The U.S. Small Business Administration needs to take additional steps to reform its disaster loan program and improve the application process, recommends a new report.

The report by the Government Accountability Office was presented at a hearing of the House Committee on Small Business. GAO financial markets and community investment director William Shear noted that after a series of disasters in recent years such as Hurricanes Katrina, Wilma and Rita, the SBA was criticized for what was perceived to be a slow and confusing response and a significant backlog of applications for disaster loans.

In response, Congress and the SBA decided that the program needed significant improvements, and the SBA created an online loan application, increased the capacity of its Disaster Credit Management System, and developed a disaster recovery plan. In June 2008, Congress enacted the Small Business Disaster Response and Loan Improvements Act to expand these steps and require new measures to ensure that the SBA was prepared for future disasters.

The GAO found that the SBA has so far addressed about half of the act’s provisions, but has not yet established milestones for implementing the remaining requirements. For example, the agency put in place a secondary facility in Sacramento, Calif., to process loans during times when the main facility in Fort Worth, Texas, was unavailable, made improvements to its Disaster Credit Management System to track and follow up with applicants, and expanded its disaster reserve staff from about 300 to more than 2,000 individuals.

However, the SBA still needs to take additional steps to completely address eight provisions of the act. Some of those provisions require new regulations, according to SBA officials, along with extensive changes to current programs or the implementation of new programs, such as Immediate and Expedited Disaster Assistance Programs, to satisfy the requirements of the act. These programs, which require the participation of private lenders, are designed to provide businesses with access to short-term loans while they are waiting for long-term assistance.

In addition, the SBA has not yet issued an update on its comprehensive disaster recovery plan that reflects recent changes resulting from the act’s requirements, as well as the SBA’s own reform efforts. The SBA also has not fully addressed the requirement for providing region-specific marketing and outreach, and ensuring the information is made available to small business development centers and other local resources.

The GAO said it consistently heard from regional entities, such as emergency management groups, about the need for more up-front information on the SBA’s disaster loan program and their expected roles and responsibilities in disaster response efforts. The act also established multiple new reporting requirements. While the SBA has addressed some of these, the agency has failed to issue its first annual report on disaster assistance, which was due last November.

In response, the SBA generally agreed with the report’s recommendations and said it plans to incorporate them in its ongoing efforts to implement the act and improve the disaster loan application process.

SBA administrator Karen Mills testified at the hearing about the agency’s efforts at rolling out various programs in the stimulus bill, such as America’s Recovery Capital, or ARC, loans. She acknowledged that the loans were inherently riskier than traditional SBA loans as they are 100 percent backed by the SBA with zero interest costs for the borrower. Mills also discussed the disaster recovery program.

“Optimizing operations is crucial in areas such as disaster assistance,” she said. “We have made many strides in this area, such as hiring more full-time and on-call employees, acquiring ‘surge’ space to prepare for a major catastrophe, increasing capacity, improving technology, shortening processing times, and more. Also, we continue to put stronger muscle behind marketing and outreach efforts, Electronic Loan Application processing, and other tools that help us reach out directly to communities affected by disaster.”

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