Small Business Administration: Observations on the Disaster Loan 
Program (01-MAY-03, GAO-03-721T).				 
                                                                 
This testimony discusses the role of the Small Business 	 
Administration's (SBA) Disaster Loan Program in responding to the
September 11, 2001, terrorist attacks, general performance	 
measures for the program, and the effects of SBA's program to	 
sell loans to private investors on disaster loans and their	 
borrowers. In reviewing SBA's loan sales program, which includes 
disaster loans, we identified three areas needing improvement:	 
tracking borrower inquiries and complaints; sales budgeting and  
accounting which affect the reliability of SBA financial	 
statements and budget information; and reporting on the 	 
operational benefits of the loans sales. This testimony focuses  
on SBA's (1) response to the September 11 terrorist attacks; (2) 
performance plans and measures for its Disaster Loan program; and
(3) loan assets sales program, which involves selling disaster	 
and other loans.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-721T					        
    ACCNO:   A06777						        
  TITLE:     Small Business Administration: Observations on the       
Disaster Loan Program						 
     DATE:   05/01/2003 
  SUBJECT:   Disaster relief aid				 
	     Performance measures				 
	     Program evaluation 				 
	     Small business loans				 
	     SBA Disaster Loan Program				 

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GAO-03-721T

Testimony Before the Committee on Small Business and Entrepreneurship, U.
S. Senate

United States General Accounting Office

GAO For Release on Delivery Expected at 9: 30 a. m. EDT Thursday, May 1,
2003 SMALL BUSINESS

ADMINISTRATION Observations on the Disaster Loan Program

Statement of Davi M. D*Agostino Director, Financial Markets and Community
Investment

GAO- 03- 721T

This is a work of the U. S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

Page 1 GAO- 03- 721T

Madam Chair and Members of the Committee: I am pleased to be with you
today at this roundtable to discuss the role of the Small Business
Administration*s (SBA) Disaster Loan Program in responding to the
September 11, 2001, terrorist attacks, general performance measures for
the program, and the effects of SBA*s program to sell loans to private
investors on disaster loans and their borrowers. As you know, the effects
of the September 11 attacks were felt not only in New York but also around
our country, with the economic damage occurring in states as far west as
California. The unique nature of the attacks and the government*s response
required SBA to make unprecedented efforts to expand its disaster lending
coverage and to be flexible in its efforts to serve those needing
assistance. Notwithstanding SBA*s extraordinary performance in responding
to the September 11 attacks, our work showed that the Disaster Loan
Program*s performance measures do not fully or adequately reflect SBA*s
actual performance. In reviewing SBA*s loan sales program, which includes
disaster loans, we identified three areas needing improvement: tracking
borrower inquiries and complaints; sales budgeting and accounting, which
affect the reliability of SBA financial statements and budget information;
and reporting on the operational benefits of the loan sales.

My remarks today will focus on SBA*s (1) response to the September 11
terrorist attacks; (2) performance plans and measures for its Disaster
Loan Program; and (3) loan asset sales program, which involves selling
disaster and other loans. 1 My comments are based on our recent reports on
SBA*s Disaster Loan Program (Small Business Administration: Response to
September 11 Victims and Performance Measure for Disaster Lending,

GAO- 03- 385, Jan. 29, 2003) and loan asset sales program (Small Business
Administration: Accounting Anomalies and Limited Operational Data 1 For
information on assistance provided to small businesses in the Lower
Manhattan area after September 11 by SBA and other government agencies,
please see U. S. General Accounting Office, September 11: Small Business
Assistance Provided in Lower Manhattan in Response to the Terrorist
Attacks, GAO- 03- 88 (Washington, D. C.: Nov. 1, 2002).

Page 2 GAO- 03- 721T

Make Results of Loan Sales Uncertain, GAO- 03- 87, Jan. 3, 2003). 2 Both
are available on our Web site: www. gao. gov.

The nature of the September 11 attacks and subsequent government actions
presented SBA*s Disaster Loan Program with new and difficult challenges.
Specifically, small businesses in both the declared disaster areas and
around the nation suffered economic injury. SBA sought to respond to the
concerns of small businesses in the months following September 11 by
extending eligibility for economic injury loans nationwide* a marked
change from earlier disasters that affected primarily businesses in one
geographic location. In addition, SBA modified both the terms and lending
practices of its Disaster Loan Program* for

example, by reducing the amount of documentation some borrowers needed to
provide. Congress supported these efforts with supplemental appropriations
that allowed SBA to offer larger loans to a relatively broad population of
victims. By the end of fiscal year 2002, the agency had worked with
individuals and businesses in all 50 states, the District of Columbia, and
the U. S. territories, approving 9,700 loans totaling $966 million.

