[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]




 
    STORM WATCH: MAKING SURE SBA'S DISASTER LOAN PROGRAM IS PREPARED

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                             APRIL 26, 2017

                               __________
                               
                               

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]              


                               

            Small Business Committee Document Number 115-016
              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
                          DAVE BRAT, Virginia
             AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
                        STEVE KNIGHT, California
                        TRENT KELLY, Mississippi
                             ROD BLUM, Iowa
                         JAMES COMER, Kentucky
                 JENNIFFER GONZALEZ-COLON, Puerto Rico
                          DON BACON, Nebraska
                    BRIAN FITZPATRICK, Pennsylvania
                         ROGER MARSHALL, Kansas
                                 VACANT
               NYDIA VELAZQUEZ, New York, Ranking Member
                       DWIGHT EVANS, Pennsylvania
                       STEPHANIE MURPHY, Florida
                        AL LAWSON, JR., Florida
                         YVETTE CLARK, New York
                          JUDY CHU, California
                       ALMA ADAMS, North Carolina
                      ADRIANO ESPAILLAT, New York
                        BRAD SCHNEIDER, Illinois
                                 VACANT

                   Kevin Fitzpatrick, Staff Director
          Jan Oliver, Deputy Staff Director and Chief Counsel
                Adam Minehardt, Minority Staff Director
                
                
                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Steve Chabot................................................     1
Hon. Nydia Velazquez.............................................     2

                               WITNESSES

Mr. James Rivera, Associate Administrator, Office of Disaster 
  Assistance, United States Small Business Administration........     4
Mr. Hannibal ``Mike'' Ware, Acting Inspector General, United 
  States Small Business Administration...........................     6
Mr. William Shear, Director, Financial Markets and Community 
  Investment, United States Government Accountability Office.....     7

                                APPENDIX

Prepared Statements:
    Mr. James Rivera, Associate Administrator, Office of Disaster 
      Assistance, United States Small Business Administration....    24
    Mr. Hannibal ``Mike'' Ware, Acting Inspector General, United 
      States Small Business Administration.......................    28
    Mr. William Shear, Director, Financial Markets and Community 
      Investment, United States Government Accountability Office.    36
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    None.


 STORM WATCH: MAKING SURE SBA'S DISASTER LOAN PROGRAM IS PREPARED

                              ----------                              


                       WEDNESDAY, APRIL 26, 2017

                  House of Representatives,
               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 11:05 a.m., in Room 
2360, Rayburn House Office Building, Hon. Steve Chabot 
[chairman of the Committee] presiding.
    Present: Representatives Chabot, Luetkemeyer, Radewagen, 
Knight, Kelly, Fitzpatrick, Velazquez, Evans, Brat, Lawson, 
Clarke, Adams, Blum, Espaillat, Comer Schneider, Bacon, and 
Marshall.
    Chairman CHABOT. Good morning. The Committee will come to 
order. I want to welcome everybody here today.
    The Committee is here today to take another hard look at 
the SBA's Disaster Loan Program, a program that has struggled 
in the past responding to major disasters. The Disaster Loan 
Program provides direct loans to help businesses of all size, 
homeowners, and renters build following a federally declared or 
certified disaster.
    But in the wake of past major disasters, such as Hurricane 
Katrina and Hurricane Sandy, the SBA has fallen short. Disaster 
victims have had to wait weeks, and sometimes months, for their 
loans to be processed, and in already desperate and confusing 
times, they have been left confused by the SBA's role within 
the Federal Government's complex and duplicative disaster 
response. Congress and government watchdogs have tried to help 
the SBA improve its Disaster Loan Program through legislation 
and hearings and recommendations. Following Hurricane Katrina, 
Congress passed the Small Business Disaster Response and Loan 
Improvements Act. At our July 2015 hearing on the Disaster Loan 
Program, however, the SBA had yet to implement all the 
statutory provisions and mandates. We will find out today where 
the SBA currently stands on these efforts.
    Then, following Hurricane Sandy, Congress passed the RISE 
After Recovery Act. Our ranking member, Ms. Velazquez, led that 
effort. She played a very important role, and obviously, her 
constituents had been affected and she fought for this for 
quite some time and ultimately was successful in getting her 
legislation approved into law. So we commend her for that. This 
legislation provided the SBA with better tools to more 
efficiently and effectively respond to the needs of disaster 
victims.
    The Government Accountability Office, the GAO, and the 
SBA's Office of Inspector General both represented here on the 
panel today, have issued several recommendations over the years 
advising the SBA on ways to improve loan processing times, 
guard against waste and fraud, and clarify communication 
between the agency and disaster victims.
    Again, the SBA has implemented many of these 
recommendations, but not all. We will have the opportunity to 
check today where the SBA stands on implementing these 
important recommendations. The SBA has made strides since the 
days following Hurricane Katrina. The agency has simplified the 
loan application process while reducing processing and closing 
timeframes, but it is yet to be seen if the SBA is better 
prepared for the next big disaster, and we know one thing, that 
there will be one at some point.
    How is it trying to reduce loan process times? How is it 
ensuring that loan officers still check applicants' eligibility 
and creditworthiness in a timely manner? Is the SBA conducting 
simulations? What kinds of simulations? How is it improving 
post-disaster communications? These are just some of the 
questions before our panel today.
    Unlike past hearings, we are not in the wake of a major 
catastrophe. That provides us a unique opportunity to examine 
the steps the SBA is currently taking to prepare for the next 
one, whenever and wherever it may strike.
    As Administrator McMahon stated in her confirmation 
hearing, ``Disasters do not pick a time, they happen, and we 
need to be prepared for those disasters.'' This Committee wants 
to help the SBA and Administrator McMahon make sure it is 
prepared.
    I want to thank all the witnesses for being here today. We 
look forward to hearing your testimony and I would now yield to 
the Ranking Member, Ms. Velazquez, for her opening statement.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman.
    Natural disasters profoundly disrupt our lives and affect 
tens of thousands of households every year. These unanticipated 
events leave families and small businesses facing significant 
rebuilding costs. Typically, insurance covers monetary losses, 
but that is not always the case. Recognizing the gap in the 
market, Congress created SBA's low interest rate Disaster Loan 
program in 1953. This program serves as a critical lifeline for 
disaster victims by providing a system to both businesses and 
homeowners.
    Over the past 64 years, SBA has responded to thousands of 
natural disasters, including two of the worst, Hurricane 
Katrina in 2005 and Hurricane 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.
    As I saw firsthand, the first few weeks following a natural 
disaster is a critical period for small businesses. It is 
estimated that 40 percent of impacted businesses failed to 
fully recovery. One major reason is the lack of capital to 
rebuild. As such, it is critical that SBA process and disburse 
the disaster loans quickly to maximize the likelihood small 
businesses will survive.
    Unfortunately, soon after Sandy struck, it became clear 
that SBA's response was lacking. GAO identified a number of 
reasons for the problems at the SBA, including failing to 
quickly staff up, underestimating the number of electronic 
submissions, and failing to implement private disaster loan 
programs signed into law 4 years prior.
    These programs aimed at expediting disaster assistance by 
bringing in the private sector to meet low demand have yet to 
be implemented. It was the agency's response to Sandy that 
prompted me to offer the RISE Act. Legislation that reopened 
the disaster-loan filing window for victims of Sandy.
    Thanks to the bipartisan law, more than 1,000 homeowners 
and businesses were able to secure an additional $50 million in 
emergency assistance. The RISE Act also made a number of 
changes to the collateral requirements in the program and 
helped reduce delays in loan processing.
    Since Hurricane Sandy, SBA has made a number of other 
improvements. It has enhanced its planning for disaster 
response, including processing of loan applications and taking 
some action to improve available resources for business loan 
applicants. However, challenges persist. The SBA IG has 
reported that the nature of disaster loans make them vulnerable 
to fraud and GAO has identified the need for better integration 
of disaster loan related resources for users.
    Given that SBA has not had to respond to a large-scale 
disaster in recent years, it is imperative that the agency have 
planning efforts in place to be mobilized for such an 
occurrence. Should this require further legislative action by 
the Committee, I am confident that this is an area where the 
chairman and I can work together again. All members of the 
committee want to ensure these programs operate efficiently and 
effectively and that entrepreneurs harmed by disaster receive 
the assistance they need.
    This hearing will give members the opportunity to examine 
the Disaster Loan program to ensure SBA is prepared for the 
next major disaster.
    I thank the witnesses for their participation and I yield 
back. Thank you, Mr. Chairman.
    Chairman CHABOT. Thank you very much. The gentlelady yields 
back.
    And now I will take just a moment to explain our timing 
rules which a number of you have testified before so you are 
very familiar with. We operate by the 5-minute rule. Each of 
the witnesses gets 5 minutes and then we get 5 minutes. We go 
back and forth on that.
    There is a lighting system to assist you. The green light 
will be on for 4 minutes. The yellow light will come on to let 
you know that you have got a minute to wrap up, and then the 
red light will come on to let you know, hey, I better wrap up. 
So, and we would ask you to stay within that if at all 
possible. We will give you a little flexibility.
    And I would now like to introduce our very distinguished 
panel. Our first witness will be James Rivera, Associate 
Administrator for the Office of Disaster Assistance at the SBA, 
the Small Business Administration. Mr. Rivera has been leading 
this office since November 2009. He began his SBA career in 
1989 as a disaster loan specialist, so he has seen this program 
evolve across several decades. And we appreciate your testimony 
today.
    Our second witness today is Mr. Hannibal Mike Ware. I have 
to say you have one of the coolest names that we have had 
testify before us, and I do not mean the Mike part. Hannibal is 
a cool name. Mr. Ware serves as the Acting Inspector General 
for the Small Business Administration Office of Inspector 
General. The OIG is responsible for the independent oversight 
of the SBA's programs and operations. We look forward to 
hearing from you, Mr. Ware. Thank you very much.
    And our last witness is no stranger to this Committee. He 
has testified many times before us. That is Mr. William Shear, 
who also has a cool first name. He is the Director of the 
Financial Markets and Community Investment team at the 
Government Accountability Office for GAO. We welcome Mr. Shear 
today to discuss GAO's body of work over SBA's Disaster Loan 
Program.
    We want to thank again our very distinguished panel, and 
Mr. Rivera, you are recognized for 5 minutes.

