Small Business Administration: SBA Followed Appropriate Policies
and Procedures for September 11 Disaster Loan Applications
(31-AUG-04, GAO-04-885).
The Small Business Administration (SBA) played a key role in
assisting small businesses affected by the September 11, 2001
terrorist attacks by providing over $1 billion in disaster loans
to businesses that sustained physical damage or economic injury.
Small businesses in the immediate areas of the attacks and others
nationwide that suffered related economic injury were eligible to
apply for disaster loans. SBA declined or withdrew about half of
these loan applications. SBA's disaster loans are direct federal
government loans provided at a subsidized interest rate. In
response to concerns that more small businesses impacted by
September 11 could have benefited from SBA's disaster loans, GAO
conducted a review of its Disaster Loan Program. Specifically,
GAO addressed the following questions: (1) Are the disaster
program policies consistent with the law and the overall mission
of SBA's Disaster Loan Program? (2) What were SBA's underwriting
policies and criteria for September 11 Economic Injury Disaster
Loans (EIDL) and how did they compare with those applied by
nonprofit lenders that were active in New York City after
September 11? (3) Did SBA correctly apply its policies and
procedures in its disposition of September 11 EIDLs?
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-885
ACCNO: A11980
TITLE: Small Business Administration: SBA Followed Appropriate
Policies and Procedures for September 11 Disaster Loan
Applications
DATE: 08/31/2004
SUBJECT: Disaster relief aid
Eligibility criteria
Eligibility determinations
Program management
Small business
Small business assistance
Direct loans
Emergency loans
Policy evaluation
Policies and procedures
SBA Disaster Loan Program
******************************************************************
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GAO-04-885
United States Government Accountability Office
GAO Report to the Administrator, Small Business Administration
August 2004
SMALL BUSINESS
ADMINISTRATION
SBA Followed Appropriate Policies and Procedures for September 11 Disaster Loan
Applications
a
GAO-04-885
Highlights of GAO-04-885, a report to the Administrator, Small Business
Administration
The Small Business Administration (SBA) played a key role in assisting
small businesses affected by the September 11, 2001 terrorist attacks by
providing over $1 billion in disaster loans to businesses that sustained
physical damage or economic injury. Small businesses in the immediate
areas of the attacks and others nationwide that suffered related economic
injury were eligible to apply for disaster loans. SBA declined or withdrew
about half of these loan applications. SBA's disaster loans are direct
federal government loans provided at a subsidized interest rate.
In response to concerns that more small businesses impacted by September
11 could have benefited from SBA's disaster loans, GAO conducted a review
of its Disaster Loan Program. Specifically, GAO addressed the following
questions: (1) Are the disaster program policies consistent with the law
and the overall mission of SBA's Disaster Loan Program? (2) What were
SBA's underwriting policies and criteria for September 11 Economic Injury
Disaster Loans (EIDL) and how did they compare with those applied by
nonprofit lenders that were active in New York City after September 11?
(3) Did SBA correctly apply its policies and procedures in its disposition
of September 11 EIDLs?
GAO makes no recommendations in this report.
www.gao.gov/cgi-bin/getrpt?GAO-04-885.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Davi M. D'Agostino at (202)
512-8678 or [email protected].
August 2004
SMALL BUSINESS ADMINISTRATION
SBA Followed Appropriate Policies and Procedures for September 11 Disaster Loan
Applications
SBA's policies and procedures for providing EIDLs are consistent with the
Small Business Act: applicants must have suffered substantial economic
injury as a result of a declared disaster, and SBA must determine that
they are not able to obtain credit elsewhere. The act addresses some loan
terms, such as length of maturity, but it does not specify underwriting
criteria for SBA to follow. However, SBA's regulations contain
underwriting criteria such as assessing an applicant's ability to repay
the loan and obtaining collateral.
SBA's underwriting requirements for September 11 EIDLs generally followed
program guidelines and were similar to those of selected nonprofit
organizations in New York City. Small businesses that were eligible to
apply for SBA assistance were expected to meet standard requirements for
documentation, creditworthiness, repayment ability, collateral, and
character. These requirements are generally consistent with best practices
published by lending industry experts and guidance issued by federal
regulators. Changes made to address the unusual circumstances of the
September 11 disaster were to eligibility and loan terms and not to loan
underwriting criteria. The three nonprofit organizations in New York City
that made September 11 disaster loans had requirements similar to SBA, but
the nonprofits had some additional flexibility to address the needs of
their small business constituents.
GAO found that SBA followed its policies and procedures in making
decisions for September 11 EIDLs. All of the files in our random,
representative sample of declined or withdrawn applications contained
documentation and analysis to support the SBA's determination. GAO's
review of this sample also indicated that SBA followed its procedures for
processing applications-such as supervisory review and notifying
applicants of its decision and their right to have the application
reconsidered. GAO's review of a small sample of approved loans also
indicated that SBA followed its policies and procedures.
SBA's Disposition of Economic Injury Disaster Loan Applications for
September 11
Withdrawn
Declined
Approved
Source: GAO.
Contents
Letter
1
Results in Brief 2 Background 5 The SBA Disaster Loan Program's Policies
and Procedures Are
Consistent with the Law and the Program's Overall Mission 9
SBA's Underwriting Criteria Followed Program Guidelines and Best Practices
and Were Similar to Those of Nonprofits Offering Disaster Loans 12
SBA Followed Its Own Policies and Procedures in Making Determinations on
September 11 Economic Injury Disaster Loans 20
Observations 25 Agency Comments 26
Appendixes
Appendix I: Scope and Methodology 27
Appendix II: Comments From Small Business Administration 31
Table 1: Disposition of Loan Application Sample
Table By SBA Disaster
Area Office
Figures Figure 1: SBA's Underwriting Criteria Compared
with Those of Three Nonprofit Lenders 18
Figure 2: Reasons SBA Declined and Withdrew
September 11 Loan
Applications in Our Sample 22
Figure 3: SBA's Processing Times for Declined
and Withdrawn
Loan Application Files in Our Sample 24
Contents
Abbreviations
EIDL Economic Injury Disaster Loan
FEMA Federal Emergency Management Agency
IRS Internal Revenue Service
SBA Small Business Administration
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
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separately.
A
United States Government Accountability Office Washington, D.C. 20548
August 31, 2004
The Honorable Hector V. Barreto
Administrator
Small Business Administration
Dear Mr. Barreto:
The Small Business Administration (SBA) played a key role in assisting
small businesses affected by the September 11, 2001 terrorist attacks. SBA
provided approximately $1.1 billion in disaster loans to businesses that
were physically damaged or had suffered a substantial economic injury as a
result of the attacks. Small businesses in the declared disaster areas
surrounding the World Trade Center and the Pentagon, as well as others
nationwide that had suffered economic injuries directly related to the
events of September 11, were eligible to apply for disaster loans. SBA
required eligible applicants to document the extent of their losses and
provide enough financial information for SBA to determine repayment
ability. SBA declined or withdrew those loan applications that its loan
officers determined did not meet its underwriting criteria. SBA's disaster
loans are direct federal government loans provided at a subsidized
interest
rate.
