Throughout its 53-year history the Small Business Administration has always made disaster-relief loans directly, but after enduring months of criticism for its response to Hurricane Katrina, the agency is considering letting private-sector lenders make the loans instead.
Bankers say they would welcome such a shift - to a point - because it could speed recovery in the hardest-hit areas.
Their participation, however, would depend largely on the size of the government's guarantee. Disaster-relief loans generally have much higher default rates than the SBA's guaranteed loans, and bankers would probably want at least as high as the 75% to 85% guarantee the SBA provides on its 7(a) loans, said James Ballentine, the American Bankers Association's director of community development.
"A high guarantee would make a program like this extremely attractive," Mr. Ballentine said.
Earlier this month the SBA put out a request for information seeking suggestions on how it could increase private-sector participation in its disaster-relief lending operation "within its current operational framework and/or within a guaranteed lending framework."
Under the current framework, the SBA makes disaster-relief loans directly to homeowners and businesses. A guaranteed-lending framework would operate similar to the agency's 7(a) lending program; that is, lenders would make the loans and the SBA would cover as much as 85% of the lender's losses if the borrower defaults.
Bankers in the devastated Gulf Coast region began lobbying the SBA to give them a role in disaster-relief lending a few weeks after Hurricane Katrina and Hurricane Rita struck, saying the process would be faster and more efficient with the help of their branch networks and knowledge of local conditions. But the SBA initially rebuffed them, relying instead on its traditional model.
It hired more than 4,000 temporary employees to underwrite and process disaster loan applications. But demand for loans has been so strong that the SBA has been unable to respond in a timely manner.
In the request document it released March 14, the SBA said that it tries to give disaster-loan applicants an answer within three weeks. In past disaster situations, the agency said, it was able to meet that deadline, but "Hurricanes Katrina, Rita, and Wilma pushed the capabilities of SBA's program far beyond normal limits."
Now, says Hector V. Barreto, the agency's administrator, every aspect of the disaster-relief program is under review.
"Where there are ideas to improve the federal government's response to such unprecedented natural disasters as the 2005 hurricanes along the Gulf Coast, it is our obligation to hear them," Mr. Barreto said in a press release.
Todd Murphy, senior vice president of marketing at the $611 million-asset Omni Bank in Metarie, La., said that allowing banks to make disaster loans "would definitely make the system quicker. Our main goal has always been to get money to the businesses and individuals as soon as possible."
Chevis C. Swetman, the chairman and chief executive of the $845 million-asset Peoples Financial Corp. in Biloxi, Miss., said the Gulf Coast's recovery would be further along if banks had been able to participate in the SBA's disaster-loan program.
"I don't know of a single loan that has been closed on the Mississippi side of the Gulf Coast," he said. "There has got to be a better way. The disaster has been beyond the scope of imagination, but the reaction time has been too slow."
Mr. Swetman said he would favor a hybrid approach - with banks making disaster loans to business owners and the SBA continuing to lend directly to homeowners. Though he did not rule out making loans to homeowners, he said his bank's resources would be better spent focusing on the businesses that drive local economies.
"Small businesses are the backbone to any recovery," he said.
The SBA has taken several steps to increase private-sector participation in its disaster-relief operation.
In November it created the Gulf Opportunity program, providing 85% guarantees on loans of up to $150,000 to borrowers in the hurricane-affected region. The agency promised to expedite the processing of these loans, but the program failed to catch on, in large part, banking groups said, because its interest rates were about twice those of conventional disaster-relief loans.
In March, after months of prompting from banking groups and later from White House officials, the SBA agreed to allow banks to process and close some disaster-relief loans.
Paul Merski, the chief economist at the Independent Community Bankers of America, said that Gulf Coast banks are well positioned to get into disaster lending because they are flush with deposits from hurricane-related insurance payments.