We found that SBA had adapted its Disaster Loan Program to respond to the
needs of September 11 victims but that SBA*s performance measures did not
provide congressional decision makers with an accurate description of the
program*s performance. For example, two of SBA*s six performance measures
assessed only one discrete step in the loan application and disbursement
processes* the application process. In addition, some output measures 3
had not kept up with SBA*s actual progress in assisting disaster victims.
Further, we identified features in SBA*s description of its Disaster Loan
Program in the 2002 and 2003 performance plans that made assessing the
agency*s progress in attaining

2 Also see April 29, 2003, testimony before the Subcommittee on Government
Efficiency and Financial Management, Committee on Government Reform, U. S.
House of Representatives. U. S. General Accounting Office, Small Business
Administration: Loan Accounting and Other Financial Management Issues
Impair Accountability, GAO- 03- 676T (Washington, D. C.: Apr. 29, 2003).

3 According to Office of Management and Budget (OMB) guidance, outputs are
the level of activity that can be produced or provided over a given period
of time or by a specific date. Outcomes are the intended results, effects,
or consequences that occur from carrying out program activities. OMB,
Preparation and Submission of Strategic Plans, Annual

Performance Plans, and Program Performance Reports, Circular No. A- 11,
Part 6. (Washington, D. C: June 2002). Summary

Page 3 GAO- 03- 721T

its strategic goals difficult. For example, although SBA guidance
recommended that program goals be outcome oriented, SBA*s 2003 performance
goal was output oriented.

Our review of SBA*s five loan sales from August 1999 to January 2002
revealed that 85 percent of the $4.4 billion in loans sold were disaster
assistance home and business loans. SBA established some policies to
protect borrowers whose loans were sold. For example, disaster loans less
than 2 years old were not sold because they typically required more
servicing and sometimes had to be increased to cover exigencies, such as
revised physical damage estimates. In trying to determine how borrowers

reacted to having their loans sold, we found that SBA relied on borrower
inquiries and complaints to determine whether purchasers of the loans were
using prudent loan servicing practices. However, information on borrowers*
reactions was incomplete because SBA did not have a comprehensive process
to capture the inquiries and complaints it receives. Moreover, we found
serious issues in SBA*s budgeting and accounting for the loans sold, as
well as the remainder of the portfolio. For example, SBA

incorrectly calculated the accounting losses on the loan sales and lacked
reliable financial data to determine the overall financial impact of the
sales. In addition, there were significant unexplained declines in the
subsidy allowance for the disaster program. We discussed these issues with
SBA*s auditor who subsequently withdrew its *clean* financial statement
audit opinions for fiscal years 2000 and 2001 and disclaimed an opinion
for 2002. SBA is continuing to work on resolving its accounting

and financial reporting problems. Finally, our analysis of the operational
benefits from loan sales suggested that some benefits that SBA reported,
such as reductions in servicing and workload volume, either had not yet
materialized or were overstated.

When disasters such as floods, tornadoes, or earthquakes strike, federal,
state, and local government agencies coordinate to provide assistance to
disaster victims. SBA, through its Disaster Loan Program, is part of this
effort. SBA provides loans to households and businesses without credit
available elsewhere at a maximum rate of 4 percent and up to a 30- year
term. For households or businesses with credit available elsewhere, SBA
provides loans at a maximum rate of 8 percent and, for businesses, up to a
3- year term. Business loans are available up to $1.5 million, 4 loans for

4 Even if a business receives a loan to cover both physical damage and
economic injury, the total loan amount generally cannot exceed $1. 5
million. Background

Page 4 GAO- 03- 721T

physical damage to homes are available up to $200,000, and loans for the
repair or replacement of personal property are available up to $40,000.

Like other federal programs, SBA*s Disaster Loan Program follows
performance measurement guidelines under the Government Performance and
Results Act (GPRA) of 1993. 5 GPRA requires agencies to set multiyear
strategic goals in their strategic plans and corresponding annual goals in
their performance plans, measure performance toward the achievement of
those goals, and report on their progress in their annual performance
reports. 6 Annual performance plans are sent to Congress soon after the
transmittal of the President*s budget and provide a direct linkage between
an agency*s long- term goals and mission and day- to- day activities.
Related annual performance reports describe the degree to which
performance

goals have been met. Guidance from the Office of Management and Budget
(OMB) indicates that performance plans should include measures of
outcomes* intended results* when the outcomes can be achieved during the
fiscal year covered by the plan. Otherwise, the guidance recognizes that
the performance plans will predominantly include measures of outputs
(program activities) rather than outcomes.