In previous work, we reported that SBA had declined or withdrawn about
half of approximately 24,000 post-September 11 applications for disaster
loans nationwide.1 In response to concerns that more small businesses
impacted by September 11 could have benefited from these loans, we
conducted a review of SBA's Disaster Loan Program. Specifically, we
addressed the following questions: (1) Are the disaster program policies
consistent with the law and the overall mission of SBA's Disaster Loan
Program? (2) What were SBA's underwriting policies and criteria for
September 11 Economic Injury Disaster Loans (EIDL) and how did they
compare with those applied by nonprofit lenders that were active in New
York City after September 11? (3) Did SBA correctly apply its policies and
procedures in its disposition of September 11 EIDLs?
To determine whether SBA's program policies are consistent with the law
and overall mission of SBA's Disaster Loan Program, we reviewed the law
1GAO, Small Business Administration: Response to September 11 Victims and
Performance Measures for Disaster Lending, GAO-03-385 (Washington D.C.:
Jan. 29, 2003).
related to the program as well as SBA's regulations and operating
procedures. To determine SBA's underwriting policies and criteria for
September 11 EIDLs, we analyzed SBA's policies and procedures for
approving, declining, and withdrawing disaster loans, and changes in its
policies and the law made after September 11. We discussed the provisions
of the law and SBA's policies and procedures with SBA officials. We also
analyzed the underwriting policies and procedures of three selected
nonprofit lenders that provided loans to small businesses in New York
after September 11 and discussed the lenders' policies with officials of
the respective organizations. In addition, we compared SBA's underwriting
requirements with best practices for managing credit risk during the
loanmaking process of industry and banking regulators. To determine
whether SBA correctly applied its policies in the disposition of September
11 EIDL applications, we reviewed a representative random sample of
declined and withdrawn September 11 EIDL application files drawn from all
disaster area offices,2 and a small sample of application files for
approved September 11 loans. The representative sample of declined and
withdrawn files allowed us to project to the universe of about 12,000
declined and withdrawn EIDLs, but the small sample of approved loans did
not allow us to project to the universe of all approved loans, and we
discuss only the disposition of the 27 approved loans we reviewed.
Appendix I contains a detailed description of our scope and methodology.
We conducted our work between May 2003 and June 2004 in Atlanta, GA; New
York, NY; and Washington, D.C. in accordance with generally accepted
government auditing standards.
Results in Brief The SBA Disaster Loan Program's policies and procedures
are consistent with the law and the program's overall mission of helping
businesses, among others, recover from disasters.3 The Small Business Act
authorizes SBA to make low-interest loans to small businesses that have
suffered a
2SBA's four disaster area offices are located in California, Georgia, New
York, and Texas, and serve the entire continental United States and U.S.
territories.
3SBA's Office of Disaster Assistance defines its mission as helping people
recover from disasters and rebuild their lives by providing affordable,
timely, and accessible financial assistance to homeowners, renters, and
businesses. This report addresses only economic injury disaster loans SBA
provided to businesses, although SBA also provides loans to businesses for
physical damage from disasters.
substantial economic injury as the result of a disaster.4 The act states
that no loan for economic injury shall be extended unless SBA finds that
the applicant is not able to obtain credit elsewhere, but it does not
specifically address underwriting criteria. For example, the act does not
specify that EIDLs must be of such sound value or so secured as to provide
reasonable assurance of repayment, as it does for SBA's general business
loans. Additionally, the act does not specifically address the issue of
collateral for EIDLs, whereas it specifies that SBA not require collateral
for physical disaster business loans of $10,000 or less. However, SBA's
regulations for its Disaster Loan Program do specify underwriting criteria
for EIDLs. Under its disaster program regulations, SBA generally requires
collateral for EIDLs over $5,000, but it will not decline a loan if an
applicant lacks adequate collateral if there is a reasonable assurance
that the applicant can repay the loan.
SBA's underwriting policies and criteria for September 11 EIDLs generally
followed program guidelines, although notable exceptions were made for
this disaster, and were generally similar to those of the selected
nonprofit organizations we reviewed. Applicants eligible for SBA's program
were expected to meet established requirements for documentation,
creditworthiness, repayment ability, collateral, and, as determined by
SBA, appropriate character.5 These requirements are generally consistent
with best practices published by lending industry experts and guidance
issued by federal regulators. With the Defense Appropriations Act of 2002,
Congress increased the statutory loan limit and the deferral periods for
repayment and SBA increased business size standards for eligible
borrowers.6 The maximum loan amount was increased from $1.5 million to $10
million, and SBA's standard 4-month deferral period was increased to 2
years for borrowers in the immediate areas of the disaster. Also, SBA took
action so that businesses nationwide-not just those in the immediate area
4Although the Small Business Act does not define substantial economic
injury for EIDLs, SBA regulations define it as economic harm to a business
concern that results in its inability to meet its obligations as they
mature or pay its ordinary and necessary operating expenses. 13 C.F.R.
S:123.300 (a) (1) (2003).
5By statute, SBA is required to deny assistance to persons convicted
during the past year of committing a felony during and in connection with
a riot or civil disorder. Pub. L. No. 90-448 S: 1106(e) (1968). According
to SBA officials, SBA uses specific program guidelines to make a character
determination on each loan applicant with a prior arrest or conviction.
SBA's procedure is documented in the Standard Operating Procedure 50-30.
6See Pub. L. No. 107-117 S:S: 202, 203, 115 Stat. 2297 (Jan. 10, 2002).
of the disaster-were able to apply for EIDLs if they had suffered economic
injury as a result of the terrorist attacks and subsequent federal
actions, such as closing airports.7 In addition, applicants in the
expanded area were required to provide a statement linking their economic
injury claims to the September 11 disaster. The three nonprofit
organizations that we selected for comparison generally provided financial
and technical assistance to businesses in New York City that suffered
losses as a result of September
11. All of these organizations had requirements that were similar to SBA's
for documentation, creditworthiness, and repayment ability. Unlike SBA,
all had limited requirements for collateral, and none used character as a
factor in determining eligibility for assistance.
Our review of a representative sample of declined and withdrawn September
11 EIDLs and a small sample of approved loans indicated that SBA followed
its own policies and procedures in making determinations on these loan
applications. We reviewed a sample of 99 declined and withdrawn loan
application files to determine whether SBA made its determinations
correctly. For all of the 99 files, SBA's policies and procedures
justified its decisions to decline or withdraw the applications. SBA's
primary reason for declining September 11 loan applications overall was
its determination that the applicant lacked repayment ability. In making
such determinations, SBA looked at whether the applicants had the cash
flow to make payments on the loan based on their pre-disaster financial
performance. The primary reason SBA withdrew loan applications was the
applicant's failure to file and pay federal income tax for 1 or more
years. Outside the designated September 11 disaster area, the primary
reason SBA declined applications was the applicants' failure to establish
a direct link between the events of September 11 or related federal
actions and the applicants' business downturn. In all of the 99 files, we
found that SBA had notified the applicants in writing of its reasons for
declining or withdrawing loan applications, problems with the applications
and the means of correcting any deficiencies, and each applicant's right
to have the loan application reconsidered by SBA. Our review of a small
sample of 27 approved loan application files indicated that SBA also
followed its policies and procedures in approving these loans. SBA had
denied or withdrawn 8 of these 27 applications prior to approving them.
7The Small Business Administration promulgated regulations dealing
specifically with EIDLs relating to the September 11, 2001, terrorist
attacks. See 13 C.F.R. Part 123, Subpart G (2003).
