr. RIVERA. Yes, sir. Understood.
Mr. PAYNE. All right.
You know, Mr. Shear, in your testimony, you noted that
Super Storm Sandy, the approval rate for business loans was
higher than for Hurricane Ike and comparable to Irene. However,
the approval rate was lower than for Katrina, Rita, and Wilma.
Just in New Jersey, we almost lost approximately 200,000
businesses. Can you shed some light on why the approval rating
varied so much?
Mr. SHEAR. I cannot address your specific question because
it was not like we analyzed basically individual loan
applications, the credit histories of the borrowers, or what
information was submitted from the standpoint of ability to
repay. So we noticed a similar pattern, but I cannot explain
why in this disaster the approval rate was 42 percent rather
than something either higher or lower.
Mr. PAYNE. Okay. All right. Thank you, sir.
Let us see. Mr. Rivera, it looks like of the 14,558
original business loan applications that were submitted, 4,715
were withdrawn. Of that figure, the SBA was actually
responsible for withdrawing almost 3,000. In New Jersey, it is
estimated that small businesses incurred approximately $3.5
billion in damages and the SBA issued $819 million, roughly 25
percent of the need. Can you elaborate on why the SBA would
withdraw an application, and what alternative services were
offered to the small business owners in need of disaster
relief?
Mr. RIVERA. Yes, sir.
In situations where we offer--we will make a loan
commitment to a business, so we give them up to 60 days if they
want to accept the loan commitment. And often, they do not like
the terms of the conditions, and we will go back and we will
try to rework the debt with them to see if we can make the
payment more affordable. Or they will collect insurance and
they will not want to secure their business assets because they
do not want to have an SBA loan, because our debt is debt on
top of debt. It is not to improve working capital. It is not
for new facilities to expand to increase their working capital.
Our debt is basically to take them back to where it was pre-
disaster, or as close to it as we can pre-disaster. So we often
run across situations where somebody will have some insurance
and they will decide based on their insurance recovery that
they do not want to take any additional debt so they will go
ahead and withdraw their application or cancel their
application and they will say they will just go ahead and work
from a smaller insurance recovery than they will with the SBA
loan.
Chairman CHABOT. The gentleman's time is expired. The
gentlelady from New York, Ms. Meng, who is the Ranking Member
of the Agriculture, Energy, and Trade Subcommittee, is
recognized for five minutes.
Ms. MENG. Thank you, Mr. Chairman. Thank you to our ranking
member for your hearing on this issue.
Obviously, this is something that has affected people from
all across the country, but specifically, many of our
constituents in New York. I wanted to get a better
understanding of how the interest rates for disaster loans
compare to other similar SBA small business loans. How are the
interest loans determined and if there is any uniformity of
that process from disaster to disaster?
Mr. RIVERA. So we determine our interest rates on a
quarterly basis. It is a statutory formula. It is based on
treasuries compared to, for example, the 7(a) program where it
is prime plus whatever. We are capped statutorily at 4 percent
and 8 percent. Our current home rate is running around 2
percent--2 percent for no credit elsewhere, 4 percent for
credit elsewhere. And 90 percent of our loans are no credit
elsewhere, so it is the lower rate. On the business side, we
run the two rates of 4 percent and 6 percent, which prime is
at, what, 2-3/4, so it is a point and a quarter over prime from
that perspective. It is a fixed loan, fixed interest rate, and
it is a fixed term also, so we can expand terms up to 30 years
on a no-credit-elsewhere loan.
Ms. MENG. So it is different for homeowners and for small
businesses?
Mr. RIVERA. Yes, ma'am. It is two different calculations
based on the statutory definitions we have.
Ms. MENG. And traditionally, it is lower for homeowners?
Mr. RIVERA. Yes, ma'am. It is generally lower.
Ms. MENG. Compared to small businesses?
Mr. RIVERA. Mm-hmm.
Ms. MENG. Regardless of the earnings of the small business?
Mr. RIVERA. Yes, ma'am.
So we can make loans to businesses of any size, and often,
if it is a large business, they will have a credit-elsewhere
loan, so it will be a 6 percent loan, and it terms out at seven
years, where often they can borrow cheaper with commercial
paper or with their lender themselves. They may be a prime
borrower, and if prime is at 2-3/4 and they are getting a 6
percent rate, they will not want our terms and conditions.
Ms. MENG. Okay. Thank you.
I yield back.
Chairman CHABOT. The gentlelady yields back. And I now
yield to the Ranking Member to make a statement.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
I would just like to ask Mr. Rivera that you submit for the
record a Sandy era loan application that was filled out by an
applicant during Sandy. Not the actual one that you have.
Mr. RIVERA. Yes, ma'am. We can do that.
Ms. VELAZQUEZ. Thank you.