In 1999, SBA began a loan asset sales program, at the direction of OMB, to
reduce the amount of debt the agency owned and serviced. OMB is interested
in increasing loan asset sales in order to improve the management of loan
assets and to transfer loan servicing responsibilities to the private
sector. Our review focused on SBA*s first five loan sales through January
2002 in which 110,000 loans with an outstanding balance of $4.4 billion
were sold. Approximately 85 percent of the dollar volume of

loans SBA sold were disaster assistance loans made directly by SBA, most
of which have below- market borrower interest rates. The remaining 15
percent were mostly defaulted 7( a) loans, made by SBA*s lending partners
(primarily banks).

5 P. L. 103- 62, GPRA 1993. 6 OMB provides guidance on developing these
plans in *Preparation and Submission of Strategic Plans, Annual
Performance Plans, and Annual Program Performance Reports,* Circular No.
A- 11, Part 6 (Washington, D. C: June 2002).

Page 5 GAO- 03- 721T

In the weeks and months following the terrorist attacks, SBA and Congress
faced the challenge of responding to the lingering effects of the attacks
and subsequent federal actions on small businesses throughout the country.
SBA responded first in Lower Manhattan, then expanded its response as
additional parts of the New York City and Pentagon areas were designated
disaster areas. Ultimately, SBA helped small businesses around the country
with disaster lending. In response to the concerns expressed by small
businesses, SBA and Congress modified the program, expanding eligibility
for economic injury loans to small businesses around the country,
providing translators for applicants, modifying the size standards for
small businesses, expediting the loan approval and disbursement processes,
and providing larger loans.

SBA*s response to the terrorist attacks began on September 11, when SBA
officials arrived in Lower Manhattan to begin coordinating the agency*s
efforts. The initial disaster area in New York City and New Jersey
eventually expanded to include additional counties in Connecticut,
Massachusetts, New Jersey, New York, and Pennsylvania. Maryland, Virginia,
and parts of the District of Columbia were also declared disaster areas
for SBA purposes. As the United States began to deploy military personnel
in response to the terrorist attacks, small businesses nationwide affected
by the loss of employees called up as military reservists were eligible to
apply for a disaster loan under the Military Reservist Economic Injury
Disaster Loan (EIDL) program. 7 Small businesses across the nation that
were adversely affected by the lingering effects of the attacks and
subsequent government action, such as airport closings and the precipitous
drop in tourism, were also eligible to receive disaster loans under SBA*s
Expanded EIDL program. In essence, the entire country was deemed a
disaster area. More than half the loans went to small businesses outside
the area of the

attack sites in New York City and at the Pentagon, with businesses in
Florida and California receiving the second and third largest share of
loans (see fig. 1). Loans ranged from $300 to $1.5 million, with $50,000
as the most frequently disbursed amount (11 percent of all loans).
Businesses outside the immediate sites of the attacks generally received
slightly more than those close by, in part because they did not have
access to the

7 The Military Reservist EIDL program is available to small businesses
whenever the government calls military reservists to duty, not just during
federally declared disasters. SBA Expanded and Changed the Terms of

Its Disaster Loan Program in Response to the September 11 Attacks

SBA*s Response Covered Small Businesses Nationwide

Page 6 GAO- 03- 721T

resources available in New York City. The loans were spread among
industries, with no single type of business accounting for most of the
funds (see fig. 2). The manufacturing sector received the most funds,
followed by professional, scientific, and technical services;
transportation and warehousing; wholesale trade; and accommodation and
food services.

Figure 1: Geographic Distribution of SBA September 11 Loan Disbursements

Source: GAO analysis of SBA data. $100 to $400

$50 to $100 $20 to $50 $10 to $20 Less than $10

11% Fla.

4% N. J.

3% Va.

3% Tex .

45% N. Y.

6% Cal.

Dollars in millions

Page 7 GAO- 03- 721T

Figure 2: SBA September 11 Business Loan Disbursements, By Industry

In the months after the terrorist attacks, small business owners affected
by the terrorist attacks presented a number of concerns to Congress about
SBA*s Disaster Loan Program. SBA officials regarded these comments as
valuable feedback and worked with Congress to make several modifications
to the program for September 11 victims:

 First, in October 2001, SBA issued regulations to make economic injury
disaster loans available to small businesses nationwide, an unprecedented
change to the Disaster Loan Program, according to SBA officials. SBA*s
Expanded EIDL program enabled businesses outside the declared disaster
areas to apply for loans to cover *ordinary and necessary* operating
expenses that could not be met because of the attacks or related actions
of the federal government between September 11 and October 22, 2001. 
Second, SBA printed informational packets in languages such as

Spanish and Chinese; provided multilingual staff at its offices who could
speak Mandarin Chinese, Croatian, Arabic, and Spanish; and was prepared to
send employees with additional language capabilities to New York City. SBA
and Congress