For these eight approved loans, the applicants addressed deficiencies
identified by SBA, such as failure to file for federal income taxes.
We provided a draft of this report to SBA and received written comments
from the Associate Administrator For Disaster Assistance. SBA's letter is
reprinted in appendix II. SBA agreed with the findings in this report.
Background When a disaster occurs, staff from SBA's Disaster Loan Program,
the Federal Emergency Management Agency (FEMA), and other government
agencies work together to assess the damage to the affected area and aid
household and business disaster victims. Either the President or the SBA
Administrator may issue a disaster declaration. When the President issues
a disaster declaration, FEMA specifies the immediate disaster area and SBA
determines which contiguous counties are eligible for federal assistance.8
When SBA issues a disaster declaration, it specifies the immediate
disaster area and any contiguous counties that are eligible for
assistance. Unlike FEMA, which can provide some grants to residents in the
area of a disaster, SBA provides loans to households and businesses
affected by disasters. Once a disaster is declared, officials from one of
SBA's four Disaster Area Offices-located in California, Georgia, New York,
and Texas-arrive at the disaster site and begin assisting victims. These
officials provide information about the disaster loan process, distribute
loan applications, and assist victims, if requested, in completing
applications. In response to the September 11 terrorist attacks, SBA
disaster program officials from around the country provided assistance to
the New York Disaster Area Office, which was the office primarily
responsible for providing assistance.
Depending on the nature of the disaster, SBA can provide businesses hurt
by a disaster with fixed-rate, low-interest loans to address physical
8According to SBA officials, most requests for disaster declarations come
from the governor of the affected state, who can ask for a presidential
disaster declaration or an SBA administrative declaration, depending on
the severity of the disaster. A presidential declaration makes many
federal programs available, including SBA loans; an SBA declaration makes
only SBA loans available.
property damage and economic injuries.9 These low-interest loans are
subsidized by taxpayers through federal appropriations, and if the loans
are not repaid, the subsidy cost for disaster loans increases. SBA
provides loans to cover physical damage to both small and large
businesses, enabling them to repair or replace damaged real property,
machinery, equipment, fixtures, and inventory to begin restoring the
property to its pre-disaster condition. SBA provides EIDLs only to
eligible small businesses, allowing them to meet necessary financial
obligations that could have been met if the disaster had not occurred and
to maintain necessary working capital during the period that business
activities are affected by the disaster. For most disasters, SBA has
primarily assisted businesses with physical disaster loans. However, given
the nationwide economic impact resulting from the terrorist attacks of
September 11, 2001, EIDLs became SBA's primary form of assistance. Of the
approximately 24,000 September 11 disaster loan applications, SBA approved
about 11,000, totaling $1.1 billion. Over 10,000 of these loans, amounting
to $1 billion, were for EIDLs.
Under its statutory authority to provide economic injury disaster loans to
small businesses, SBA has established policies and procedures for
determining whether an applicant qualifies for a loan and the likely
viability of the loan, using pre-disaster financial information from the
applicant. SBA loan officers determine whether applicants meet agency
criteria. SBA loan officers may determine that applicants do not meet
these criteria for one or more of the following reasons:
o lack of repayment ability;
o unsatisfactory history on an existing or previous SBA loan;
o unsatisfactory history on a federal obligation, such as taxes;
o unsatisfactory credit history;
o unsatisfactory debt payment history;
9For physical and economic injury disaster loans made after October 1,
1982, to businesses that cannot obtain credit elsewhere, the maximum
interest rate is 4 percent per annum. For businesses with credit available
elsewhere, SBA provides loans for physical damage at a maximum rate of 8
percent with a 3-year term; economic injury loans are not available to
businesses with credit available elsewhere. See 15 U.S.C. S: 636(c)(5)
(2000 & Supp. 2003).
o economic injury not substantiated;
o business activity not eligible;
o not a small business;
o credit available elsewhere (for instance, from a commercial financial
institution);
o recovery available from other sources, such as an insurance settlement;
o failure to maintain required flood insurance on an SBA loan;
o not a qualified business;
o refusal to pledge collateral;
o no direct link established between the business downturn and the
disaster (for September 11 EIDLs only); and
o outstanding judgment for a federal debt.
When SBA does not receive all the required information or documentation
from an applicant, it withdraws the loan application. SBA also withdraws
applications when the Internal Revenue Service (IRS) has no record that
the applicant has filed income tax returns for 1 or more years10 or
because of an unresolved character issue (for example, an applicant's
criminal activity). Additionally, an applicant may request that SBA
withdraw its application. After SBA declines or withdraws an application,
the applicant has 6 months to request reconsideration. SBA explains its
reason(s) for not approving the loan and the process for reapplying in
correspondence to the applicants.
In addition to SBA, several nonprofit organizations (nonprofits) in New
York City offered economic relief to small businesses in the area affected
by the events of September 11. The nonprofits that we contacted to discuss
their September 11 programs typically provide economic and technical
support to small, entrepreneurial, and nontraditional businesses such as
10In processing loan files, SBA requests 3 years of an applicant's
business federal tax transcripts and 1 year of the principal's personal
federal tax returns directly from the IRS.
street vendors and taxi drivers, in New York City and generally receive
funding from private and public sources. Funding for their September 11
programs came from these sources as well as from federal grants allocated
to support such programs. All three nonprofits received grants from the
September 11th Fund and raised additional capital with the help of private
banks and partner organizations.11 Two of the three nonprofits reported
that they provided both grants and loans to small businesses, but all
provided working capital loans to help businesses meet short-term
obligations such as rents, salaries, and accounts payable. These working
capital loans were expected to help businesses weather expected recovery
periods of between 3 and 6 months. One nonprofit offered only low-interest
working capital loans of up to $150,000, while another reported providing
$900,000 in grants and $3.1 million in low-interest loans. The third
nonprofit reported providing $7.1 million in grants and no-interest loans,
$12.4 million in low-interest loans, and $4 million in wage subsidies.
Small businesses in New York were also assisted by $3.5 billion in
Community Development Block Grant funding appropriated by Congress.
Congress earmarked at least $500 million of this funding to compensate
small businesses, nonprofits, and individuals for their economic losses.
This assistance included grants to compensate small businesses for some of
their losses, as well as payments to attract and retain small businesses
in an effort to revitalize the affected areas.12
11The September 11th Fund was established on the day of the terrorist
attacks by The New York Community Trust and United Way of New York City.
Grants from the fund enable cash assistance, counseling, and other
services to individuals and families, small businesses, and community
organizations affected by the disaster. The fund, which continues to
operate, makes grants directly to nonprofit organizations and agencies
with the expertise to meet a wide range of needs in a timely manner, as
well as those that were directly affected by the disaster.
12We have discussed federal assistance in response to the September 11
terrorist attacks in several other reports. See GAO, September 11: Small
Business Assistance Provided in Lower Manhattan in Response to the
Terrorist Attacks, GAO-03-88 (Washington, D.C.: Nov. 1, 2002); GAO,
Disaster Assistance: Information on FEMA's Post 9/11 Public Assistance to
the New York City Area, GAO-03-926 (Washington, D.C.: Aug. 29, 2003); and
GAO, September 11: Overview of Federal Disaster Assistance to the New York
City Area, GAO04-72 (Washington, D.C.: Oct. 31, 2003).
