Emergency loans.....

Will emergency loans be the next mess in Texas?

Washington's disaster-lending agency bungled Katrina and Sandy. Now it tries to avoid another bureaucratic failure.

By DANNY VINIK

When President Donald Trump boarded Air Force One Tuesday morning to survey the flood wreckage across southeastern Texas, two of the most crucial figures onboard—and people with the most at stake—were barely noted by press reports: Small Business Administrator Linda McMahon and a career agency employee named James Rivera.

McMahon, the former pro wrestling executive, runs an agency that has become the front line of American disaster lending. Through its Office of Disaster Assistance, run by Rivera, the 28-year veteran, the SBA made over $11 billion in loans after Hurricane Katrina, and more than $2 billion after Superstorm Sandy—most of those to distressed homeowners with no business claims at all. Since its inception in 1953, it has issued more than 2 million loans for more than $54 billion.

It has not gone smoothly. After both Katrina and Sandy, the natural disaster was followed by a bureaucratic one, as an agency whose main job is small-business boosterism suddenly transforms into America’s last-ditch emergency lender. After Katrina, the SBA needed an average of more than 65 days to process disaster loan applications—a delay that led to a congressional backlash and major reforms. When Sandy struck, the agency was again unprepared; it took SBA an average of around 40 days to process loan applications.

Appalled by the Katrina delays, Congress created three new emergency loan programs to get loans to people much faster—but the agency never implemented any of them, a casualty of bureaucratic inertia, miscommunication and poor program design.

Now, after Hurricane Harvey deposited more than 50 inches of rain in some parts of Texas, Rivera and the Office of Disaster Assistance are gearing up to prove they’ve learned their lessons. Earlier this year, under grilling from lawmakers, Rivera assured the House Small Business Committee hearing that his office was “as prepared as we’ve ever been” for a major disaster. But he also offered a warning. “The trend is in the right direction,” he said. “But, I hate to say this, until we are able to process a disaster like Sandy or Katrina, we are going to continue to have these same discussions.”

By all accounts, Harvey will be a multi-billion dollar cleanup on the scale of Sandy and Katrina. The question now is whether SBA is actually prepared for such a disaster—or whether past problems will resurface once again. “This is a real test for all the improvements they’ve worked on,” said Jane Campbell, director of advocacy at the National Development Council and formerly the staff director on the Senate Small Business Committee.

In the days after a disaster, as homeowners and businesses return to their property and assess the damage, rebuilding can appear daunting. Businesses need money to remove debris, replace broken equipment and pay their employees—but their customers may be stranded elsewhere, cutting off their cash flow. Homeowners need money to rebuild their homes and replace their property, but they may have trouble even finding the basic papers they need to apply for loans. This creates big challenges for normal lenders. “You don’t say to someone who is flooded out, Can you give me a deed to your property and mortgage?” said Campbell, who is also the former mayor of Cleveland

That’s where the SBA’s Office of Disaster Assistance is supposed to help. It’s not exactly clear why a business agency had ended up responsible for such a broad loan portfolio, but the SBA is broadly tasked with helping communities develop economically after a disaster, and lending is a linchpin. It has a careful playbook for responding for disasters, involving setting up field offices, calling up reserve loan officers and adjusting work schedules to quickly get information to disaster victims. SBA can access information in the public domain, like a mortgage, reducing the burden on homeowners, and open service centers so people without access to a computer or the Internet can fill out online forms. It can also provide loans not just for physical property damage but also for economic injuries, covering business expenses that the business could have otherwise paid. Borrowers must still prove to the SBA that they are likely to repay their loan—these aren’t grants—so a high percentage of applications are rejected. But after a disaster, victims—especially businesses—don’t have many options. Said Jeff Sjostrom, president of the Galveston Economic Development Partnership, “Unfortunately, the reality is there are very few sources of gap financing after a natural disaster.”

This process makes sense, experts agree, but the agency has struggled mightily in the past. After Katrina, the agency faced major technological difficulties and didn’t have the staffing needed to quickly process loan applications, leading to long delays. The money eventually flowed—more than $11 billion in loans in total—but the application process took months and many businesses went bust in the meantime. The agency had similar problems after Sandy when it underestimated the number of loan applications and delayed increasing staffing.

“The real dilemma we had in the previous disasters is getting the decisions in a timely manner,” said Campbell, who also said she had confidence in Rivera.

Congress passed legislation in 2008 with 26 different reforms, including the creation of the three new emergency loan programs designed to get money to disaster victims in as little as 36 hours. Under these programs, SBA wouldn’t lend money directly, but would instead encourage private sector lenders to make the loans, with the government guaranteeing 85 percent of the loan if a borrower defaulted. But, as POLITICO reported, the three programs never made a single loan. In fact, they were never even launched. Lawmakers grew increasingly frustrated with the agency over the slow implementation process, but even after Rivera testified multiple times that private lenders simply wouldn’t participate in the programs on the loan terms, which are set by statute, Congress hasn’t made any changes to the underlying law.

Almost a decade later, the fate of the programs is unclear. Rep. Steve Chabot, chairman of the House Small Business Committee, blamed the Obama administration for failing to implement the legislation. “It’s a new day at the SBA and we hope that this administration takes our recommendations seriously to better help small businesses when disaster strikes,” he said in a statement. But SBA now says the programs aren’t needed at all because the agency now has the capacity to get more money to people far more quickly. Carol Chastang, a spokeswoman at SBA, said in an email that the agency’s recent improvements in disaster response, including the ability to provide unsecured disaster loans up to $25,000, “provide immediate disaster funds on a permanent basis, eliminating the need for the short-term assistance provided by [the three emergency loan programs]. That makes things easier for survivors, who have better things to do with their time than fill out multiple loan applications.”

As of Wednesday, the agency had already received 1,210 applications and was calling up temporary staffers to assist with the expected heavy load of applications. Two loan applications have been approved so far, for $141,600 in total, and SBA has 68 field staffers working on Harvey. As Harvey continues to sweep across the Gulf Coast, migrating from the Houston region to New Orleans, it’s too early to tell how many more will follow. If previous disasters are any indication, it will be in the tens of thousands. “The SBA is prepared—for the long haul—to respond to the recovery needs of residents and business owners rebuilding their lives in the aftermath of Hurricane Harvey,” said Chastang

At the April congressional hearing, Rivera expressed confidence to lawmakers that the Office of Disaster Assistance could likely handle a Katrina-style event. After flooding in Baton Rouge last August, he pointed out, average processing time for business disaster loans was just 12 days and home disaster loans was just eight days. But the agency received just 66,000 applications after that flooding, compared to 385,000 after Katrina, and experts believe that Harvey is closer to a Katrina-magnitude disaster. Which means, as Rivera said at the hearing, it’s impossible to know if the SBA is truly prepared for a major disaster. Said Campbell, “This is the road test.”