STATEMENTS OF JAMES RIVERA, ASSOCIATE ADMINISTRATOR, OFFICE OF 
       DISASTER ASSISTANCE, UNITED STATES SMALL BUSINESS 
   ADMINISTRATION; HANNIBAL ``MIKE'' WARE, ACTING INSPECTOR 
 GENERAL, UNITED STATES SMALL BUSINESS ADMINISTRATION; WILLIAM 
 SHEAR, DIRECTOR, FINANCIAL MARKETS AND COMMUNITY INVESTMENT, 
         UNITED STATES GOVERNMENT ACCOUNTABILITY OFFICE

                   STATEMENT OF JAMES RIVERA

    Mr. RIVERA. Good morning, Chairman Chabot, Ranking Member 
Velazquez, and distinguished members of the Committee. Thank 
you for inviting me here today to discuss SBA's Disaster Loan 
Program. SBA appreciates your strong support of the agency's 
disaster assistance mission and your continued leadership to 
ensure as a country that we are prepared to meet the challenges 
of future natural disasters.
    I am James Rivera, the associate administrator in SBA's 
Office of Disaster Assistance. SBA provides affordable, timely, 
and accessible financial assistance following a declared 
disaster to businesses of all sizes, private nonprofit 
organizations, as well as homeowners and renters. This 
financial assistance is available in the form of low-interest, 
long-term loans. Since the agency's inception in 1953, we have 
provided over 2 million loans for more than $56 billion.
    Even though SBA is on the ground immediately following a 
disaster, we are not a first-responder agency. Our primary 
focus again is to provide low-interest, long-term loans. As 
part of the overall effort to assist disaster survivors to get 
back on their feet, SBA provides loan assistance of up to 
$200,000 for homeowners to repair their home, up to $40,000 to 
homeowners and renters to repair their personal property. For 
businesses of all sizes and private nonprofit organizations, 
SBA provides up to $2 million to repair/replace damaged real 
estate, leasehold improvements, furniture and fixtures, 
inventory, and machinery equipment. Additionally, SBA offers 
economic injury disaster loans to small businesses, small 
agricultural cooperatives, and most private nonprofit 
organizations that have suffered economic injury caused by 
disaster. These loans provide working capital funds until 
normal operations can resume following a disaster, and SBA also 
provides additional funding for mitigating measures of up to 20 
percent of the total physical loss to help prevent damages from 
similar disaster events from occurring in the future. SBA 
disaster loan funds can only be used for uninsured, 
underinsured, or uncompensated losses.
    Over the past several years, we have made a number of key 
improvements to help us better respond to disaster survivors. 
We have the Committee to thank for some of the most meaningful 
improvements which are a result of legislation this Committee 
has passed. Most recently, the Recovery Improvement for Small 
Entities After Disaster or RISE Act of 2015 included several 
measures that SBA was quick to implement, such as reopening the 
application period for Hurricane Sandy; increasing the 
unsecured loan limit from $14,000 to $25,000; expending 
mitigation assistance to include safe rooms and storm shelters 
that will save lives; and the creation of a disaster loan 
assistance portal that provides disaster survivors with quick 
and easy access to their loan application status, filing 
requirements, document upload, including some electronic 
signature capability.
    The reopening of the application period for Hurricane Sandy 
resulted in over 1,100 approved disaster loans totaling over 
$58.5 million, which is in addition to the original 37,000 
approved disaster loans for a total of $2.5 billion that was 
approved in response to Hurricane Sandy.
    The creation of the Disaster Assistance Loan assistance 
portal changed the way SBA interacts with disaster survivors. 
Prior to the launch of the portal, the primary way for disaster 
survivors was to check the status of their loan application by 
calling the customer service center or going into a disaster 
recovery center. The portal now provides disaster survivors 
with online communication regarding the status of their 
application, access to filing requirements and SBA forms, even 
the ability to electronically sign the IRS Form 4506-T, which 
is needed to verify income for repayment ability purposes.
    To maintain pace with the lending industry online 
advancements, SBA plans to continue enhancing the portal so the 
disaster survivors receive the best-in-class service experience 
possible when applying for a SBA disaster loan.
    The August 2016 Louisiana floods is the largest disaster 
event that SBA has responded to since Hurricane Sandy of 2012. 
As of this month, SBA approved over 17,000 disaster loans for a 
total of $1.2 billion. Following this disaster, SBA responded 
to Hurricane Matthew, which resulted in disaster declarations 
for Florida, Georgia, North Carolina, South Carolina, and 
Virginia. As of this month, the SBA has approved over 7,500 
disaster loans totaling more than $262 million.
    In fiscal year 2016 and fiscal year 2017, we have 
maintained low processing times of 7 days for home and 12 days 
for businesses while responding to periods of increased 
activity for the Louisiana floods and Hurricane Matthew. Our 
goal was 21 days.
    In closing, I appreciate the opportunity to update this 
Committee on SBA's disaster recovery efforts. We firmly believe 
that the reforms we have instituted and continue to institute 
enable us to better prepare to efficiently and effectively 
respond to the needs of our disaster survivors.
    I look forward to answering any questions. Thank you.
    Chairman CHABOT. Thank you very much.
    Mr. Ware, you are recognized for 5 minutes.