Modified the Disaster Loan Program in Response to Complaints from Small
Businesses

Page 8 GAO- 03- 721T

 Third, in February 2002, SBA modified the size standards for all
September 11 loan applicants, allowing borrowers to take advantage of
recent inflation- based adjustments. 8 In addition, in March 2002, SBA
increased the size threshold for travel agencies adversely affected by the
attacks from $1 million in annual revenues to $3 million.  Fourth, to
expedite loan processing, loan officers streamlined their

needs analysis, calculating economic injury loans using the applicant*s
annual sales and gross margin. By the end of fiscal year 2002, SBA was
processing September 11 business loans, on average, in 13 days compared
with 16 days for disaster assistance business loans processed in fiscal
year 2001. To further expedite disbursement to those in the World Trade
Center and Pentagon disaster areas, SBA decreased the amount of
documentation needed to disburse up to $50,000.

 Fifth, in January 2002, Congress approved supplemental appropriations
for SBA of $150 million, raised the maximum loan amount from $1.5 million
to $10 million, and deferred payments and interest for 2 years. 9 Congress
also created the Supplemental Terrorist Activity Relief

(STAR) program to provide assistance to small businesses affected by the
terrorist attacks through SBA*s 7( a) loan guaranty program, which is not
part of the Disaster Loan Program. Under the STAR program, SBA reduced the
fee charged to lenders on new 7( a) loans from 0.50 percent of the
outstanding balance of the guaranteed portion of the loan to 0.25 percent.
As of the end of fiscal year 2002, SBA had guaranteed about 4,700 STAR
loans for $1.8 billion.

Some small businesses affected by the terrorist attacks maintained that
SBA*s underwriting criteria* for example, collateral requirements* were
too restrictive. They testified that SBA had withdrawn their applications
because they would not use their homes as collateral. They argued that it
was too risky to use their homes as collateral, especially since the
survival of their businesses was uncertain. SBA, however, did not change
its

underwriting criteria for September 11 victims. SBA officials said that
the 8 In January 2002, SBA increased the revenue- based thresholds for
determining the size of businesses by the rate of inflation. In February
2002, SBA retroactively applied the inflation- adjusted size standards to
all businesses applying for September 11 loans, allowing more businesses
to seek assistance. 9 Emergency Supplemental Appropriations for Recovery
and Response to Terrorist Attacks on the United States Act, 2002 P. L.
107- 117 (Emergency Supplemental Act of 2002).

Page 9 GAO- 03- 721T

agency makes every effort to approve each application by applying more
lenient credit standards than private lenders. However, the officials said
that they adhered to their credit standards to minimize losses and program
costs.

SBA data indicate that the 52 percent rate for withdrawing and declining
September 11- related loan applications was not out of line when compared
with other disasters or with private lenders. The primary reasons SBA
identified for withdrawing September 11 loan applications was a lack of
Internal Revenue Service (IRS) records to corroborate applicants* income,

and applicants* failure to provide additional information SBA had
requested. SBA officials said that the most common reasons for declining
September 11 loan applications were inability to repay the loan and
unsatisfactory credit. According to SBA, these were also the primary
reasons for withdrawing or declining nearly two- thirds of all SBA
disaster loan applications in fiscal year 2001.

SBA officials believed that many of the complaints about the disaster
program resulted from the mismatch between victims* expectations of SBA*s
disaster program and the nature of the program. SBA officials told us that
they tried to minimize public confusion about the nature of the assistance
available from SBA by working closely with the media and public officials
to provide accurate information about the Disaster Loan Program.

The six performance indicators SBA currently uses to measure the Disaster
Loan Program are

 field presence within 3 days of a declaration, 10  loans processed
within 21 days,  customer satisfaction rate,  homes restored to
predisaster condition,

10 Federal assistance, including all types of SBA disaster loans, is
available once the President declares that a major disaster or emergency
situation exists. Governors may request a disaster declaration from SBA if
damage is minor or moderate and a declaration from the Department of
Agriculture if losses are confined to agricultural production. SBA offers
only economic injury loans in these last two situations. SBA*s Disaster

