[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
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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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