              STATEMENT OF HANNIBAL ``MIKE'' WARE

    Mr. WARE. Thank you, Chairman Chabot, Ranking Member 
Velazquez, and distinguished members of the Committee. Thank 
you for the opportunity to be here today and for your continued 
support of the Office of Inspector General.
    As Acting Inspector General, I am proud to represent the 
dedicated men and women of the OIG and to be with you here 
today to discuss our oversight of the Disaster Assistance 
Program.
    OIG conducts and supervises independent reviews and 
investigations relating to SBA programs and supporting 
operations which, as you know, encompasses SBA's Disaster 
Assistance Program. We are keenly aware of congressional 
interest in ensuring this program is designed and managed 
effectively, and we share this concern. We have a dedicated 
audit team based in Fort Worth, Texas, which also is the 
location of SBA's disaster Processing and Disbursement Center, 
PDC. This audit team is aligned internally within the OIG's 
Credit Program's group. Unlike SBA's guaranteed loan programs, 
SBA wholly owns the risk for these direct loans. As I am sure 
we will discuss this morning, this is just one aspect of this 
program that amplifies risk to taxpayers.
    Hurricane Sandy is just one example of the devastation that 
disasters can cause to our citizens and to the economy, though 
every disaster presents its own challenges for victims. As SBA 
responded to Hurricane Sandy, our oversight plans took place 
and our work began to root out fraud, waste, and abuse. Aided 
by vital supplemental funding, our audit division initially 
focused its reviews on timeliness, eligibility, technical 
assistance grants, and early defaults.
    To date, we have issued nine reports pertaining to our 
oversight efforts of SBA's Hurricane Sandy disaster assistance 
and have an additional ongoing review pertaining to loans made 
pursuant to the RISE After Disaster Act of 2015.
    Our criminal investigators also are highly skilled and 
possess an expertise of SBA's programs that adds a critical 
dimension to the government's law enforcement posture against 
fraud. Following major disasters and SBA's initial response, 
our experience has been that fraud, which was perpetuated in 
application or following disbursement, surfaces in earnest 2 to 
3 years after the response. Our perspective is that fraudulent 
loans begin to default or manifest in other schemes that may be 
realized in other responding Federal programs, such as HUD or 
FEMA.
    From fiscal year 2006 through fiscal year 2016, OIG, in 
conjunction with other law enforcement agencies, produced 86 
arrests, 97 indictments, and 96 convictions related to 
wrongdoing in SBA's Disaster Loan Program. To date, these 
investigations have resulted in nearly $8 million in court-
ordered restitution and related recoveries, as well as the 
denial of nearly $4.5 million in loans to potentially 
fraudulent borrowers.
    Systemic improvements are key to reducing fraud and 
delivering efficient services. In recent years, OIG audits and 
investigations have identified specific instances of fraud, as 
well as necessary systemic improvements to reduce fraud and 
provide effective and efficient loan delivery and protect 
taxpayer dollars. The reduction of duplicate benefits is a 
noteworthy example of our work and SBA's corrective action to 
implement systemic improvements.
    In 2010, our office reported over $925 million in community 
development block grants, or CDBG funding, being used before 
SBA loan funds, contrary to the delivery sequence. 
Specifically, about $644 million of CDBG funds was sent to SBA 
to pay down fully disbursed SBA loans, and SBA canceled $282 
million of undisbursed SBA disaster loans. We made five 
recommendations that were primarily geared toward having SBA in 
coordination with HUD and FEMA develop agreements and roles 
consistent with sequence of delivery. In 2014, our Hurricane 
Sandy oversight found SBA's internal controls to prevent 
duplication of benefits were adequately designed and generally 
working as intended, a major improvement from the 2010 
findings. It is clear having effective internal controls is a 
key component to mitigating risks to the taxpayer.
    In closing, our work in the disaster program area will 
continue to focus on ensuring eligible personnel receive timely 
disaster assistance from SBA. The victims of these unfortunate 
and often tragic events deserve nothing less. Similarly, our 
taxpayers must be assured that SBA is being a good steward of 
these funds.
    Thank you for the opportunity to speak to you today. I look 
forward to your questions.
    Chairman CHABOT. Thank you very much.
    Mr. Shear, you are recognized for 5 minutes.