Program Performance Measures Do Not Capture the Scope of the Agency*s
Efforts

Page 10 GAO- 03- 721T

 businesses restored to predisaster condition, and  initial loan
disbursement within 5 days of receiving closing documents. We identified
several problems with these measures. For example, several are output
measures that did not reflect the actual progress being made. Some are
proxies that did not accurately represent what was being

measured. There is a lack of measures for intermediate or end outcomes,
and features in SBA*s description of the Disaster Loan Program in its
performance plans made assessing the program difficult. Several of the
limitations we found had been identified in previous GAO or SBA Inspector
General reports and had not been corrected. 11 Officials from SBA*s
Disaster Area Offices (DAO) questioned whether the

three output measures* establishing a field presence within 3 days of a
disaster declaration, processing loan applications within 21 days, and
disbursing initial loan amounts within 5 days of receiving the closing
documents* were appropriate indicators of timely service to disaster
victims since they did not, for example, capture recent program
improvements. SBA has had a 98 percent success rate in meeting the

target for establishing a field presence each fiscal year since 1998.
Officials from the area offices said that improvements in planning,
interagency coordination, and technology enabled them to have staff on
site within 1

day of a disaster declaration. According to DAO staff, delays in
establishing a field presence generally occurred because SBA was waiting
for decisions from state officials. SBA data and comments from DAO
officials suggested that the second output measure* processing loan
applications within 21 days of receipt* did not reflect improvements in
past performance. For example, SBA aimed for an 80 percent success rate
for fiscal year 2001, but the actual time required for processing averaged
13 days in fiscal year 2001 and fell to 12 days in fiscal year 2002. The
average time required to process the

11 See U. S. General Accounting Office, Managing for Results:
Opportunities for Continued Improvement in Agencies Performance Plans,
GAO/ GGD- 99- 215 (Washington, D. C.: July 20, 1999); Small Business
Administration: Status of Achieving Key Outcomes and

Addressing Major Management Challenges, GAO- 01- 792 (Washington, D. C.:
June 22, 2001); and Final Audit Report* Results Act Performance
Measurement for the Disaster Assistance Program, Small Business
Administration, Office of the Inspector General, Audit Report 1- 06 (Feb.
15, 2001). Three Output Measures Do

Not Capture Progress

Page 11 GAO- 03- 721T

September 11 business loans was also about 13 days. DAO officials
attributed their faster processing times to several agencywide
improvements.

DAO staff also suggested that another measure* the 5- day target for
making initial disbursements once closing documents are received* did not
reflect past performance and was a low threshold. Before 2002, SBA had an
internal goal of ordering disbursements within 3 days of receiving closing
documents. When SBA included this measure in the performance

plan, the disbursement target was increased to 5 days to accommodate
weekends and holidays, because SBA*s system for tracking disaster loan
processing could not distinguish between workdays and other days.
Accustomed to the stricter 3- day standard, staff were able to meet the 5-
day standard with ease. In commenting on a draft of our report, SBA
indicated that the output

measures were established based on what was determined to be a reasonable
level of service in an average year, taking into account the amount of
resources required. Because disasters cannot be predicted, officials did
not think it would be feasible to adjust production levels based on a
single year*s performance. Even with some program improvements, they
believed it would be very difficult and costly to maintain such levels
during periods of multiple major disasters. Although SBA acknowledged that
a basis for modifying some output measures might exist, the officials
believed that the modifications should be based on an average level of
projected activity that takes into consideration some permanent
improvements that have been made to the program. SBA officials indicated
that three measures* number of homes restored to

predisaster condition, number of businesses restored to predisaster
condition, and customer satisfaction* were used to assess the effect, or
outcomes of lending to disaster victims. But these *outcome* measures also
had limitations. First, while the restoration of homes and businesses was
a stated outcome in SBA*s strategic and performance plans, SBA did not
actually measure the number of homes and businesses restored. Instead, SBA
reported on the number of home loans approved as a proxy measure for the
number of homes restored to predisaster condition. However, these measures
assessed what are actually program outputs (loans approved) rather than
stated outcomes (homes and businesses restored). Such proxy measures,
then, were likely to have overestimated the number of homes and businesses
restored because borrowers might cancel the loan. According to SBA, about
10 percent of the loans approved Two *Outcome* Measures Actually Assessed
Outputs

Page 12 GAO- 03- 721T

for September 11 victims were cancelled by borrowers. Third, these
indicators used annual figures that were affected by factors outside of
SBA*s control, such as the number of disasters that occurred during a
given fiscal year. A more useful indicator would be the percentage of
homes and businesses receiving loans that were restored each year to
predisaster conditions.

To measure customer satisfaction, SBA used the results of its survey of
successful loan applicants. (SBA also used this survey to evaluate the
impact of the program.) But the survey methodology had significant
limitations. For example, it measured the satisfaction of only a portion
of the customers that the disaster loan program serves. Every DAO director

we interviewed indicated that all disaster victims were SBA customers and
that a broader population should be surveyed. In 2001, we and the SBA
Inspector General made the same suggestion to SBA. As we indicated then,
the survey method SBA had been using was likely to produce positively
skewed responses. SBA headquarters officials indicated that they were
resistant to surveying those who were denied loans because they presumed
that the applicants* responses would be negative.