Chairman CHABOT. Thank you very much.
And I want to thank you both for participating this
afternoon. And as we have heard, the SBA serves a vital role in
helping communities rebuild following a disaster. The Committee
understands that is no easy task, but it is of utmost
importance. It is imperative that the SBA continue to improve
its process to ensure that future disaster victims are able to
secure the necessary loans that they need, and the Committee
will continue to monitor the SBA's progress.
And I would ask unanimous consent that Members have five
legislative days to submit statements and supporting materials
for the record. And if there is no further business to come
before the Committee, we are adjourned.
Thank you very much.
[Whereupon, at 12:24 p.m., the Committee was adjourned.]
A P P E N D I X
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Good morning Chairman Chabot, Ranking Member Velazquez, and
distinguished members of the Committee. Thank you for inviting
me to discuss SBA's Disaster Loan Program. SBA appreciates your
strong support of the agency's disaster operations and your
continued leadership in making our country better equipped to
deal with natural and other disasters.
I am James Rivera, the Associate Administrator for the SBA
Office of Disaster Assistance (ODA). ODA is responsible for
providing affordable, timely and accessible financial
assistance following a disaster to businesses of all sizes,
private non-profit organizations, homeowners, and renters. This
financial assistance is available in the form of low-interest
loans, and since SBA's inception in 1953, we have provided 2
million loans for more than $53 billion dollars.
SBA's Role in Responding to a Disaster:
SBA is not a ``first responder'' agency even though we are
on the ground in the immediate aftermath of a disaster. SBA's
primary focus is providing low-interest, long term loans as
part of the recovery effort in coordination with other
government partners at all levels. As part of an overall effort
to assist survivors to get back on their feet, SBA's disaster
home loans of up to $240,000 help local community residents
return and rebuild their homes. Moreover, nonprofits and
businesses of all sizes are eligible for loans of up to $2
million dollars.
Additionally, SBA offers Economic Injury Disaster Loans
(EIDL) to small businesses, small agricultural cooperatives,
and most private non-profit organizations who have suffered
economic injury caused by a disaster. These loans provide
working capital to a business or organization until normal
operations can resume following a disaster.
Preparedness and SBA's Key Improvements to the Disaster
Assistance Program:
SBA has made a number of improvements in recent years that
have allowed us to better respond to disaster survivors. First,
we have streamlined application forms and implemented a
redesigned electronic loan application--which has led to a more
transparent and efficient application process.
Over the past several years, SBA has seen significant
increases in its Electronic Loan Application (ELA) activity. In
Fiscal Year 2014, 79 percent of SBA disaster loan applications
were submitted online using ELA, which was a substantial
increase from previous years--27 percent in Fiscal Year 2011,
36 percent in Fiscal Year 2012 and 55 percent in Fiscal Year
2013. ELA activity continues to increase in Fiscal Year 2015,
currently at 83 percent. The steady increase of ELA activity
reflects the improvements made by SBA to streamline its online
application and ensure that disaster survivors have access to
ELA and program information. SBA's electronic loan application
provides disaster survivors with immediate access to the
disaster loan application and helps to ensure they have access
to much needed disaster funds at the soonest possible time
following a declared disaster.
Second, SBA has taken several steps to enhance its
communication strategy and improve customer service to disaster
survivors. Effective and clear communication to the public
about the availability of disaster loans is critical to ensure
that disaster survivors have access to funds for repairing and
rebuilding homes and businesses at the soonest possible time
after a declared disaster.
In 2014, SBA launched a new communications plan referred to
as ``The Three Step Process'' when seeking SBA disaster loan
assistance: Step 1) How do you apply for loan; Step 2) How do
we verify your property and process your loan; and Step 3) How
the loan is closed and funds disbursed. The new strategy
ensures that disaster survivors have a clearer understanding of
the steps involved when seeking SBA disaster loan assistance.
SBA also made another important improvement in its
communication with disaster survivors in Fiscal Year 2014 by
increasing direct contacts with potential disaster loan
applicants. SBA now calls all disaster survivors referred by
the Federal Emergency Management Agency (FEMA) to SBA within 48
hours and informs them of the availability of disaster loan
assistance and the various ways to apply, including: 1) online
using SBA's Electronic Loan Application (ELA); 2) in-person at
a disaster recovery center; and 3) by mail. SBA supplements
initial phone calls with follow-up calls, emails and in some
cases a letter sent by mail. By increasing the number of direct
contacts with potential disaster loan applicants, SBA helps to
ensure that disaster survivors are aware of the availability of
SBA disaster loan assistance and informed about the various
ways to apply for assistance.