                   STATEMENT OF WILLIAM SHEAR

    Mr. SHEAR. Chairman Chabot, Ranking Member Velazquez, and 
members of the Committee, thank you for inviting me to discuss 
SBA's Disaster Loan Program and actions the agency has taken to 
help ensure timely disaster assistance in response to major 
disasters.
    My statement discusses, first, SBA implementation of 
provisions from the Small Business Disaster Response and Loan 
Improvement Act of 2008; second, the additional improvements 
the agency was planning following Hurricane Sandy; and third, 
SBA's recent and planned actions to improve information 
resources for business loan applications.
    With respect to the 2008 Act, SBA implemented most 
requirements. For example, SBA annually updates its disaster 
response plan. However, SBA has not yet implemented provisions 
to establish three guaranteed loan programs. In 2010, SBA took 
actions to establish a pilot program for one of the programs. 
However, in 2014, we found that SBA had not implemented the 
programs or conducted a pilot because of concerns from lenders 
about loan features.
    After Hurricane Sandy, SBA further enhanced its planning 
for disaster response, including processing of loan 
applications. In our 2014 report, we found that while SBA 
encouraged electronic submission of loan applications, SBA did 
not expect early receipt of a high volume of applications after 
Sandy and delayed increasing staffing. SBA also did not update 
key disaster planning documents to adjust for the effects of 
such a surge in future disasters. We recommended that SBA 
revise its disaster planning documents to anticipate the 
potential impact of early application submissions on staffing 
and resources. In response, SBA updated its planning documents 
to account for such impacts.
    SBA has taken some actions to enhance information resources 
for business loan applicants, but could do more to improve its 
presentation of online disaster loan-related information. In 
2016, we reported that SBA took or planned to take various 
actions to improve the Disaster Loan Program and focused on 
promoting disaster preparedness, streamlining the loan process 
and enhancing online application capabilities. However, we 
found that SBA had not effectively presented information on 
disaster loans in a way that would help users efficiently find 
it and not consistently describe key features and requirements 
of the loan process in print and online resources or clearly 
define financial terminology used in loan applications. Absent 
better integration of and streamline access to disaster loan-
related information, loan applicants may not be aware of key 
information and requirements for completing the applications.
    We made three recommendations based on our findings. In 
January 2017, SBA indicated it was working on a glossary for 
the application, which is a glossary of financial terms. We 
plan to follow up with SBA about the other two open 
recommendations which have to do with providing accurate, clear 
information in an easy-to-access way.
    As always, it is a great pleasure and privilege to discuss 
our work with the Committee. I would be happy to answer any 
questions.
    Chairman CHABOT. Thank you very much. I will recognize 
myself for 5 minutes to begin the questioning and, Mr. Shear, I 
will start with you if I can.
    What would you say is the Disaster Loan Program's biggest 
or most significant weakness?
    Mr. SHEAR. I will give two answers for that, which is one 
where I have incomplete information and one where I have more 
complete information.
    Chairman CHABOT. Okay.
    Mr. SHEAR. SBA has gotten better and I will refer to one 
part in the 2008 Act, which was to provide regional marketing 
and outreach, to have that capacity. SBA has gotten better at 
providing information to disaster victims and to tailor it to 
certain situations. So that was one part of the improvement. It 
took SBA some time to do that.
    And as we saw in our most recent report, there has been 
some improvement in conveying information. But what we find is 
that SBA, especially its online resources--the business loan 
applicant is in a very challenged position--and the online 
information just is not provided in a clear, concise manner 
that the business applicants can really use and use 
effectively. And to some degree it even affects the types of 
assistance the Small Business Development Centers can provide. 
So that is the one that stands out from our open 
recommendations.
    I will turn to----
    Chairman CHABOT. Can you make the other one quick? Because 
I have a couple questions.
    Mr. SHEAR. Yes. Thank you. Thank you. Okay.
    The other one that I will mention is that the planning has 
improved and the ability to forecast, such as how much surge 
capacity, things of that nature, have improved and have 
improved since Sandy. But I say the thing that could keep me up 
at night, especially when you go through long periods without 
major disasters, is that, well, the reserve corps is such. Will 
they be up and ready and ready to assume things? I know that in 
Sandy there was a training that was going on after the disaster 
struck of the cadre, and that affected the efficiency of 
providing assistance to those. And so that stands out for me as 
well.
    Chairman CHABOT. Thank you very much. I appreciate it.
    Mr. SHEAR. Thank you.
    Chairman CHABOT. Mr. Ware, let me move to you next, if I 
can. What would you say is the top priority, the most important 
thing that the SBA should do to ensure that they are prepared 
for the next big disaster? And your mic, if you could. Thank 
you.
    Mr. WARE. Mr. Chairman, I believe at this point the body of 
work that our office has done has shown that the biggest thing 
that they could do right now is to have properly tested 
processes and properly trained personnel or loan officers. And 
while they have made great strides in this area, we still feel 
that they need to do a lot more to be sure that they are more 
ready. So they do their simulations and they, of course, in 
those simulations they determine how many people they will need 
in terms of the surge. But our work has found that the 
volunteer corps that they would be bringing in would not 
necessarily be trained sufficiently enough to just hit the 
ground running to be able to effectively process the loan 
applications in a way to make sure that we cut down on errors 
and also to make the process a lot faster.
    Chairman CHABOT. Okay. Thank you very much.
    Mr. Rivera, let me go to you next, if I can. The SBA, of 
course, relies upon Small Business Development Centers, the 
SBDCs. Could you discuss the role that they play in the wake of 
a disaster? You know, how important are they? Are there any 
things that we need to improve on there?
    Mr. RIVERA. So thank you, Mr. Chairman.
    The SBDCs play a pivotal role as all resource partners do, 
whether it is the women business centers, SCORE, or SBDC. From 
our perspective, where they are able to help us is whether we 
approve or whether we decline a disaster survivor, an 
applicant, we refer those to the local district office that 
enables a SBDC partner because we are a snapshot lender. So we 
are looking at one point in time when they apply and even if 
somebody is declined and we refer them back to an SBDC, that 
SBDC can work the credit side where they can help them maybe 
have more repayment ability and fix their debt. They may have 
been a little bit on the tipping point when the disaster struck 
that resulted in a decline. So we often find when they go to 
the resource partners that they are able to get another--the 
propensity to approve a loan is much higher from that 
perspective.
    Chairman CHABOT. Thank you very much. My time is expired.
    The Ranking Member is recognized for 5 minutes.
    Ms. VELAZQUEZ. Thank you.
    My first question is addressed to both Mr. Ware and Mr. 
Shear. You know, 2005 was Katrina, and then we saw 2012, Sandy. 
Yet, here we are today discussing preparedness, protocol, 
simulation, training of its reserve staff. I just want to hear 
from the assessment, the evaluation that you have made, that if 
we were faced or confronted with a large-scale disaster today, 
like Sandy, that you feel you have done everything within the 
law, that you have everything in place to immediately respond. 
This is about the viability of small businesses. Do not tell 
me--and we know because the numbers tell the story--that if we 
do not provide assistance within the first 4 weeks, for the 
most part a lot of those businesses will have to shut their 
doors. So when disaster strikes, the federal government has a 
responsibility.
    As the chairman mentioned, what is the biggest challenge 
that we are confronting today? And based on Katrina, we 
provided tools for SBA to be able to immediately respond. I 
just want to hear, Mr. Rivera, again, why is it that SBA has 
not implemented the three guaranteed disaster loan programs? 
What type of outreach, Mr. Shear, have you seen? I know that 
you made reference that they have made some outreach to the 
financial institutions. I just want to know what isn't working? 
What is impeding you from getting those programs up and 
running? And if we need to do any fixes, we need to hear from 
you. So, please.
    Mr. SHEAR. Let me start with the private loan programs. 
Early in 2010, we met with SBA to talk about its action with 
respect to those loan programs and what is called IDAP, in 
particular. And we met with James; we met with Steve Smith, the 
head at the time of the Planning Office; and with Grady 
Hedgespeth, leader from Financial Assistance in the Office of 
Capital Access. What was clear to us is that something was 
initiated to try to stand up a pilot and the anticipation was 
the Gulf Coast was an area where they had gone through the 
experience and you had lenders that also had experience with 
the GO loan program. You had lenders that had experience with a 
State-run program.
    That was a good place to start to try to find lenders that 
might be interested in participating in such a program, and it 
was in an area that is prone for major disasters. So there 
might actually be an opportunity to exercise that pilot. And 
there was some interest that was expressed in taking that to 
the ideas that once something was stood up, that is, in the 
Gulf Coast, could be stood up someplace else; it was clear that 
shortly after that, the process ended. I hate to say it because 
it was an effort, and, as you say, I alluded to an effort with 
the advanced Notice of Proposed Rulemaking. But rather than 
taking what had been initiated in 2010, let us reach out to 
lenders who might be most prone to be willing and able to stand 
up such programs.
    Ms. VELAZQUEZ. Okay.
    Mr. SHEAR. They abandoned that effort.
    Ms. VELAZQUEZ. So Mr. Rivera, would you please react or 
respond to Mr. Shear's assessment?
    Mr. RIVERA. So thank you for that question. That is 
something that we have been working on, as you know, for years. 
We simply just have not been able to get any lenders to 
participate in the program. It is just not a good fit for the 
private sector. I mean, the last time when I was here a couple 
of years ago, we had a very similar discussion, the same 
discussion, and we provided letters to both the chairman and 
the ranking member here.
    To cut to the chase, we can develop the program. We can 
establish a program. But if the lenders just are not genuinely 
interested--and that was the case during Superstorm Sandy. We 
tried to pilot some lenders to participate and they were just 
genuinely not interested in providing because of the risk 
associated with making a disaster loan, you know, in reference 
to their portfolio.
    Ms. VELAZQUEZ. So maybe we might move to direct lending 
from SBA.
    Mr. RIVERA. To do what? I am sorry.
    Ms. VELAZQUEZ. Direct lending.
    Mr. Ware?
    Chairman CHABOT. The gentlelady's time is expired, but you 
can answer the question.
    Ms. VELAZQUEZ. Thank you.
    Mr. WARE. Yeah, the work that we have done in that area, 
and I would like to say that we still have open recommendation 
relative to implementing those private loan programs, but we 
are aware that SBA has provided in writing reasons to this 