Recommendations from SBA*s Inspector General, and guidance from us and
within SBA, have encouraged the use of outcome measures for this program.
But we found that only one of the performance measures SBA was using*
customer satisfaction* had the potential to assess a stated outcome of the
Disaster Loan Program. The other intended outcomes, which could have been
measured annually or biannually, such as jobs retained or housing
restored, were not measured.

In addition, SBA had stopped using intermediate outcome measures it had
used in the past* loan currency and delinquency rates* to assess the
quality of disaster loans. It also had not measured another potential
intermediate outcome from the underwriting process* having appropriate
insurance. As one DAO official suggested, having coverage such as flood

insurance potentially reduces the number of loans required in some
disaster- prone areas. As we have reported previously, such insurance can
reduce disaster assistance costs and could reduce the effect of a disaster
on its victims. 12 12 U. S. General Accounting Office, Disaster
Assistance: Information on Federal Costs and Approaches for Reducing Them,
GAO/ T- RECD- 98- 139 (Washington, D. C.: Mar. 26, 1998). Some Measures
Did Not

Assess Intermediate or End Outcomes

Page 13 GAO- 03- 721T

SBA headquarters staff said that while they recognized some of these
shortcomings, they had limited ability to develop and use better outcome
measures. The staff indicated that the very nature of disaster lending was
unpredictable, making it difficult to set performance targets for
intermediate or end outcomes. One SBA official said that the agency is
reluctant to measure and report intermediate or end outcomes that are
outside its control. Other DAO officials indicated that conducting some
end outcome measurement methodologies would be expensive* for instance,
on- site inspections of a sample of homes and businesses to assess
restoration.

We made two recommendations designed to help SBA improve its performance
measures for disaster lending. First, we recommended that SBA revise the
performance measures to include more outcome measures;

assess more significant outputs, such as service to applicants or loan
underwriting; report achievements that can be compared over several years,
such as percentages; and include performance targets that encourage
process improvement rather than maintaining past levels of performance.
Second, we recommended that SBA revise and expand its current research to
improve its measures and evaluate program impact. To improve its current
measures, we suggested that SBA conduct research, such as surveying DAO
staff and reviewing relevant literature to identify new outcome measures
that could be tested. To evaluate its program impact, SBA needs to ensure
that its survey covers all disaster loan applicants and to employ other
methods, such as periodic analyses of regional statistics, to assess the
economic impact of the program on local communities. SBA generally agreed
with our recommendations and said it is addressing our concerns. As of
this month, SBA had distributed a

customer service survey to help evaluate the Disaster Loan Program*s
impact and was developing a broader survey. We will follow up with SBA
regarding the status of their efforts.

We identified several features of the description of the Disaster Loan
Program in the 2002 and 2003 performance plans that make it difficult to
assess whether SBA is making progress in attaining its strategic goal.
First, between 2002 and 2003, the program*s performance goal changed from
an outcome- oriented goal (helping families recover from disasters) to an
output- oriented goal (streamlining disaster lending) without the required
explanation. GPRA requires agencies to explain why they change performance
goals, and OMB generally recommends that agencies use goals that are
outcome- oriented. SBA*s Performance Plans

Had Limitations

Page 14 GAO- 03- 721T

Second, the 2002 and 2003 performance plans do not define the linkages
between each program output and each intermediate or end outcome. The
plans do not explain how the outputs (disaster loans) are related to the
performance indicators (field presence, customer satisfaction, and
application processing time frames). Third, the plans do not explain how
the performance measures or indicators are related to either program

outcomes or outputs. Fourth, performance indicators are added to or
dropped from the plans without explanation, making it difficult to
understand how and if SBA expects to improve or sustain its loan
processing performance.

The performance plans also contain incomplete or inaccurate information on
some performance indicators. For example, despite OMB and SBA guidance,
validation and verification information on field presence and loan
processing measures is omitted, making it difficult to assess the quality
of performance data. In addition, the 2003 performance plan indicates that
data on the number of homes restored to predisaster condition are based on
on- site inspections of homes. However, SBA officials indicated that they
use a proxy measure* the number of original home loans approved* as the
actual source of data for homes restored to predisaster condition.

We recommended revising the section of the performance plan that covers
the Disaster Loan Program to establish direct linkages between each output
and outcome and the associated performance measure; accurately describe
proxy measures as either outcome or output measures; accurately describe
the validation and verification of performance measures; and explain
additions, deletions, or changes from the previous year*s goals and
measures. SBA also agreed with this recommendation. SBA informed us this
month that it has undertaken a long- term review of the strategic plan
with the aim of revising the performance goals and measures and linking
performance to the new plans and goals. We will monitor SBA*s progress in
implementing this initiative.