Third, SBA has implemented separate home and business loan
processing tracks in order to mitigate processing delays in the
future. After a disaster, homeowners normally apply for loans
faster than small businesses. Typically, small business owners
first assess the economic damage to their businesses caused by
disrupted supply chains, displaced consumers, structural
damage, inventory loss, and a range of other complex factors.
As a result, businesses tend to apply for disaster loans later
than homeowners and renters. Separate home and business loan
processing tracks helps to ensure that business applicants do
not face long delays as a result of submitting applications
behind a large number of home loan applications which are being
processed in the order they were received.
Fourth, in April 2014, SBA implemented a new regulatory
that allows for a modified approval process (RAPID) for both
home and business loans. In keeping with private lending
practices, SBA recognized that applicants with higher credit
ratings could generally be processed more quickly. The new
RAPID approval process considers the applicant's credit without
the need to complete the entire cash flow analysis and was made
effective for disasters declared on or after April 25, 2014.
Because the RAPID approval process provides an expedited
processing channel for home and business loans, it also has the
potential to ease the stress on SBA loan processing resources
used to process files that require more time to complete.
As part of the regulatory change implementing the new RAPID
approval process, SBA also raised the unsecured loan limit from
$14,000 to $25,000 on home and business physical disaster loans
for Presidential (major) disaster declarations, and from $5,000
to $25,000 on EIDL loans for all declarations. The increased
unsecured loan limit allows SBA to disburse more funds to
disaster survivors faster which not only helps homeowners and
businesses to jumpstart their rebuilding project, it could also
help to speed up the recovery of businesses that offer critical
services in communities.
On July 1, 2015, we released SOP 50 3 8, Disaster
Assistance Program, a complete re-write of our standard
operating procedures which brings a ``back-to-basics'' approach
to SBA's loan making processes. The refreshed SOP collects for
the first time our efforts made over the last several years to
improve the disaster survivor's experience when applying for
disaster loan assistance in several meaningful ways, including
streamlining processes to help facilitate faster loan
processing and disbursements, adding more underwriting
flexibility to extend disaster loan assistance to more
survivors, and helping business owners and homeowners in
communities rebuild and prepare for future disasters. In an
effort to improve the overall customer experience for disaster
survivors, we have introduced new changes to the process and
removed countless redundancies in the new SOP.
Response to Superstorm Sandy
A number of these improvements were made in response to
lessons learned as a result of Superstorm Sandy. The effects of
the devastation caused by Sandy were far-reaching. SBA approved
more than $2.4 billion in disaster loans to help nearly 37,000
homeowners, renters, businesses and non-profit organizations
recover and rebuild.
As reflected in SBA's Disaster Preparedness and Response
Plan, ODA currently maintains 1,750 workstations in the Fort
Worth processing and disbursement center and 350 more surge
workstations in our Sacramento disaster center. During Sandy,
we not only used the Ft. Worth location and our Sacramento
surge space, but also expanded the loan processing footprint to
include 50 workstations at the Buffalo Call Center. At the
height of the response to Sandy, we had 2,451 employees engaged
in disaster response. Additionally, SBA responded to the needs
of residents and business owners by deploying 695 SBA disaster
assistance workers and field inspectors to staff 248 Disaster
Recovery Centers located throughout the East Coast. At these
centers, SBA representatives provided one-on-one service to
disaster survivors and personally met with disaster survivors
to answer questions, explain SBA's disaster loan program and
help complete disaster loan applications and close disaster
loans. As such, during Sandy, SBA had more than 152,700
contacts in the field.
Superstorm Sandy disaster survivors in New York, New
Jersey, Connecticut, Rhode Island, and Maryland--all of which
received Presidential Disaster Declarations--were able to apply
for home and business disaster loans online or in person at any
of the Disaster Recovery Centers throughout the region.
Disaster survivors could also apply for business disaster loans
at any of the 49 Business Recovery Centers (BRCs) run by SBA
with additional assistance from local resource partners such as
SBDCs, SCORE, and Women's Business Centers. Additionally, North
Carolina, Virginia, West Virginia, and Puerto Rico received SBA
Administrative Disaster Declarations, making affected
homeowners, renters, and businesses eligible for SBA disaster
assistance.
Many disaster survivors do not have easy access to
television, radio or the internet. To address these situations,
SBA has a telephone hotline, which also provides language
translation services. For Superstorm Sandy, our Disaster
Customer Service Call Center in Buffalo, New York, responded to
over 212,200 calls with minimal wait times.
In closing, I appreciate the opportunity to update this
Committee on SBA's disaster recovery effort for Superstorm
Sandy and recent improvements to the Disaster Loan Program. We
firmly believe that the reforms we have instituted have enabled
us to be prepared to efficiently and effectively respond to the
needs of our nation's disaster survivors. I look forward to
answering any questions. Thank you.
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