Congress as to why they have been unable to do that.
    But I will say this, because there were several parts of 
your question and what we were talking about is everything in 
place to adequately respond. And I would say in fairness that 
our reviews have found, the more current ones, that SBA is in a 
better position now than they have been with the other storms 
in terms of steps that they have taken. We cannot say for sure 
whether they would be ready because of the uniqueness of every 
single disaster that comes along. I am a disaster survivor 
myself being from the Virgin Islands. I have lived through a 
few of them, every one of them different. And in that regard, 
it is tough for us to say that.
    And plus, as an audit organization, we are very leery to 
make that type of statement. But they are more prepared than 
they have been, but like I said before, still with the training 
of that staff that needs to come in and be able to hit the 
ground running. Absent that, I believe that we are going to 
find some of the same problems in terms of timely delivery of 
services.
    Ms. VELAZQUEZ. Are you telling me that the reserve staff 
are better prepared without being trained on updated 
procedures?
    Mr. WARE. No. I am telling you that absent the training to 
the reserve staff that they will have some of the same issues 
that we have seen in the past.
    Chairman CHABOT. Okay. The gentlelady's time is expired.
    The gentleman from Pennsylvania, Mr. Fitzpatrick, is 
recognized for 5 minutes.
    Mr. FITZPATRICK. Thank you, Mr. Chairman.
    First, Mr. Ware, regarding fraud schemes, you started to 
address this in your opening statement, as we know in law 
enforcement, technology can tend to change criminal schemes, 
fraud schemes. Is there anything you are seeing as far as 
emerging schemes that agents have not previously encountered?
    And Mr. Rivera, one of the big issues for disaster loan 
recipients is the timeliness as far as processing of loan 
applications. What is the current processing time? And what, if 
anything, is being done to improve that?
    So if Mr. Ware could answer first. Thank you.
    Mr. WARE. Thank you for your question. So in response to 
are there any newer fraud schemes that our agents have been 
encountering, I would have to say not at this time. Not in what 
I have seen or what they have prepared me for. We are seeing 
the same old in terms of unauthorized use of loan proceeds, 
overstatement of financial losses, and especially claiming that 
your secondary residence was indeed your primary residence. So 
that type of thing.
    Mr. FITZPATRICK. Is the number of pending investigations 
law enforcement sensitive or is that something you can----
    Mr. WARE. I could tell you what the number of pending ones 
are. We currently have 32 pending investigations.
    Mr. FITZPATRICK. Thirty-two?
    Mr. WARE. Yes.
    Mr. RIVERA. So if I could just real quickly take you from 
Katrina, we processed 385,000 applications. It was not our best 
day. From a home perspective, it took us an average of 74 days 
for homeowners and 65 days for businesses. In Sandy, we did 
123,000 applications. For homeowners, it took us 24 days; for 
businesses, it took us 40 days. The most recent disaster we had 
in Louisiana, we did 66,000 applications last fiscal year; 8 
days for homes, 12 days for businesses. So the trend is in the 
right direction but what--you know, I hate to say this, but 
until we are able to process a like type of disaster for Sandy 
or Katrina, we are going to continue to have these same 
discussions over and over again. We have a lot of very positive 
improvements that have been done. We just need to stress test 
it, as much as I do not want there to be a big disaster. We are 
as prepared as we have ever been before. We learn from every 
disaster. Our technology, you know, and I can provide you a 
one-pager or an individual briefing from the perspective of how 
we continue to improve.
    For example, in Louisiana, because the water was up, we 
would generally wait 5 to 6 to 10 days to go on the ground. We 
did desktop verification, so we changed a 5-day process to 2 
days. We do a lot of these kinds of improvements from that 
perspective and know that the internal controls that we are 
keeping in place are good and secure from that perspective.
    So I sit here a little bit frustrated because we are 
talking about Katrina from 2005 and Sandy from 2012. We are in 
2017. And not to get cute here, but can you imagine an iPhone 
from 2005 or 2007 to 2017, now? I mean, we really improved a 
lot of our process. But you know the proof is in the pudding. 
It is the ability to have a like-kind disaster from that 
perspective.
    Mr. FITZPATRICK. The agency overlap during a natural 
disaster situation, how does SBA handle that situation?
    Mr. RIVERA. I am sorry, the agency overlap?
    Mr. FITZPATRICK. So there are multiple agencies that will 
be responding in the event of a natural disaster.
    Mr. RIVERA. So we have coordinated very well. Katrina, the 
big issue we had was HUD, CBDG came in. We did about $11 
billion in loans. They paid down about $6 billion. That is what 
the acting inspector general was referencing. We now have a MOU 
with HUD. So from a sequence of delivery, whoever is in front 
of you, you have to address that benefit so there is no 
duplication behind it. So we addressed that back in 2005.
    Most recently, in Superstorm Sandy, we did not have any 
duplication of benefit issues from our perspective. We have a 
very strong communication with FEMA. We have a computer 
matching agreement where our systems talk back and forth 
between themselves, you know, all the time. And from HUD's 
perspective, we give them a complete download of all the 
information that they request of who has gone through the SBA 
queue.
    Mr. FITZPATRICK. I yield back.
    Chairman CHABOT. The gentleman yields back.
    The gentleman from Pennsylvania, Mr. Evans, who is ranking 
member of the Subcommittee on Economic Growth, Tax, and Capital 
Access is recognized for 5 minutes.
    Mr. EVANS. Thank you, Mr. Chairman.
    Mr. Ware, what recommendations do you have to increase 
cooperation between the SBA, HUD, and FEMA in order to reduce 
the potential for duplicity while ensuring that the potential 
borrowers are not thwarted in their quest to secure disaster 
loans?
    Mr. WARE. Thank you for your question. We made several 
recommendations in that regard.
    As Mr. Rivera was just saying, they were very serious about 
those recommendations and they improved their systems so much 
that when we went in in 2014, we found that that type of 
overlap was not happening and that the proper controls were in 
place to mitigate that type of risk. I am not sure if you are 
talking about in terms of the timing of delivery meaning if 
somebody gets this loan maybe they cannot get that grant.
    Mr. EVANS. Right.
    Mr. WARE. But that is outside of those systems and how they 
are set up and the internal controls.
    Mr. EVANS. Could you expand upon the point you mentioned in 
your testimony about the SBA does not limit the proportion of a 
borrower's gross income on the service debt?
    Mr. WARE. Right. So on SBA's normal loan programs the 
maximum debt would be at 40 percent. That ratio would be at 40 
percent. Of course, disasters are something a little bit 
different, so they move to 60 percent for businesses. But on 
the home side, they are able to override regardless of what 
that ceiling is. So there is none. So our reviews have found 
some cases where there is 100 percent and the loans have still 
been granted. From our perspective, what happens with that is 
you are creating loans that more than likely cannot be repaid 
because the people could not afford to have those loans when 
they are at 100 percent or at these high things. And those are 
the type of loans that we saw that defaulted more often than 
some of the others. So from that perspective, to us we would 
prefer if they had some type of ceiling that would serve to 
prevent that.
    Mr. EVANS. Mr. Shear, in your report you noted that some 
applicants and even SBDCs were confused by financial 
technology. How can the SBA best adjust this, especially when, 
generally speaking, they never know when the next disaster will 
hit?
    Mr. SHEAR. One of the recommendations that we made, which 
is quite, I think, simple and straightforward, is to create a 
glossary of financial terms. So especially for the smallest 
business owners that might not be familiar with financial terms 
used by SBA, it gives a guide that they can use to help them 
navigate the application process. So SBA has taken some action 
to move forward on that. We look forward to seeing it.
    The other recommendations we made really speak to the issue 
as far as, especially the online resources, how difficult it is 
to figure out the process and what the business applicants 
should expect as part of that process.
    Mr. EVANS. I yield back the balance of my time. Thank you, 
Mr. Chairman.
    Chairman CHABOT. Thank you very much. The gentleman yields 
back.
    The gentleman from Kansas, Dr. Marshall, is recognized for 
5 minutes, and he may want to introduce someone we have in our 
audience today. His son is here with us, so.
    Mr. MARSHALL. Yeah, thanks, Mr. Chairman. My oldest son, 
Victor, is here today visiting. Thanks for joining us.
    Chairman CHABOT. We welcome you.
    Mr. MARSHALL. So thank you, Mr. Chairman.
    I briefly got to share that before the meeting started that 
in Kansas recently a catastrophic event in my district, 600,000 
acres of excellent grassland was burned, torched; maybe 10,000 
head of cattle lost; thousands of miles of fence were lost. 
Evidently, it is not going to qualify as a Federal disaster, 
and my question is from the SBA standpoint, and I am sure it is 
obvious to everybody in the room that farming is a business, 
raising cattle is a business, and basically, a lot of small 
businesses. What does it take for you all to be able to step 
into a situation like this?
    Mr. RIVERA. Congressman, thank you for your question. In 
this case, SBA does not have authority for farmers and ranchers 
and ag-businesses. We can help a farmer for their primary 
residence or we can help a farmer in a situation where it is 
non-ag type of items. So we would have to work with the USDA 
and with Farm Services.
    Mr. MARSHALL. Well, thanks for that.
    A question I often ask my employees is, what can we do for 
you to help you do your job better? What do you need from us?
    Mr. RIVERA. So Congress, you guys have been phenomenal from 
my perspective. I mean, the RISE Act, there are a lot of really 
good provisions.
    Chairman CHABOT. Would you like to say that again?
    Mr. RIVERA. Sorry, I do not think that is one of my talking 
points.
    So the RISE Act a couple of years ago, we have always had a 
challenge, especially in your part of the country where you 
have tornadoes, right? This year we are on track to have twice 
the amount of tornadoes than we have ever had historically. The 
weather patterns are just bizarre as always. We were never able 
to fund a storm shelter for somebody, so if a tornado came 
through and wiped out a home, we could not repair/replace, we 
could not provide funding, disaster funding, for that storm 
shelter. Now we can as a mitigating measure as a result of 
that. Unless you have lived through these kinds of situations, 
you really do not understand the meaning of saving lives, and 
so this bill, I mean, the RISE Act was part of that type of 
meaningful assistance that we can provide from that 
perspective. And there are several other tools that we have 
used historically. Increasing the unsecured limit from $14,000 
to $25,000; we can now disperse funds much faster. That has an 
expiration date on it. It is a 3-year limit. So there are some 
of those types of items that we continue to look at from that 
perspective.
    Mr. MARSHALL. Mr. Ware, the same. What can we do to help 
you do a better job?
    Mr. WARE. The same type of things right now that this 
Committee does in terms of allowing us to come up and talk 
about our issues and to talk about the type of work that we are 
doing, having that open dialogue keeps the body informed and 
keeps us also knowing what your expectations are and the type 