The SBA Disaster Loan Program's Policies and Procedures Are Consistent with
the Law and the Program's Overall Mission
SBA's policies and procedures for providing EIDLs are consistent with the
Small Business Act. The agency's policies and procedures are consistent
with the two requirements specific to EIDLs. These requirements are that
applicants must have suffered a substantial economic injury as a result of
a covered disaster and that SBA must find that the applicant is not able
to obtain credit elsewhere. The act addresses some loan terms, such as
length of maturity, but it does not specify underwriting criteria for SBA
to follow. However, SBA's regulations do contain underwriting requirements
such as assessing an applicant's ability to repay the loan, credit
history, and the availability of collateral, as well as other
requirements.
The Small Business Act Provides Little Specific Guidance on How SBA Should
Manage Its Disaster Loan Program, Particularly in Providing EIDLs
The law provides for SBA to make loans to small business concerns that
have suffered a substantial economic injury as a result of a covered
disaster, provided that SBA finds that an applicant is not able to obtain
credit elsewhere.13 Although the law does not define substantial economic
injury for EIDLs, SBA's regulations define it as economic harm to a
business concern that results in its inability to meet its obligations as
they mature or to pay its ordinary and necessary operating expenses. SBA
may provide an EIDL if it determines that an applicant has suffered a
substantial economic injury resulting from a disaster described in the
act. For EIDLs, the act describes four disaster scenarios: (i) a major
disaster, declared by the President of the United States; (ii) a natural
disaster, as determined by the Secretary of Agriculture; (iii) a disaster
declared by SBA; and (iv) if no disaster was declared under scenarios (i)
through (iii), certification to SBA by the Governor of a State that
eligible concerns have suffered economic injury as a result of a disaster
and are in need of financial assistance which is not available on
reasonable terms in the stricken area.14
Although the act specifies some terms for EIDLs, it does not specify
underwriting requirements. For example, the law states that the loans
should not exceed $1,500,000, unless the applicant is a major source of
employment in the impacted area or have more than a 30-year maturity
13The law excludes agricultural enterprises from eligibility to receive a
disaster loan. 1415 U.S.C. S: 636(b)(2)(A)-(D).
period.15 It also provides some specific interest rate requirements, based
on the year of the disaster. However, it does not specify underwriting
criteria for EIDLs. The act does not specify that EIDLs should be of sound
value or secured to provide reasonable assurance of repayment, as it does
for SBA's general business loans. Additionally, the act does not
specifically address the issue of collateral for EIDLs, whereas it
specifies that SBA not require collateral for physical disaster business
loans in the amount of $10,000 or less.
SBA's Regulations Specify Underwriting Criteria and Other Requirements for
Disaster Loan Applicants
SBA's regulations for EIDLs contain underwriting criteria that require,
among other things, a reasonable assurance of repayment, satisfactory
credit and character, and generally, collateral.16 The regulations state
that SBA must have reasonable assurance that all disaster loan applicants
can repay their loans from their personal or business cash flow. The
regulations also state that SBA is prohibited from lending to businesses
with an associate who is incarcerated, on probation, on parole, or who has
been indicted for a felony or a crime of moral turpitude.17 The
regulations do not elaborate on satisfactory credit, however, as discussed
later, SBA's policies and procedures address these issues. For EIDLs
greater than $5,000, SBA regulations require that applicants provide
collateral, although SBA will not decline a loan if the applicant lacks a
particular amount of collateral, as long as it has reasonable assurance
that the applicant can repay the loan. However, SBA may decline or cancel
a loan where the applicant refuses to pledge available collateral when
requested by SBA. SBA regulations also specify eligibility requirements
for the types of businesses that may obtain an EIDL. The regulations
exclude the following types of small businesses:
o businesses engaged in lending, speculation, or investment;
o nonprofits and charities;
o consumer or marketing cooperatives;
15Under certain circumstances, SBA may suspend payment of principal and
interest for up to 5 years. As discussed elsewhere in this report,
Congress increased the limitation on loan amounts and provided a deferral
of the repayment period for loans resulting from the September 11, 2001
attacks.
1613 C.F.R. S:S: 123.6, 123.11 (2003).
1713 C.F.R. S: 120.110(n) (2003).
o businesses deriving more than one-third of gross annual revenue from
gambling activities;
o loan packagers that earn more than one-third of gross annual revenue
from packaging SBA loans;
o businesses principally engaged in teaching, counseling or
indoctrinating religion or religious beliefs; and
o businesses primarily engaged in political or lobbying activities.18
SBA amended its regulations in October 2001, expanding eligibility to
small businesses outside the declared disaster area, applicable only to
September 11 EIDLs. SBA made this change in recognition that the September
11 disaster had a widespread economic impact, beyond the boundaries of the
declared disaster areas in New York and Virginia. Under the new section of
the regulations, SBA agreed to provide EIDLs to businesses outside of the
declared disaster area if they could show that they suffered a substantial
economic injury as a direct result of the destruction at the World Trade
Center or the damage to the Pentagon, or any related federal actions (such
as the suspension of air travel) taken between September 11, 2001, and
October 22, 2001.19 The regulations specify that loss of anticipated
profits or a drop in sales is not considered substantial economic injury
for purposes of an EIDL under these provisions.20 Other than this change
to expand EIDL eligibility nationwide, SBA's general regulatory
requirements for disaster loans, which we discuss more fully later in this
report, applied to September 11 EIDLs.
1813 C.F.R. S: S:123.301. Also, SBA EIDL assistance may not be provided to
the following business concerns: concerns with a principal convicted,
during the past year, of a felony during and in connection with a riot or
civil disorder or other declared disaster; concerns with a principal
presently incarcerated, or on probation or parole following conviction of
a serious criminal offense; concerns engaged in illegal activities;
government-owned entities (except for a business owned or controlled by a
Native American tribe); concerns which present live performances of a
prurient sexual nature or which derive more than de minimus gross revenue
through the sale of products or services, or the presentation of any
depictions or displays of a prurient sexual nature; concerns with a
principal who owns more than 50 percent of the business and who is more
than 60 days late on a child support order, unless the principal divests
all interest in the business. See ID. and 12 U.S.C. S: 633(e), (f) (2000).
1913 C.F.R. S: 123.600.
2013 C.F.R. S: 123.601(a)(2).
SBA's Underwriting Criteria Followed Program Guidelines and Best Practices and
Were Similar to Those of Nonprofits Offering Disaster Loans
SBA's underwriting policies and criteria for September 11 EIDLs generally
followed established guidelines, even with the exceptions that were made
for this disaster, and were similar to those of selected nonprofits in New
York City. Small businesses that were eligible to apply for SBA loans were
expected to meet standard requirements for documentation,
creditworthiness, repayment ability, collateral, and appropriate
character, as determined by SBA.21 We found that SBA's lending activities
followed best practices for private lending, as set out by industry
experts. As we reported previously,22 modifications to SBA's Disaster Loan
Program were made to address the unusual circumstances surrounding the
September 11 disaster and to respond to the concerns of affected small
businesses. However, the changes that were made were to eligibility and
terms, not to loan underwriting criteria. Finally, the three nonprofits
that we reviewed had requirements that were similar to SBA's for
documentation, creditworthiness, and repayment ability, but their
requirements differed for collateral and appropriate character.