A large portion* 85 percent in the first 5 sales* of the loans sold are
disaster loans previously serviced by SBA. SBA*s program to sell disaster
loans that it makes directly to borrowers and subsequently services
results in private investors owning and servicing the loans over their
remaining terms. It was difficult for us to determine the reaction of
borrowers whose loans were sold because of incomplete records at SBA. We
identified numerous errors in SBA*s accounting for the loan sales,
including unexplained declines in SBA*s loss allowance account for
disaster loans. Loan Assets Sales

Affect Disaster Loan Borrowers and the Loan Program

Page 15 GAO- 03- 721T

Until corrected, these errors mean that SBA*s subsidy estimates and
reestimates for the disaster loan program cannot be relied upon. The
operational benefits from selling loans that SBA has claimed may be
overstated.

SBA built in some safeguards to protect borrowers when their loans are
sold. But, because SBA*s process for documenting and tracking borrower
inquiries and complaints has weaknesses, we could not determine how many
borrowers had actually contacted SBA with complaints or concerns about the
loan sales.

Borrowers have little control over what happens to their loans if SBA
decides to sell them. However, SBA has some policies intended to protect
the integrity of the programs that provided the loans. SBA*s programs,
including servicing disaster loans after they are made, are designed to
help the borrower recover from a disaster. To protect this public policy
goal, SBA*s loan sales agreements with purchasers require certification
that the investors are qualified to purchase and service the loans and
will follow prudent loan servicing practices. The loan sales agreement
also prevents purchasers from unilaterally changing the terms and
conditions of the loans. In addition, SBA does not sell some disaster
loans, including those issued to borrowers currently residing in a
federally declared disaster area and those that are less than 2 years old.
According to SBA, more servicing

is typically required in the first 2 years of a disaster loan* such as
changes due to revised physical damage estimates.

Nevertheless, we were not able to validate the way in which borrowers
reacted to the loan sales because SBA could not provide a reliable
estimate or information on the number of borrowers who had contacted them
about their sold loans. Complete and reliable information on borrower
complaints is important because SBA officials told us that when a borrower
complained about a servicing action they contacted purchasers to collect
additional information and determine whether a purchaser was breaching the
borrower protections. One reason why SBA*s tracking system is ineffective
is that borrowers with questions or complaints can call or write to
several different SBA offices, or to a representative of Congress. Some
SBA field office officials told us that SBA does not provide them with
clear guidance on how to respond to or document such complaints. Officials
from seven district offices, three servicing centers, and two disaster
area offices told us that they had received calls and letters from
borrowers who had concerns about loans that had been sold. But the methods
for documenting inquiries and complaints varied across Information on How

Selling Disaster Loans Affects Borrowers Is Incomplete

Page 16 GAO- 03- 721T

offices, except for congressional letters, which were consistently
forwarded to SBA headquarters. In August 2001, SBA began providing a toll-
free number for borrowers to call with questions or complaints about loan
sales. Borrowers were informed about the toll- free number in a letter
telling them how to contact the new owner of their loan. However, field
office staff did not receive any guidance regarding the purpose and use of

the toll- free number. Though we were unable to determine how many
borrowers have contacted SBA about their sold loans, we reviewed 133 of
the 155 written inquiries and complaints documented at headquarters, along
with SBA*s written responses, to identify the types of questions and
problems borrowers may have when their loans are sold. Our analysis showed
that almost half (65) were inquiries and concerns about their loans being
sold, requests to buy their own loans, or pleas not to have their loans
sold.

However, 47 of the borrowers complained about a purchaser*s servicing
action. For example, some letters involved disagreements or frustration
with servicing decisions, such as refusing to subordinate or release
collateral, 13 or imposing a fee to complete a servicing action such as
subordination. Another 18 letters were from borrowers who wanted to defer
payments or change the amount of their monthly payments because of
financial problems, and felt they were not getting appropriate treatment
from the purchasers of their loans.

To address these weaknesses in the loan sales program, we recommended that
SBA develop procedures for documenting and processing inquiries and
complaints from borrowers, and then provide guidance to the field offices
about implementing them. SBA reported to Congress in March 2003 that it
would soon issue a procedural notice to its field offices providing a
uniform process for handling borrower inquiries and complaints. SBA stated
that it also intends to establish an e- mail account for use by all
employees to record and forward borrower comments to the asset sales

team at headquarters, establish a database to track borrower comments, and
enhance a tracking system used for residential borrower inquiries at a
servicing center. We will follow up with SBA to monitor its implementation
of our recommendations.

13 *Subordination* occurs when a lender allows a new or existing loan to
take a superior lien to another loan. For example, a borrower with an SBA
disaster home loan may want SBA or a lender to subordinate the disaster
loan to a new or refinanced home mortgage.