of work that we should be doing. And we appreciate that. That 
is happening right now.
    Mr. MARSHALL. Okay. Mr. Shear, anything to add?
    Mr. SHEAR. I always have to commend this Committee. We 
always know there is a political divide in any Committee, but 
the idea that both sides of the aisle on this Committee work so 
constructively with us and just recognize what role we play as 
a nonpartisan fact-based agency and having hearings like this, 
which the idea is that we cannot force any agency to do 
anything, but by having the oversight that this Committee 
performs I think is just a tremendous service and really helps 
us better serve the American people.
    Mr. MARSHALL. Well, Mr. Chairman, I will yield back the 
rest of my time. And congratulations, it sounds like you guys 
have done some great work before we got here.
    Chairman CHABOT. Well, we are trying. Thank you. Thank you 
very much.
    The gentleman from Florida, Mr. Lawson, who is the ranking 
member of the Subcommittee on Health and Technology, is 
recognized for 5 minutes.
    Mr. LAWSON. Thank you very much, Mr. Chairman. I know some 
of this might have been addressed while I was coming. But in 
2016, Hurricane Hermine and Hurricane Matthew hit my district 
in Florida pretty hard for a span from Jacksonville to 
Tallahassee. Tallahassee, as a district, was left with data 
outage for over a week for some homes and businesses. Mr. 
Rivera, how quickly is SBA--and I heard you speak up a little 
bit earlier--was able to provide support for small businesses 
with what you are saying happened in Louisiana after a natural 
disaster, particularly micro businesses that operate with five 
or less employees?
    Mr. RIVERA. So our process right now is once the disaster 
is declared we are on the ground immediately. The big 
achievement that we had post-Sandy, and this is something that 
Bill Shear referenced to, we used to have an electronic loan 
application that had 80 screenshots. We reduced it to 20 
screenshots. We did some research and we found out that most 
people dropped off at screenshot 22 or 23. There are two 
questions per screenshot. Since we have had that retooled, the 
electronic loan applications, we actually have a 90 percent 
response rate. So once we receive that application online, what 
that enables us to do is credit score and then we are able to 
get that response out pretty quickly. The footprint of a 
disaster is always unique. In situations where we cannot get on 
the ground, for example, with homeowners, we now do a desktop 
verification instead of going on the ground. So we continue to 
try to make these types of enhancements to expedite the process 
from that perspective. And then we do the same on the 
disbursement side. Once we get the loan closing documents, we 
will disburse the unsecured limit up to $25,000 within 5 days.
    Mr. LAWSON. Okay. And my question also centered around, 
again, in 2010, you know, I served on a task force for the BP 
oil spill which had spilled directly south of Tallahassee and 
my district. Although it is not a natural disaster, it 
certainly impacted businesses along the coastline in the 
district. What resources does the SBA have available for small 
business and disaster other than natural disasters? Obviously, 
having insurance helps the business, but I am wondering what 
tools, if any, does SBA have to help these businesses, many of 
which are still in recovery?
    Mr. RIVERA. So post-BP oil spill, we were able to declare 
the disaster from the middle of Louisiana, the parish, all the 
way over to pretty much the middle of the western part of 
Florida. We provide an economic injury disaster loan. So what 
this does is this pays the fixed operating expenses for the 
business during that period of time when they are recovering 
from that disaster period, to try to help them return to 
normal.
    Mr. LAWSON. Okay. And Mr. Shear, I have one question for 
you. Based on your knowledge, if another major disaster 
occurred, which could happen at any time, has SBA done enough 
to adequately serve the needs of those affected?
    Mr. SHEAR. It is a relative question. How well is SBA 
compared with some other standard? The program has improved 
over the years. I remember being in New Orleans right after 
Katrina. It was a terrible response by this program, and so I 
have seen the progression over time. I have seen the 
improvements that have occurred in response to the 2008 act. I 
have seen certain improvements from what we identified with 
planning in response to Sandy. So the program has improved.
    But I will come back to a couple of things I mentioned to 
the chairman. There still is the question, if we do not have 
these private loan programs, what are we going to do to try to 
assess certain needs that occur in very major disasters? You 
know, there can be lessons learned from the GO loan program 
which was introduced in the Gulf Coast after Katrina and the 
actions that the State of Louisiana took to establish grant and 
loan programs, as well as some of the support at the local 
level in New York. So there are certain lessons to be learned 
from that.
    And then the other part that I mentioned to the chairman is 
the idea that the planning is very good, but there really has 
to be a commitment that when the planning models say it is time 
to ramp up, the agency ramps up and it has the cadre of the 
Reserve Corps up and ready to really respond. So there are some 
improvements that can occur, but, generally, SBA is better 
equipped to deal with major disasters.
    Mr. LAWSON. I yield back, Mr. Chairman.
    Chairman CHABOT. Thank you very much. The gentleman's time 
is expired.
    The gentleman from Kentucky, Mr. Comer, is recognized for 5 
minutes.
    Mr. COMER. Thank you, Mr. Chair.
    My questions are for Mr. Ware. What did OIG recommend to 
SBA to make sure it verifies borrowers are eligible and 
creditworthy?
    Mr. WARE. Thank you for the question by the way. We have 
made several recommendations in that regard, and again, in many 
ways, Mr. Rivera and his staff have been very attentive to 
these recommendations and they have resolved the great majority 
of them. But they had to do with, in a critical environment 
like a disaster, being quick with their response in terms of 
making sure that people are trained, like I spoke about before, 
to be able to make these decisions. What happens is that they 
have a system that can either approve or disapprove at the 
beginning. After that the loan officer or supervisor can make a 
change to that in terms of their determination. We have made 
recommendations to the fact that the loan officers need clearer 
rules to be able to know that, hey, if this happens then I do 
this, that, or the other. And while SBA has strengthened their 
SOPs, we still believe that there is room for improvement in 
that regard because even some of the loan officers that we have 
interviewed have said that there is not enough in there. It is 
not clear enough. It is not specific enough.
    Mr. COMER. Okay. Does the OIG currently have ongoing fraud 
investigations relating to the SBA's Disaster Loan Program?
    Mr. WARE. We do have ongoing work in that area.
    Mr. COMER. What are the typical fraud schemes that the OIG 
encounters in the SBA Disaster Loan Program?
    Mr. WARE. The typical ones are the unauthorized use of the 
proceeds, folks taking the money and using it for whatever they 
feel like, overstatement of financial losses. And one of the 
main ones that we see is where they make a false assertion 
about their primary residence. So instead of it being their 
primary residence it would be a vacation home that they are 
trying to----
    Mr. COMER. What is the typical loan loss or--I do not want 
to say delinquency, but what percentage of the disaster loans 
get written off because of nonpayment, roughly?
    Mr. WARE. The work that we have done so far does not inform 
that in terms of----
    Mr. COMER. Can anyone answer that? Just out of curiosity.
    Mr. RIVERA. I would love to answer that question. We are 
currently at less than 2 percent default rate.
    Mr. COMER. Really?
    Mr. RIVERA. Default rate. Yes. So we probably need to 
expand that credit box.
    If I can for a minute, I would like to talk about the 
philosophical difference. I started as a loan officer in 1989, 
right? We are following the exact same process today. Shame on 
me for allowing that.
    Over the last several years we started credit scoring. So 
if you have a FICO score pretty low, 30 percent of those 
applicants get declined immediately. Why put you through the 
whole process if we know that your credit is so low?
    What we are trying to do is we are trying to get away from 
doing this fixed-debt method calculation. We want to go with 
the score band. So if you have income of this and you have 
credit of that, let us just go with it and let us stop 
overanalyzing these situations. But we put our loan officers in 
these tough positions where they are analyzing something and we 
know a credit score is a propensity to repay. We should use 
that as a factor.
    So we are going to continue to work with the IG, and maybe 
we will never convince him, but we are going to nudge him 
towards that way that we need to rely on scoring. That is what 
the private sector does. Our loss rate is really low right now 
and we need to take advantage and maybe get more aggressive to 
make more of these disaster loans for these disaster survivors.
    Mr. COMER. Thank you, Mr. Chairman. I yield back.
    Chairman CHABOT. The gentleman yields back.
    The gentleman from New York, Mr. Espaillat, is recognized 
for 5 minutes.
    Mr. ESPAILLAT. Thank you, Mr. Chairman and Ranking Member 
Velazquez, for holding this hearing.
    It is good to see all of you again. Today represents a 
proactive effort by our Committee to review the Small Business 
Administration Disaster Loan Program before the next major 
storm may hit. This will ensure that small businesses 
throughout the country are protected. As you know, and as we 
all know, the first few months after a natural disaster are the 
most critical period in determining how fully affected 
communities will recover, and it is our responsibility to 
ensure that those communities have the necessary resources to 
respond and react quickly and effectively.
    As my fellow New Yorkers are keenly aware, we cannot afford 
to repeat what occurred when Superstorm Sandy hit back in 2012. 
Sandy directly and severely impacted New York City and 
surrounding communities. As a direct consequence of this 
impact, the small business community faced immediate and 
significant disruption. And while the SBA processed numerous 
disaster loan applications in response, insufficient efforts 
were implemented to ensure that victims' loans were processed 
within the agency's targeted 21-day timeframe. The Disaster 
Loan Program is a critical lifeline for disaster victims, and 
it is the Committee's responsibility to provide the necessary 
oversight and ensured accountability. We must be adequately 
prepared for the next major disaster to protect the wellness of 
the backbone of the U.S. economy, our small businesses.
    Mr. Chairman, I have a question for the panel. My first 
question is considering that time is a critical factor for 
small businesses to recover from a natural disaster, what would 
be the most effective way to combat fraud, yet also reduce the 
number of days that it takes for these lifeline loans to be 
processed? As we know, in New York City, due to Superstorm 
Sandy, it was far too long. Is there any mechanism that you 
will bring to the table to ensure that these loans are quickly 
processed as quickly as possible?
    Mr. SHEAR. Limiting it to our work in the affected region, 
and we certainly were on the ground. We spent a week in New 
York and New Jersey, interacting with the small business 
communities and the SBDCs and other parties. And what I go back 
to is even though it is a more recent report where we brought 
up concerns with clearly communicating to people what is 
expected of them and how the process works, and how the 
interaction between SBA and FEMA works and things like that, is 
those types of considerations--I am going to say that we 