SBA EIDL Requirements for September 11 Generally Followed Program
Guidelines
SBA used the same requirements for September 11 EIDLs as it would for any
other disaster. In accordance with the guidelines of the Disaster Loan
Program, SBA required small business applicants to provide the following:
o personal financial statements for all principals with at least 20
percent interest in the business and each general partner;
o business tax records for the 3 most recent tax years and 1 year of
personal tax records;
o balance sheets and operating statements dated within 90 days of
application; and
o monthly sales figures beginning 3 years before the disaster and
continuing through the most current month available.
21According to SBA officials, SBA follows the requirements of the Office
of Management and Budget Circular A-129, Managing Federal Credit Programs,
which, among other issues, prescribes policies and procedures for
extending credit such as screening applicants, documenting loans, and
collateral requirements.
22GAO-03-385.
Applicants were also required to undergo the standard credit analysis
required for the EIDL program. Since EIDLs are available only to small
businesses unable to obtain credit elsewhere, SBA administers its own test
to determine whether applicants are able to qualify for private funds
under reasonable terms and conditions, or if the applicant has the
financial capacity to recover without federal assistance. September 11
loan applications were processed using SBA's "credit elsewhere" test, a
combination of two formulas that looks at cash flow for debt servicing and
available net worth. Loan officers then used information provided in the
credit reports, balance sheets, and tax records to determine repayment
ability, based primarily on pre-disaster financial performance. SBA
required that EIDLs of more than $5,000 be secured by personal guaranties
from all business principals and by the "best available collateral."23 SBA
officials stated that the best available collateral typically would be
business or personal real estate, since real estate is the only asset that
will likely maintain its value over the life of a 30-year SBA loan.24 In
some cases, SBA accepted other business property as collateral for smaller
September 11 EIDLs, if it was the best available, according to SBA
officials.
Finally, Disaster Loan Program guidelines require that SBA make a
character determination on all loan applicants in order to determine
eligibility for federal loans. By statute, SBA is required to deny loans
to persons convicted during the past year of a felony committed during a
riot or civil disorder and in connection with another declared disaster.25
SBA uses specific program guidelines to make a character determination on
each loan applicant who has a prior arrest, indictment, or conviction or
is on parole or probation. Applicants are required to provide information
on any previous arrests or convictions.
SBA's Program Policies Were Generally Consistent with Good Lending
Practices
SBA's guidelines for its Disaster Loan Program generally coincide with
best practices published by lending industry experts and guidance issued
by federal regulators. As stated previously, modifications that were made
specifically for the September 11 disaster did not affect the
administration of the program or underwriting criteria for EIDLs made to
small businesses
23Personal guaranties were not required for sole proprietorships, because
the sole proprietor is individually obligated under the note.
2430 years is the maximum term for an SBA disaster loan.
25P. L. No. 90-448 S: 1106(e) (1968).
nationwide. Disaster Loan Program requirements include specific and
clearly stated criteria and processes for analyzing credit and determining
repayment ability. Operating procedures for the program also detail
internal control and supervisory review directives.
According to experts, "a cornerstone of safe and sound banking is the
design and implementation of written policies and procedures related to
identifying, measuring, monitoring, and controlling credit risk. Such
policies should be clearly defined, consistent with prudent banking
practices and relevant regulatory requirements, and adequate for the
nature and complexity of the bank's activities."26 Further, in order to be
effective, credit policies must be communicated throughout the
organization, implemented through appropriate procedures, and monitored
and periodically revised to take into account changing internal and
external circumstances. We compared SBA's policies and procedures with
industry best practices and regulatory guidance for extending credit.
SBA's policies and procedures for its Disaster Loan Program in general and
EIDLs in particular are presented in SBA's standard operating procedures
and related program memoranda. Underwriting criteria are clearly defined,
with specific formulas for SBA's loan officers to use in evaluating credit
risk for each loan applicant. Industry standards also specify the
importance of a comprehensive analysis of a borrower' s ability to repay
the loan and requiring a borrower to pledge collateral. SBA's requirements
for loan guaranties and collateral and its analysis of applicants' cash
flow to determine repayment ability are in line with industry guidance on
mitigating lender risk in individual credit transactions. Modifications
that were made to eligibility and terms for September 11 EIDLs were
communicated throughout the agency in program memoranda. SBA provided
applications for the expanded program nationwide through its resource
partners.27 Our review of September 11 loan files also indicated that SBA
complied with its procedures for supervisory review of all loan decisions.
26Principles for the Management of Credit Risk: Basel Committee on Banking
Supervision, September 2000.
27Some of SBA's resource partners are Small Business Development Centers
(SBDC).
Congress and SBA Approved Modifications in Key Areas of the Disaster
Program
With the Defense Appropriations Act of 2002, Congress approved notable
modifications for this disaster that changed the terms for September 11
EIDLs for small businesses. These included increasing the maximum loan
limit from $1.5 million to $10 million and raising the maximum repayment
deferral period.28 SBA's policy of a 4-month deferral period was increased
to 2 years, by legislation, for businesses in the immediate areas of the
disaster. EIDLs granted in the immediate areas of the disaster also did
not accrue interest during the 2-year deferral period.
By regulation, borrowers in the immediate disaster areas receiving
economic injury loans also had 2 years from the date of approval to apply
for additional funds or a modified loan, and borrowers in the expanded
area had 1 year.29 Borrowers would thus have sufficient time to assess
additional disaster-related damage that had not been detected or reported
at the time of the initial application.
Under its regulatory authority, SBA expanded eligibility for the September
11 disaster to businesses nationwide that were directly affected by the
terrorist attacks and subsequent federal actions such as airport closures
that resulted in business disruptions across the country.30 The expanded
program also addressed the needs of small businesses that depended on
other businesses and industries whose operations were suspended or
disrupted because of the disaster. Businesses in the expanded areas were
required to provide an economic injury statement. Applicants needed to
make a direct link between the economic downturn affecting their business
and the events of the disaster in order to qualify for loans under the
expanded program.31
28The $10 million loan limit also included loans to businesses with joint
economic injury and physical disaster claims.
2913 C.F.R. S: 123.20 and 13 C.F.R. S: 123.606.
3066 Fed. Reg. 53329 (Oct. 22, 2001).
31SBA developed standard eligibility criteria and a sample question and
answer form for the Expanded EIDL Program to help loan officers determine
whether businesses qualified for loans. The criteria stated that a general
decline in business since September 11 was not in itself enough to
establish eligibility. The downturn had to be the direct result of the
destruction of the World Trade Center, damage to the Pentagon, or related
federal actions. The program did not cover a decline in revenue due to
public reaction in the wake of the disaster.
SBA made other accommodations for September 11 applicants, including
increasing the size limits for eligible businesses, expediting loan
processing, and providing translators to help non-English speaking
applicants. As we noted in a previous report, small business owners had
complained to Congress about some facets of the Disaster Loan Program.32
These complaints prompted SBA and the Congress to modify the program.
