SBA scrapping plan to back disaster loans by banks

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The Small Business Administration wants to end a series of disaster-relief programs created in the wake of Hurricane Katrina.

SBA plans to ask Congress to rescind authority for three programs called for in the Small Business Disaster Response and Loan Improvements Act of 2008, along with a program tied to the 2015 RISE After Disaster Act, according to the agency's Office of the Inspector General.

Under all four programs, the agency would have guaranteed disaster loans made by banks and other lenders.

The moves come at a time when Express Bridge Loan, a pilot program unveiled last year and authorized through September 2020, has languished despite two crippling hurricanes this summer. No banks have participated in the program despite the damage caused by hurricanes Harvey, Irma, Florence and Michael. Express Bridge Loan allows SBA to offer guarantees small-dollar disaster loans made by the private-sector institutions.

There are several theories why the disaster programs foundered.

The SBA pointed to bankers' risk appetites. Bankers, meanwhile, expressed concerns over turnaround times and terms that would have forced them to hold some the loans on their balance sheets for years.

The concept merits a "do-over," said James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association. “The idea shouldn’t go by the wayside."

Express Bridge, which offers 85% guarantees on small-dollar loans made by banks and other lenders, marked the first time the SBA gave the private sector a chance to participate in its growing disaster-relief operation. Unlike its regular programs, which are frequently pointed to as model public-private partnerships, SBA has historically made disaster loans directly.

Given the apparent lack of interest, SBA officials have concluded that time and money would be better spent fine-tuning direct relief, which skyrocketed in fiscal 2018, reaching $7.2 billion. That was a spike from $1.7 billion in fiscal 2017. (The agency's fiscal year runs through Sept. 30.)

While it looked good on paper, the concept of private-sector bridge loans struggled against the reality of lenders' risk appetites, said James Rivera, associate administrator for the SBA's Office of Disaster Assistance.

“Most banks don’t want to play on our sandbox because we’re debt on top of debt,” Rivera said.

While few bankers wanted to discuss the seeming disinterest in Express Bridge, one executive said her bank passed on it due to concerns over turnaround time.

Cullen/Frost Bankers in San Antonio, which considered the program after Hurricane Harvey hit the Gulf Coast, ultimately decided to meet customers' needs with its own products, said Rebecka Holt, the $31 billion-asset company's director for central credit and business banking.

“We discussed it with a team of people and realized our program was quicker,” Holt said. While Frost aims to disburse funds within two days, “in a lot of cases we can do it eight hours.”

Other bankers have expressed concerns about some of Express Bridge's terms, including one that permits durations of up to seven years in cases where borrowers are unable to repay with insurance proceeds or funds from a larger disaster-relief credit.

Few banks want to add long-term, low-dollar loans to their balance sheets, Ballentine said, adding that the SBA compounded the situation by failing to effectively publicize the program.

“If they were really interested in having bankers participate, they would have marketed it better,” Ballentine said.

Private-sector participation became a hot topic when the SBA struggled to process a record number of loan applications following Hurricane Katrina in 2005. Rivera, who has held the agency’s top disaster-relief job since November 2009, said it took about 70 days, on average, to process applications for home and small-business loans during the crisis.

Individuals and bankers in Gulf Coast communities affected by the storm expressed deep, repeated frustration with the agency’s slow pace.

The SBA has responded in a much timelier fashion in recent years. On average, it took the agency between to and three weeks to process the 340,000 applications it received in fiscal 2018, Rivera said. The agency averaged 16 days for home-repair and 23 days for small business applications.

As of Oct. 24, SBA has received more than 15,000 applications tied to Florence, approving nearly $245 million in loans. It has received about 3,700 applications associated with Michael, has approved 369 loans totaling $16 million.

The SBA has made a series of upgrades to its lending process, including greater use of automation. About 97% of applications are submitted online, Rivera said. And if a new operating system currently being installed lives up to expectations, turnaround times could get shorter, he added.

Such reforms have helped the SBA's reputation. In fiscal 2017, customer satisfaction with the agency’s disaster-relief effort totaled 85%, according to a survey by the University of Michigan.

"We’re catching up to what the private sector does,” Rivera said. “We’re getting there. There’s a lot of runway still. I think we can be faster.”

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