observed it in our most recent report in dealing with disasters 
that are not as catastrophic, and then we also, it is 
consistent with what we observed in New York, the ideas that 
the SBDCs lack certain information.
    The ideas that the businesses that are affected, they are 
coming to the SBA and they say we are bounced around from 
person to person and it is not clear what we have to do, then 
we sign forms for things like submission, approval to get 
information from IRS, and then later on we get surprised by 
being asked for tax records. There is a rationale for this 
whole thing, but I think part of it is just the idea that 
making sure everybody is up and ready and that the information 
sources are up and ready in that the reserve cadre is really, 
as Mike Ware mentioned, are really up and ready to be able to 
help all the victims of major disasters like Sandy.
    Mr. ESPAILLAT. My last question is many small businesses 
are not English-speaking business owners. Do you have services, 
outreach services, to make sure that these businesses are aware 
of the Disaster Loan Program? Do you have information in 
different languages? Do you have a website that will 
communicate to Chinese-speaking, Korean-speaking, Spanish-
speaking business owners that this is available for them?
    Mr. RIVERA. Congressman, thank you for the question. All 
our forms are in Spanish. In situations where the disaster 
footprint shows a Korean community or a Chinese community, we 
work with the local community to get our information translated 
into whatever language it is. And we also have a language 
service line if we have a dialect or a language that we do not 
have a skillset in that we can actually use to communicate from 
that perspective.
    Mr. ESPAILLAT. Is the agency's website in different 
languages as well?
    Chairman CHABOT. The gentleman's time is expired, but you 
can answer the question.
    Mr. RIVERA. Thank you, Chairman.
    We have English and Spanish.
    Mr. ESPAILLAT. Thank you, Mr. Chairman.
    Chairman CHABOT. Thank you very much.
    The gentleman from Iowa, Mr. Blum, who is the chairman of 
Subcommittee on Agriculture, Energy, and Trade, is recognized 
for 5 minutes.
    Mr. BLUM. Thank you, Chairman Chabot. Do I have the name 
correct? Thank you to our panelists today for being here. Thank 
you also for the hard work you do on behalf of our Nation's 
small businesses, the backbone of our economy.
    My questions are probably for you, Mr. Rivera, as they are 
kind of follow-up questions to Representative Comer's.
    What size is the direct loan portfolio, disaster loan 
portfolio? How large?
    Mr. RIVERA. The current portfolio, we have 157,000 loans 
for $6.2 billion. A lion's share of that, about 135,000 are 
home loans for about $4 billion.
    Mr. BLUM. And I think you had said, I think you had told 
Representative Comer that the default rate was less than 2 
percent?
    Mr. RIVERA. Less than 2 percent.
    Mr. BLUM. Is that 1.9 percent or is that .1 percent?
    Mr. RIVERA. I can tell you here exactly.
    Mr. BLUM. If you are talking numbers that big.
    Mr. RIVERA. It is less than 2 percent, and it is running 
at--I am sorry, in the last 12 months, charge-offs for 
businesses have been at 2 percent and homes have been at 1.59. 
So overall it is at 1.64 percent.
    Mr. BLUM. Okay, thank you.
    What are the costs of those write-offs every year totally 
in dollars?
    Mr. RIVERA. So we have, as you know, we have a subsidy 
model. It is a cash flow in and cash flow out. And based on 
that the current subsidy rate is at 14.42 percent. So what that 
means is for every dollar we loan out it costs the taxpayer, we 
need 14 cents in subsidy from that perspective. So from a loss 
perspective, so the 14 percent, what we do is we leverage that. 
So we currently have $480 million in loan authority, and if you 
invert that, 14 percent, we have $3.3 billion in loan authority 
that we can loan out. But the actual subsidy that we receive 
from Congress, the appropriations we receive from Congress, I 
am sorry, is know your funds and it is currently at $480 
million, which allows us to loan out $3.3 billion with the 14.4 
subsidy rate.
    Mr. BLUM. So in terms of dollars, for example, last fiscal 
year, how much did you have to write off in terms of dollars?
    Mr. RIVERA. I need to get back with you for the record, 
Congressman. I am sorry, I do not have that information here in 
front of me.
    Mr. BLUM. And is it a net cost to taxpayers?
    Mr. RIVERA. Yes, sir.
    Mr. BLUM. Because, you know, we had administrator McMahon 
in here last month, and the SBA administration makes money on 
the loan guarantees that are made by the banks. I was wondering 
if this program, the Direct Loan Program, makes money or loses 
money.
    Mr. RIVERA. No, sir. For the disaster servicing account on 
a salary and administrative side, we run about $200 million a 
year. It is a very expensive program from that perspective 
because we are a direct lender and as a result of what we loan 
out. So we spend $200 million a year in salary and expenses, 
and then the loan amount, the fund for lending out disaster 
funds is based on how much loans we make in that specific year.
    Mr. BLUM. How is that portfolio reviewed? Is it done by 
independent bank auditors or examiners that are accustomed to 
looking at loans?
    Mr. RIVERA. So we have several reviews. We have an internal 
group. We have a contractor that independently gives us review. 
Our KPMG auditor at the liberty of the inspector general, they 
also take a review of the portfolio from that perspective.
    Mr. BLUM. So it is reviewed annually, a portion of it is?
    Mr. RIVERA. Well, we review our portfolio monthly. And then 
we have a quarterly review with the contractor on what losses 
we are having, where the losses are at, what type of loan it 
is, so forth and so on. But the annual review with the 
financial statements occurs annually, correct?
    Mr. BLUM. Do you have targets set for loan loss out of the 
portfolio? Are you less than 2 percent? Do you have a target 
set? If you do, who sets the target?
    Mr. RIVERA. No, sir, we really do not. I was a commercial 
lender in the private sector and we had a profitability 
analysis we were supposed to hit. We really do not use that 
formula and that approach. We just try to make the best loans. 
And I guess the way to explain it is our credit box is based on 
that credit score portfolio that we are trying to go and move 
more in that direction. So we do an annual assessment of what 
our credit box is and what loans we approve from that 
perspective.
    Mr. BLUM. My time is about up, so could you send either the 
chairman or myself, maybe both of us, I would like to know the 
maybe last 5 years, the dollar amount of the defaults.
    Mr. RIVERA. Okay.
    Mr. BLUM. Or what it costs us by maybe the last 5 years. 
That would be wonderful.
    Mr. RIVERA. Okay. Yes, sir.
    Mr. BLUM. Thank you very much. I yield back my time.
    Chairman CHABOT. Thank you very much. The gentleman yields 
back.
    And I think our final questioner this morning will be the 
gentleman from Nebraska, Mr. Bacon.
    Mr. BACON. Thanks to all three of you here. You know, 
disaster response is an important part of having a healthy 
society, so I thank you for what you are doing and appreciate 
your inputs today.
    I just want to follow up on the previous question. So the 
cost to the taxpayer or the budget, is it about $480 million? 
Is that what we are looking at or did I misunderstand?
    Mr. RIVERA. So if we were to loan out $3.3 billion, that 
subsidized cost translates to $480 million. So we average a 
billion dollars a year. So it would be a third of that. It 
would be $125 million. But it depends on what our disaster 
response is and the number of loans we approve.
    Mr. BACON. So $125 million is the cost to the taxpayer for 
this program?
    Mr. RIVERA. To make the loans, and then there is another 
$200 million associated with the salary and expenses and the 
operation of the program.
    Mr. BACON. Okay, thank you. That helps clarify for me. I 
appreciate it.
    This may have been mentioned earlier, but I had to step out 
for a briefing on North Korea, so I just want to make sure we 
have it for the record. I understand that in some of the 
previous disasters there were some duplications of payments. 
How do we catch that, from various agencies, and how do we 
retrieve that money?
    Mr. RIVERA. So the duplication of benefits, it is 
interesting. When you go back to 2005, the inspector general 
was actually sitting at the table when we established that, and 
then here they come 2 years after the fact and they criticize 
us for what we agreed to. Neither here nor there. What we have 
done is we have a computer matching agreement with FEMA. And 
then so when FEMA makes a grant, a small grant to repair the 
home, they provide no assistance to businesses. What we will do 
is we will make a loan and we have to check for duplication of 
benefits based with FEMA. And then behind us, if HUD comes in 
or if there is anybody else that comes in behind us, they have 
to look at the total project costs and see if there are any 
unmet needs. If there are any unmet needs, they can go ahead 
and provide that specific funding.
    Mr. BACON. That overlap does cause a potential issue, so I 
appreciate you all working it.
    And when you find that there has been a duplication, what 
is the process for getting that money back?
    Mr. RIVERA. It depends where you are at in the sequence. If 
there is a situation where we have over disbursed, we have to 
go and talk to the disaster borrower and have them repay 
whatever the over disbursement was. The same thing with HUD 
behind us, and they may need to claw back from that 
perspective.
    Mr. BACON. But there is not a legal penalty perhaps or a 
criminal element to that if it is knowingly being done?
    Mr. RIVERA. So, yes, sir. I have to go back. I think it is 
like 150 percent penalty or something that we have in our 
regulations. I can get you the exact amount for the record.
    Mr. BACON. It is hard to say it would be accidental. All of 
a sudden, if you end up with an extra--if you have been double 
or triple paid, you would know.
    Mr. RIVERA. Yeah, you know, so in the grand scheme of 
things, you know, there is always going to be fraud. I mean, it 
is naive for me to say there is never fraud. We did process 
85,000 applications and here we are talking about 300, 400, 
500, you know. So unfortunately, that happens. But generally 
speaking we have pretty good internal controls that catch these 
kind of things, and we refer most all of these situations. When 
the loan officer or account manager catches it, we will refer 
it to the inspector general if it does not look like it is 
copasetic.
    Mr. BACON. Thank you very much. And again, this is an 
important mission. We have to respond from time to time, so 
thank you.
    Chairman CHABOT. The gentleman yields back. Thank you very 
much.
    And we want to thank the witnesses very much for their 
excellent testimony this morning and a little bit this 
afternoon.
    We are fortunate, of course, as has been mentioned, we are 
not directly in the middle of a major natural disaster right 
now, but we know it is only a matter of time before another one 
will hit, and hopefully today's hearing will help the SBA 
continue to improve its Disaster Loan Program so that when that 
day does come that we are best positioned to help this Nation's 
disaster victims. So thank you very much for responding to all 
the questions that members on both sides had and continue to 
improve. It is very, very important.
    And I would ask unanimous consent that members have 5 
legislative days to submit statements and supporting materials 
for the record. Without objection, so ordered.
    And if there is no further business to come before the 
Committee, we are adjourned. Thank you.
    [Whereupon, at 12:17 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 here today to discuss SBA's Disaster Loan Program. SBA 
appreciates your strong support of the agency's disaster 
assistance mission and your continued leadership to ensure as a 
country we are prepared to meet the challenges of future large 
natural disasters.