First, because of the immediate and devastating effect on the travel
industry nationwide, SBA increased the business size standards for travel
agencies and certain other travel-related businesses.33 Applications that
were pending or had been previously declined or withdrawn solely on the
basis of the size of the business were automatically reconsidered, and SBA
adjusted the size determination date to the application acceptance date
instead of the date of the disaster. For travel agencies and other travel
businesses, the size standard was increased from $1 million to $3 million
in annual receipts, allowing larger businesses to qualify. Second, in an
effort to improve efficiency in processing the large number of EIDL
requests for September 11, particularly under the expanded program, SBA
developed an expedited process for reviewing loan applications. Under the
expedited process, applicants that did not qualify based on eligibility
criteria or predisaster credit and repayment issues were declined early in
the review process. Loan officers were required to inform these applicants
about the abbreviated process, and applicants could ask to be reconsidered
and could submit additional documentation to justify their request.
According to SBA officials, expedited processing also allowed it to
provide quick loan approval to businesses within the declared disaster
area in operation at the time of application up to a maximum amount of
$200,000 and those that were not in operation because of the events of
September 11, up to $350,000. Expedited processing allowed businesses
outside of the declared disaster area meeting certain basic requirements
to receive quick approval for loan amounts up to $50,000.34 Third, in
direct response to complaints from small business owners in New York City
with limited proficiency in English, SBA made efforts to provide loan
application documents in languages other than English, including Spanish
and Asian languages, and to provide multilingual personnel at New York
City application centers. One SBA small business development center
representative told us that
32GAO-03-385, see pages 10-15 and appendix III.
3367 Fed. Reg. 11874 (Mar.15, 2002).
34Basic requirements were adequate repayment ability, satisfactory credit,
and a verifiable federal tax return showing that the business had operated
for at least 12 months.
although this initiative was positive, interpreters who were not familiar
with business and financial jargon still faced limitations in
communicating adequately with some small business owners.
Nonprofit Lenders in New York City Had Similar Requirements for Disaster
Loans
Three nonprofits in New York City that made September 11 disaster loans
had requirements similar to SBA's, but the programs had some additional
flexibility to address the needs of their small business constituents
(fig. 1). One of the nonprofits reported ineligibility for SBA loans or
not meeting SBA's requirements as one of its own criteria for application
acceptance. Another reported that its program was geared, in particular,
toward small businesses that had not qualified for significant loans from
SBA or other recovery loan programs. The existence of these nonprofit
lenders provided alternative economic injury assistance to small
businesses in New York City.
Figure 1: SBA's Underwriting Criteria Compared with Those of Three
Nonprofit Lenders
Loan application requirements
No requirement Limited requirement Requirement Source: GAO.
Like SBA, the nonprofits we spoke with had requirements for documentation,
creditworthiness, and repayment ability. All three nonprofits required
that applicants provide business financial statements, business and
personal tax records, credit reports, and a number of other documents. One
nonprofit requested, among other documents, corporate bank statements, a
business plan, insurance statements, and receipts and invoices for
expenses related to September 11. The same nonprofit required that
applicants commit to remaining in New York City and asked for a current
executed commercial lease. Another nonprofit said that commitment to
rebuilding in the area was a factor in the decisionmaking process but did
not include this factor in its eligibility requirements. Like SBA, the
nonprofits used credit reports and business financial statements to
determine an applicant's level of past debt, management of past credit,
and likelihood of repaying the disaster loan.35 All of the nonprofits
reported that credit and repayment histories played an important role in
the decisionmaking process, but two of the nonprofits emphasized that
applicants were not declined solely on the basis of the information
provided in credit reports. One nonprofit considered the direct impact of
the disaster on a business's ability to manage its recent credit, and
another reported that it made allowances for special circumstances such as
illness and divorce if applicants provided documentation and could show a
pattern of good faith efforts to address delinquencies.
Unlike SBA, all of the nonprofits had limited requirements for collateral
and reported that collateral was only requested on a case-by-case basis.
One nonprofit reported that collateral was not required, but was accepted
in lieu of a guaranty or cosigner for applicants who had been approved
with less than satisfactory pre-disaster credit. In such cases, collateral
would be accepted, even if it was not enough to secure the entire loan and
would be considered "psychological collateral." Another nonprofit reported
that collateral was typically required when a business had a limited
operating history or highly unpredictable and inconsistent cash flow, and
offered unsecured loans up to $250,000. The third nonprofit reported that
business collateral was required on a case-by-case basis but provided no
further details. Two of the nonprofits indicated that they required
personal guaranties, with one specifying that owners with 20 percent or
more interest in the business would need to provide some guarantee. The
third nonprofit indicated that it also determined whether to ask for
personal guaranties on a case-by-case basis.
None of the nonprofits had a requirement similar to SBA's for appropriate
character for their September 11 programs. One of the nonprofits indicated
that an applicant's character was called into question if a written or
verbal account was inconsistent with the documentation provided.
35Personal credit reports are available from one of three credit-reporting
bureaus in the United States-Equifax, Experian, and TransUnion. A typical
consumer credit report provides an overall credit rating, credit history
detail, and records of any bankruptcies, liens, and judgments filed
against an individual. Besides requesting personal credit reports for each
principal of an applicant business, SBA also requested business credit
reports from Dun & Bradstreet, which provide information on company
structure, an overall business credit rating, and records of any
bankruptcies, liens, and judgments.
SBA Followed Its Own Policies and Procedures in Making Determinations on
September 11 Economic Injury Disaster Loans
In our review of SBA's September 11 EIDL application files, we found that
SBA followed its own policies and procedures in determining whether to
provide loans to prospective borrowers. Our review of a representative
random sample of applications SBA declined or withdrew showed that all of
the 99 files contained the documentation and analysis needed to support
the determination. We also found that SBA followed its procedures for
processing loan applications, such as conducting supervisory reviews of
loan decisions, and made its determinations and notified applicants in a
timely manner. Our review of a small random sample of approved loans also
indicated that SBA followed its policies and procedures in granting loans.
SBA Followed Its Policies and Procedures in Declining and Withdrawing Its
September 11 Economic Injury Disaster Loan Applications
In all of the 99 loan files we reviewed in our representative random
sample, SBA correctly declined 70 and withdrew 29 of the applications.
Overall, SBA declined September 11 loan applications primarily because it
determined that the applicants were unlikely to be able to repay the loan.
While SBA can cite several reasons for declining a loan, it gave lack of
ability to repay as at least one of the reasons for declining 38 of the 70
declined loan applications that we reviewed. In these cases, SBA concluded
that the applicants' income was insufficient to repay a disaster loan,
given existing debts and expenses, based on the analysis that loan
officers conducted using financial information provided by the applicant.
Our analysis of the universe of September 11 EIDLs revealed that SBA
declined 4,513 applications, or more than half of all declined
applications for lack of repayment ability. For the 34 declined Expanded
EIDL applications in our sample, SBA declined 18 applications, or about
half, because the applicants failed to establish a direct link between
their business downturn and the events of September 11 or related federal
actions, as SBA required of applicants outside of the declared disaster
areas. In the universe of Expanded EIDLs, SBA declined 4,186 applications
and 1,975 were declined for this reason. For example, a small business in
an airport that lost revenue during the period in which air travel was
suspended would have been eligible for an SBA September 11 Expanded EIDL.
However, a business that simply showed losses after September 11 would not
be eligible for a loan.