Page 17 GAO- 03- 721T

During our review, we found errors that we believe could have
significantly affected the reported results in the budget and financial
statements for fiscal years 2000 and 2001. Because of errors we
identified, SBA*s auditor withdrew its clean audit opinions for those
years and issued disclaimers of opinion. Moreover, because of these and
other financial management issues, the auditor has disclaimed an opinion
on SBA*s financial statements for 2002. Although this roundtable is not
intended to explore the intricacies of accounting, I will briefly comment
on our findings, which are fully discussed in the report and testimony
cited previously. 14 SBA incorrectly calculated the accounting losses on
the loan sales and

lacked reliable financial data to determine the overall financial impact
of the sales. Further, because SBA did not analyze the effect of loan
sales on its remaining portfolio, its reestimates of loan program costs
for the budget and financial statements cannot be relied upon. In
addition, SBA could not explain significant declines in its loss allowance
account for disaster loans. Until SBA corrects these errors and determines
the cause of the precipitous decline in the loss allowance account, the
subsidy estimates and reestimates for the disaster loan program cannot be
relied on. These errors and the lack of key analyses also mean that
congressional decision makers are not receiving accurate financial data to
make informed decisions about SBA*s budget and the level of appropriations
the agency should receive.

We recommended that, before doing more loan asset sales, SBA correct the
accounting and budgeting errors and misstatements. And that SBA*s
Inspector General, with SBA*s independent auditors, should assess the
impact of the identified errors and determine if the prior audit opinions
need to be revised. SBA is working to respond to these recommendations
and, as we noted above, the auditor has withdrawn the previously issued
clean audit opinions because they could not be relied upon. We will be
monitoring SBA*s continuing efforts to resolve these issues.

14 GAO- 03- 87 and GAO- 03- 676T. SBA*s Accounting for Loan

Sales and the Remaining Portfolio Was Flawed

Page 18 GAO- 03- 721T

SBA reported that loan asset sales had benefited the agency*s operations
by reducing loan servicing, and that this reduction in loan servicing
volume should help allocate resources to other areas necessary to
achieving SBA*s mission and help the agency to manage its loan portfolio
more effectively. Though we found that loan servicing volume had declined
for SBA disaster home loan centers, the effect on regular business loans
was less clear. Furthermore, despite these reductions in loan servicing
volumes, SBA had not yet redeployed staff to more missioncritical
activities, such as lender oversight and business outreach. We found that
loan sales have mostly reduced the servicing workloads for disaster
assistance loans. They have had less impact on servicing workloads for 7(
a) business loans, because lenders did not always consent to sell these
loans. Because the reduction in loan servicing has involved disaster
assistance loans, it was unclear to what extent loan sales would help the
agency realign its workforce in the district offices that primarily serve
small businesses.

SBA has also reported that the loan sales have prompted borrowers to pay
their loans in full, revealed inconsistencies in the application of the
agency*s servicing procedures, and highlighted weaknesses in its
information system. We found some support to show that the loan sales had
produced portfolio management efficiencies. But we also found that some of
the benefits SBA had reported began before the loan sales

program, or could have been caused by other factors. For example,
borrowers of disaster loans who refinanced their homes while lower
interest rates were available often paid off their disaster loans, even
though their disaster loans had low interest rates.

To provide Congress and SBA with a better understanding of the impact of
loan sales on SBA*s operations, we recommended that SBA conduct a more
comprehensive evaluation of the loan sales* impact on the agency and the
cost savings from the sales. SBA recently stated that it will conduct such
an evaluation. 15 We will follow up with SBA as it addresses our
recommendation.

Madam Chair, Members of the Committee, this concludes my prepared
statement. I would be happy to answer any questions at this time.

15 Hector V. Barreto, Administrator, Small Business Administration, Letter
to The Honorable Susan Collins, Chair, Committee on Government Affairs, U.
S. House of Representatives, March 7, 2003. Loan Sales Have Reduced

SBA*s Loan Servicing Volume, but Other Operational Benefits May Be
Overstated

Page 19 GAO- 03- 721T

For information on this statement, please contact Davi D*Agostino,
Director, Financial Markets and Community Investment, at (202) 512- 8678
or Katie Harris, Assistant Director, at (202) 512- 8415. You may also
reach

them by e- mail at dagostinod@ gao. gov or harrism@ gao. gov. Other
individuals who made key contributions to this testimony or related work
include Dan Blair, Kristy Brown, Linda Calbom, Marcia Carlsen, Emily
Chalmers, Patricia Donahue, Julia Duquette, David Eisenstadt, and Kay
Kuhlman. Contacts and

Acknowledgments

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