    I am James Rivera, the Associate Administrator for the 
SBA's Office of Disaster Assistance (ODA). ODA provides 
affordable, timely and accessible financial assistance 
following a declared disaster to businesses of all sizes, 
private non-profit organizations, as well as 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 over two million loans for more than $56 billion 
dollars.

    Role in Responding to a Disaster

    Even though SBA is on the ground immediately following a 
disaster, we are not a ``first responder'' agency. Our primary 
focus is to provide low-interest, long-term loans for 
privately-owned property losses as part of the recovery effort 
in coordination with other Federal, state, local, Indian Tribal 
and territorial government partners. The SBA and the Federal 
Emergency Management Agency (FEMA) partner to ensure disaster 
survivors obtain the maximum amount of assistance for which 
they are eligible. SBA and FEMA share information to ensure no 
benefits are duplicated when providing assistance. In events 
where a Presidential disaster declaration including Individual 
Assistance is authorized, disaster survivors should first 
contact FEMA since in order to apply for an SBA loan, they will 
need to obtain a FEMA Registration ID Number.

    As part of an overall effort to assist disaster survivors 
to get back on their feet, SBA provides loan assistance up to 
$200,000 to help homeowners repair or replace their damaged or 
destroyed primary residence. We also provide up to $40,000 in 
loans to help homeowners and renters replace damaged or 
destroyed personal property such as furniture, clothing, 
appliances, and vehicles. For businesses of all sizes and 
private non-profit organizations, SBA provides up to $2 million 
dollars in loans to repair or replace damaged real estate, 
leasehold improvements, furniture and fixtures, inventory, and 
machinery and equipment.

    Additionally, SBA offers Economic Injury Disaster Loans 
(EIDL) to small businesses, small agricultural cooperatives, 
and most private non-profit organizations that 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.

    I should also note that SBA provides additional loan funds 
for mitigation--up to 20 percent of the total physical losses 
as verified by SBA--to help prevent damages from similar 
disaster events which may occur in the future. SBA disaster 
loans funds can only be used for uninsured, underinsured or 
uncompensated losses.

    Preparedness and SBA's Key Improvements to the Disaster 
Assistance Program

    Over the past several years, SBA has made a number of key 
improvements that help us to better respond to disaster 
survivors. We have this committee to thank for some of the most 
meaningful improvements, which are a result of legislation that 
SBA worked with this committee to pass. For example, the 
Recovery Improvements for Small Entities After Disaster Act of 
2015 (RISE Act) included several measures that SBA was quick to 
implement such as re-opening the application period for 
Hurricane Sandy, increasing the unsecured loan limit from 
$14,000 to $25,000, expanding mitigation assistance to include 
safe rooms and storm shelters that will save lives, and the 
creation of a Disaster Loan Assistance Portal that provides 
disaster survivors with quick and easy access to their loan 
application status, filing requirements, document uploads, and 
includes some electronic signature capability.

    The re-opening of the application period for Hurricane 
Sandy resulted in 1,151 approved business, homeowners and 
renters loans totaling $58.5 million, which is in addition to 
the original 36,918 approved business, homeowners and renters 
loans for a total of $2.5 billion that SBA approved in response 
to Sandy.

    Increasing the unsecured loan limit up to $25,000 for 
physical damages and economic injury makes a real difference to 
the disaster survivor who is rebuilding a home or business. SBA 
typically makes an initial disbursement within five days of 
receiving the borrower's signed loan closing documents, but 
instead of a homeowner only receiving $14,000, he or she can 
now receive $25,000, helping to speed up the reconstruction 
project.

    Similarly, a small business that has both physical damages 
and economic injury can now receive $50,000 in an initial 
disbursement--$25,000 for the physical repairs and $25,000 for 
working capital--within five days of returning the signed loan 
closing documents. This increase in the unsecured loan limit 
translates into SBA getting more disaster loan funds into the 
hands of disaster survivors faster. The increase in the 
unsecured loan limit included in the RISE Act is temporary 
authority that expires in November 2018.

    The creation of the Disaster Loan Assistance Portal is 
changing the way SBA interacts with disaster survivors. Prior 
to the launch of the portal, the primary way for disaster 
survivors to check on the status of their loan application was 
to call the customer service center. While our customer service 
representatives are helpful and quick to respond, disaster 
survivors deserve more options and expect online access in 
these technological times. The portal provides disaster 
survivors with online communications regarding the status of 
their application, access to filing requirements and SBA forms, 
even the ability to electronically sign the IRS Form 4506-T, 
which is needed to verify income and repayment ability. To 
maintain pace with the lending industry online advancements, 
SBA plans to continue enhancing the portal so that disaster 
survivors receive the best customer service experience possible 
when applying for SBA disaster assistance.

    Response to August 2016 Louisiana Flooding

    The August 2016 Louisiana Flood is the largest disaster 
event that SBA responded to since Hurricane Sandy in 2012. As 
of April 17, 2017, SBA approved 17,468 disaster loans to 
businesses, homeowners and renters for a total of $1.2 billion.

    Following that event in the same year, SBA responded to 
Hurricane Matthew, which resulted in disaster declarations for 
Florida, Georgia, North Carolina, South Carolina, and Virginia. 
As of April 17, 2017, for Hurricane Matthew, SBA has approved 
7,517 disaster loans to businesses, homeowners and renters 
totaling more than $262 million.

    For fiscal year 2017, I am pleased to report that we have 
maintained low processing times--seven days for home loans and 
12 days for business loans--while responding to periods of 
increased activity for the Louisiana Floods and Hurricane 
Matthew.

    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 
Hurricane Sandy, the third largest disaster event in SBA's 
history, we peaked at 2,451 employees. To meet this demand, SBA 
ODA not only used the Fort Worth center and the Sacramento 
surge space, we also expanded the loan processing footprint to 
include 50 workstations at the Buffalo call center.

    In closing, I appreciate the opportunity to update this 
Committee on SBA's disaster recovery efforts. We firmly believe 
that the reforms we instituted enable us to be better 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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