Seven years ago, after Hurricane Katrina wiped out entire neighborhoods in the Mississippi Delta, Congress had an idea to help local businesses recover from the next big one. Small companies had found they just didn’t have the money to rebuild and keep the lights on until their customers returned. So in 2008, Congress created three new programs to get loans to small businesses quickly.
Since the new emergency lending programs were born, American small businesses have been hit by Hurricane Irene, Hurricane Sandy, and other disasters.
And here’s how many loans the new programs have secured for small businesses in that time: Zero.
“Frankly, they didn’t do squat. They really didn’t do squat,” said William B. Shear, the director of Financial Markets and Community Investment for the GAO, who has written multiple reports on SBA’s preparation for disasters. “They really dropped the ball.”
This week the Small Business Administration came under Congressional fire for what appears to be a total failure to execute the mission of issuing emergency loans. A long trail of GAO reports details this record of failure, and the SBA’s perplexing inability to explain why businesses haven’t received a dollar yet, a need that is expected to become only more acute as a changing climate brings more drastic storms.
“There’s a lot of work that needs to be done within the agency to get the kinks worked out,” said Rep. Yvette Clarke (D-N.Y.). “With climate change, we’re going to be facing disasters like this in highly populated areas, and they have to be able to be far more efficient and far more transparent.”
Behind the seven-year saga appears to be a mixture of bureaucratic inertia, miscommunication and inattention. But it also speaks to the difficulty of launching public-private financial partnerships, especially if they require banks to make risky loans on the government’s terms.
Under the 2008 law, the SBA was directed to create three loan guarantee programs, using private-sector lenders to supply quick money to help businesses recover after a disaster, in at most 36 hours. The government would act as a backstop for the small but risky loans, guaranteeing that banks would receive 85 percent of the loan value if it goes bad.
It appeared, at first, that the agency was making a legitimate effort to start making loans. It asked for—and received—$3 million for a pilot program of one of the loan programs to determine the interest of lenders and borrowers, and actually published a set of rules in 2010.
James Rivera, the associate administrator of the SBA’s Office of Disaster Assistance, appeared before the House Small Business Committee Wednesday to explain why the SBA had decided to pilot just one of the three programs, against the 2008 law which required the agency to publish rules on all three programs.
“To be honest with you, I don’t know why the other two regulatory programs were not implemented,” he said. “What I can do is I can check back with the Office of Capital Access and we can get back to you for the record.”
According to GAO reports on the loan programs, the agency repeatedly promised the pilot version would commence soon. In May 2010, the SBA said it would happen by September 2010. In June 2012, the deadline had shifted to the end of that year.
As of this Wednesday, it still hasn’t happened. Why not? A withering GAO report from last October documents two reasons: the electronic systems used to process the loans didn’t work well together, and – more crucially – lenders weren’t willing to take part.
In an interview, Rivera told POLITICO that the SBA’s computer systems are now compatible and capable of dealing with the loans. The problem, he said, is getting banks on board: “Lenders just feel it’s too much risk based on what we get.”
Making loans after a disaster is an inherently risky proposition, and Congress set strict standards on the loans: the interest rate is set by the agency, and borrowers must have at least 10 years to pay them back. According to the October GAO report, the SBA found that lenders were understandably hesitant to provide the loans, even with the government guaranteeing 85 percent repayment, unless Congress relaxed some of those conditions.
Just one problem, which surfaced in Wednesday’s hearing: the SBA never actually told the House Small Business Committee it was having trouble with lenders.
“We haven’t received anything,” Rep. Nydia Velazquez (D-N.Y.), the ranking member of the House Small Business Committee, said in an interview. “That is basically an excuse.”
Asked why it hadn’t mentioned this obstacle to Congress, the SBA provided POLITICO a copy of a letter it sent to two other committees in which it did explain that lenders objected to the rules. A spokesperson said "the SBA has worked with Congress both formally and informally" over time. But the agency just sent the letter in December 2014, despite knowing about these problems for years. (“This has been an ongoing conversation we’ve had with the lenders since the statute was passed,” Rivera told the committee Wednesday.)
Even in the letter, the SBA didn’t offer any solutions. And when I asked Rivera what Congress might need to change to make the loans more appealing to lenders, he didn’t have much of an answer. “We’ll provide the response that they’re looking for,” he said of the Small Business Committee, “and how they respond to it, I just don’t know.”
What happens next with the program? Lawmakers say they’ve run out of patience. “I think it’s taken them too little and too long for them to continue to improve,” Rep. Cresent Hardy (R-Nev.) told POLITICO. No lawmaker called for a change of leadership at the agency, but Velazquez and Steve Chabot, the chair of the House Small Business Committee, asked for a letter from SBA about when the loan programs will be up and running.
And what happened to the $3 million that Congress
appropriated in 2010? It was spent back then to deal with IT problems, said the SBA’s press secretary—fixing the computer systems for
a program that still doesn’t exist.