SBA withdrew loan files primarily because the applicants had not filed
federal income tax returns. Of the 29 withdrawn loan applications in our
sample, SBA withdrew 16 for this reason. Following its usual procedures,
SBA requested the most recent 3 years of business tax records and 1 year
of
personal tax records directly from IRS. According to a senior SBA
official, SBA has a special arrangement with IRS for obtaining federal tax
documentation for disaster loan applicants. IRS dedicates staff to
processing these requests, and the IRS staff work the same hours as the
SBA loan officers in order to provide the needed information as the loans
are processed. IRS provides SBA with transcripts of available returns or a
notification that no records could be found. SBA withdraws an application
if IRS has no record of the applicant's tax return for at least a year and
will also generally withdraw an application when missing or incomplete
information prevents the loan officer from making a determination. Figure
2 provides additional information on the reasons SBA declined and withdrew
loan applications in our sample. Our analysis of the universe of September
11 EIDLs revealed that SBA withdrew 1,294 applications, or about 38
percent of all withdrawn applications, because IRS had no record of tax
returns for the applicants for 1 or more years.
Figure 2: Reasons SBA Declined and Withdrew September 11 Loan Applications
in Our Sample
Number of applications
40
35
30
25
20
15
10
5
0 21 25 26 27 28 31 32 34 38 39 40 42 5153/5556 59 Decline codes
21 Lack of repayment ability
25 Inadequate working capital even if SBA could approve a loan
26 Unsatisfactory history on an existing or previous SBA loan
27 Unsatisfactory history on a federal obligation
28 Unsatisfactory credit history
31 Economic injury is not substantiated
32 Business activity is not eligible
34 Credit is available elsewhere
38 Not eligible due to recoveries from other sources
39 Not eligible; failure to maintain flood insurance on an existing SBA
loan
40 Not a qualified business
42 Policy reasons; business does not meet eligibility criteria
Source: GAO.
Withdrawal codes
51 Applicant did not furnish the requested additional information
necessary to process the loan application
53/55 Applicant's request
56 Other
59 IRS has no record of personal or
business tax returns for one or more of the years requested
Note: SBA may decline or withdraw a loan application for more than one
reason. The bars represent the frequency with which the decline and
withdrawal codes were cited in the loan applications we reviewed.
We found technical errors in 2 of the 99 files we reviewed, although the
facts presented in the application files showed that SBA would not have
granted the loan, even if the errors had not been made. SBA declined one
application because the applicant owed federal income taxes and lacked
repayment ability, even though the applicant was a nonprofit and therefore
ineligible for an EIDL. SBA notified another applicant that it was
declining the application for policy reasons because the applicant was a
subsidiary of a foreign company and had no revenues in the United States.
According to
an SBA official, SBA's policies and procedures suggest that the
application could have also been declined for lack of repayment ability.
SBA Followed Its Procedures for Processing Declined and Withdrawn Loan
Applications
In our review of declined and withdrawn loan files, we found that SBA
followed its policies and procedures for conducting supervisory reviews of
loan decisions and notifying applicants of the decisions and that the
agency generally processed applications in a timely manner. In all of the
99 declined and withdrawn files that we reviewed, an SBA supervisory loan
officer signed the loan officer's report, which documents how the loan
officers came to the decision on the application.36 On many of the loan
officer's reports, the supervisory loan officer made some notations
assessing the loan officer's analysis of the application. Additionally,
all of the files contained correspondence to the applicant documenting
SBA's decision that clearly described SBA's reasons for declining or
withdrawing the application, the deficiencies in the application and
additional documentation required (if applicable), and the applicant's
right to have the application reconsidered. We also found that SBA
generally processed the loan applications in a timely manner, as defined
in SBA procedures. At the time SBA processed the September 11 loans, its
benchmark was to process loan applications within 21 days. For most of the
files that we reviewed, SBA made a decision within 14 days of the
application date (fig. 3).37 Our analysis of the universe of all September
11 EIDLs found that SBA processed declined files in an average of 11 days
and withdrew files in an average of 13 days.
36In addition to supervisory reviews of loan decisions, SBA also conducts
an annual quality assurance review in each of its area offices to assess
whether loan officers are following SBA's policies and procedures in
making loan decisions. SBA reviews a randomly chosen sample of loan files
as a part of this review.
37In a previous report, GAO-03-385, we found that SBA's average time for
processing September 11 business loans was about 13 days. Thus, SBA was
exceeding its own performance measure. We recommended that, to better
demonstrate its program performance, SBA revise performance measures
related to the disaster program. SBA has made several appropriate changes
to its measures, as reported in its fiscal year 2003--2008 strategic plan,
but it has not substantially changed its performance goal for processing
EIDL applications. For example, its goal for fiscal year 2004 is to
process 85 percent of EIDL applications within 20 days.
Figure 3: SBA's Processing Times for Declined and Withdrawn Loan
Application Files in Our Sample
Number of cases 60
50
40
30
20
10 0 0-14 15-21 22-30 Number of days to process
Withdrawn
Declined
Source: GAO.
SBA Also Followed Its Own Procedures for Approving September 11 Loans
Based on our review of a small sample of loan files, SBA also followed its
own policies and procedures in approving September 11 disaster loans.38
However, this sample was not representative and cannot be projected to the
universe of September 11 EIDLs. In our review of 27 approved loan files,
we found that they contained all of the financial documentation and
underwriting analysis required to approve the loans, according to SBA's
policies and procedures. However, we did find an error in one of the
approved loan files. In this case, an applicant had stated on his
application that he was the sole proprietor of his business and not a U.
S. citizen. Under
38SBA's Office of Inspector General (OIG) is conducting a more extensive
review of approved September 11 loans to determine whether the loans were
underwritten, disbursed, and administered according to SBA's standard
operating procedures. The OIG is also reviewing a sample of loans that
have already defaulted.
these circumstances, SBA was supposed to request that the applicant
provide proof that he was a non-citizen national or qualified alien.39
Based on evidence in the file, the applicant had not provided proof of his
alien status. As with our review of the declined and withdrawn files, the
approved loans all showed evidence of supervisory review.
Of the 27 approved loan files we reviewed, SBA had initially declined or
withdrawn eight. In these eight files, applicants had deficiencies similar
to those of the declined or withdrawn loan files we reviewed but were able
to address the deficiencies and reapply. For example, the applicants whose
files had been withdrawn because of income tax issues reapplied after
filing and paying federal income taxes, allowing SBA to approve the loans.
In one of the approved loan files we reviewed, SBA withdrew the
application for failure to file for federal income taxes. After the
applicant filed federal tax returns, SBA then declined the application for
lack of repayment ability and unsatisfactory history on a federal
obligation, or failure to pay federal income taxes. After setting up a
payment plan with the IRS and reducing expenses, the applicant reapplied
and SBA approved the loan. In another approved loan file, SBA initially
declined the application because the applicant had not substantiated the
economic injury. Based on SBA's analysis of the applicant's documentation,
the business would be able to meet its financial obligations without a
loan. However, the applicant provided further documentation to show that
it had lost contracts because of the September 11 disaster and that the
loss of business would have a negative effect on the firm over time. The
additional documentation allowed SBA to approve the loan.
Observations Although SBA is not required to maintain specific
underwriting criteria for its Disaster Loan Program under the provisions
of the Small Business Act, we think that SBA's policies are generally
consistent with good lending policies as reflected in industry best
practices and regulatory guidance, and, when properly applied, should help
maintain the integrity of the program. SBA's underwriting procedures
evaluate applicants' credit risk and analyze their ability to repay the
loan. These procedures, along with requiring collateral to secure the
loans, help ensure that SBA fulfills its
39SBA instituted this procedure to comply with Pub. L. 104-193, Title IV
of the Personal Responsibility and Work Opportunity Reconciliation Act of
1996,which prohibits providing a federal public benefit to persons who are
not United States citizens, non-citizen nationals, or qualified aliens.
mission in providing loans that will assist small businesses in recovering
from disasters. By assessing repayment ability, SBA can more effectively
use its resources to assist small businesses that are more likely to be
able to repay the loan, thus limiting the loan program's cost to the
government, and therefore the taxpayer.
Agency Comments We provided a draft of this report to SBA and received
written comments from the Associate Administrator For Disaster Assistance.
SBA's letter is reprinted in appendix II. SBA agreed with the findings
presented in this report. In addition, SBA provided technical comments,
which we incorporated into this report as appropriate.
We will provide this report to appropriate congressional committees. In
addition, this report will be available at no charge on our web site at
http://www.gao.gov.
Please contact me at (202) 512-8678 or [email protected] or Katie Harris,
Assistant Director at (202) 512-8415 or [email protected] if you or your
staff have any questions about this report. Key contributors to this
report were Bernice Benta, Gwenetta Blackwell-Greer, Diane Brooks, Jackie
Garza, Fred Jimenez, and Carl Ramirez.
Sincerely yours,
Davi M. D'Agostino Director, Financial Markets and Community Investment
Appendix I
Scope and Methodology
To determine whether Economic Injury Disaster Loan (EIDL) program policies
are consistent with the law and overall mission of SBA's Disaster Loan
Program, we reviewed the Small Business Act and SBA's related regulations.
We determined what the provisions of the law require of SBA in its
operation of the program as well as SBA's regulations and operating
procedures. We discussed our views on the laws, regulations, and operating
procedures with appropriate SBA officials.
To compare SBA's underwriting policies and criteria for September 11 EIDLs
with nonprofit lenders active in New York City after the disaster, we
reviewed SBA's policies and criteria for approving, declining, and
withdrawing disaster loans, and amendments made after September 11. We
also compared SBA's underwriting requirements with industry best practices
and banking regulators' guidance for managing credit risk during the
lending process. We spoke with officials of nonprofit organizations
(nonprofits) that provided loans to small businesses in New York City
after September 11,1 and reviewed their underwriting policies and
criteria. We requested specific information on their loan programs to
answer questions regarding (1) eligibility requirements for each
nonprofits' program, (2) type of documentation that was required to
accompany a loan application, (3) actual limits and terms associated with
available loans, and (4) factors that each nonprofit considered in making
the decision to approve or decline an application. We reviewed this
information within each of the four categories and compared it with SBA's
EIDL policies and criteria applicable to post-September 11 lending.
To determine whether SBA correctly applied its policies in the disposition
of September 11 EIDL applications, we reviewed a representative random
sample of declined and withdrawn September 11 EIDL application files
across all disaster area offices, and a small sample of loan application
files for approved September 11 EIDLs. We developed a data collection
instrument containing key factors we identified in SBA's standard
operating procedures and reviewed each loan application file to determine
whether there was evidence that the appropriate policies and criteria had
been applied in determining the disposition of each application. The
representative sample of declined and withdrawn files allowed us to
project to the universe of about 12,000 declined and withdrawn EIDLs. The
small sample of approved loans did not allow us to project to the universe
1These nonprofits were identified during our previous work on assistance
provided to small businesses in New York City after September 11. See
GAO-03-88, pp. 21-24.
Appendix I Scope and Methodology
of all approved loans, and we discuss the disposition only of the files
that we reviewed.
We sampled from the original population of all 24,041 September 11
disaster loan applications.2 We selected a probability sample using a
design that was stratified by SBA's four disaster area offices and whether
or not the loan application was declined or withdrawn. We also selected a
smaller simple random sample from among all of the accepted loan
applications, as a check to see how the loan files differed from those
withdrawn or declined. We assessed the reliability of SBA's database, the
Automated Loan Control System, and found it acceptable for our purposes.
Additional details about our sampling methodology follow.
The sampling unit was the paper copy of a loan application file. The
sample sizes were estimated at the 95 percent level of confidence for a
desired precision of 6 percent. The sample size was estimated using a
formula appropriate for estimating an attribute in a stratified design.3
Within the universe, some older application files had already been
shredded. Under SBA's procedures, declined and withdrawn files that have
been inactive for 2 years may be shredded. To account for this, the sample
size was increased slightly within each of the eight strata, in case one
of these files appeared in the random sample. However, none of the files
in our sample had been shredded-SBA was able to provide us with all of the
files we requested. Between the eight strata, a sample size of 103 was
proportionally allocated and then selected. The strata allocation and
final disposition of the sample are shown in Table 1.
Table 1: Disposition of Loan Application Sample by SBA Disaster Area
Office
Out of Adjusted
Stratum Sample scope files sample
New York - Declined 44 2 42
New York - Withdrawn 21 2 19
Georgia - Declined 13 0 13
2The number of applications in SBA's universe of September 11 disaster
loans was as of January 30, 2004, when SBA provided us with the data.
3Cochran, William, Sampling Techniques: Third Edition (New York, New York:
John Wiley and Sons, 1977).
Appendix I Scope and Methodology
(Continued From Previous Page)
Out of Adjusted
Stratum Sample scope files sample
Georgia - Withdrawn 4 0
Texas - Declined 5 0
Texas - Withdrawn 2 0
California - Declined 10 0
California - Withdrawn 4 0
Total 103 4
Source: GAO.
In our loan application file reviews, we found that 4 of the 103 loan
application files sampled were physical injury disaster loans files, not
EIDL applications, and we excluded them as out of our study's scope. In
the entire original population of 13,171 declined or withdrawn
applications, we found 808 corresponding out of scope records. In
addition, there were 223 files that SBA indicated had been shredded.
Therefore, the final study population that we analyzed and to which our
data collection instrument sample is projected is 12,140.
Our confidence in the precision of the results from this sample is
expressed in 95-percent confidence intervals. The 95-percent confidence
intervals are expected to include the actual results for 95 percent of the
samples of this type. We calculated confidence intervals for our study
results using methods that are appropriate for probability samples of this
type. For all of the percentages presented in this report, we are
95-percent confident that the results would have obtained, had we studied
the entire population, are within plus or minus 6 or fewer percentage
points of our results, unless otherwise noted.
We located and reviewed all 99 declined or withdrawn sampled files. We
also reviewed 27 of the 30 approved loans in our nonprobability sample.
SBA reported that three of the files in our sample were not readily
available because the loans had been paid in full by the borrower, and the
loan files had been placed in storage. To ensure accuracy of our file
reviews, two GAO analysts reviewed each of the loan files. Based on the
reviews of documentation in the files, we entered information into an
automated data collection instrument. We also conducted basic checks on
the programming and analysis of the file review data.
Appendix I Scope and Methodology
We conducted our work in Atlanta, GA; New York, NY; and Washington, D.C.,
between May 2003 and June 2004 in accordance with generally accepted
government auditing standards.
Appendix II
Comments From Small Business Administration
Appendix II Comments From Small Business Administration
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