SBA's disaster program faces first real test in Harvey

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It’s the disaster relief program few people, if any, are talking about.

The Small Business Administration, in the wake of past criticism and a 2008 law that overhauled its disaster-loan regimen, created the Immediate Disaster Assistance Program, or IDAP, which guarantees 85% of bridge loans made to small businesses hit by a disaster.

The SBA promises to provide guarantee decisions within 36 hours of receiving an application for loans that max out at $25,000.

With Harvey’s devastation seemingly on par with Sandy and Katrina, quick and easy funding would be a welcome lifeline for scores of small businesses. But IDAP has never been tested, and there’s a concern bankers might be hesitant to participate because of qualms with some of its terms.

An even bigger problem is awareness; few bankers, apparently, even know the program exists.

“This program is not one I’ve heard much about from lenders,” said James Ballentine, the American Bankers Association’s executive vice president for congressional and public affairs. “I would hope something like this would be marketed in a way that business owners can take advantage of it.”

Questions about IDAP aside, the SBA has is revving up its disaster-lending team. As of Tuesday night, the agency had received more than 900 loan applications, with thousands more expected. To prepare, the SBA is mobilizing “additional surge staff” to supplement its nearly 1,000 permanent disaster-assistance employees, spokeswoman Carol Chastang said.

IDAP, which could play a big role, will hopefully address a major complaint during other recent hurricane recovery efforts.

In the wake of Hurricane Katrina in 2005, the Louisiana Bankers Association asked that banks be allowed to process disaster loans due to the SBA’s slow pace, said Guy Williams, CEO of Gulf Coast Bank. Williams chaired the Louisiana Bankers Association at the time.

After Hurricane Sandy in 2012, it took the agency 45 days, on average, to process a physical damage loan and 38 days for an economic injury loan, according to the Government Accounting Office. Both were significantly longer than the SBA’s goal of a 21-day turnaround.

On its own, the SBA will continue to support business loans of up to $2 million under its regular disaster-relief framework, though approvals must pass a longer, more rigorous underwriting process. Historically, the agency has handled disaster relief loans directly, a far cry from conventional programs, where it guarantees deals originated by banks and other lenders.

Though the agency has gotten “much better” at processing disaster relief loans since Sandy, the process isn’t simple, said Paul Merski, group executive vice president for congressional relations and strategy at the Independent Community Bankers of America.

IDAP, by contrast, is intended “to encourage and enable private lenders to make loans immediately following a disaster to small businesses in the affected areas ahead of permanent disaster financing,” Chastang said in an email.

Merski, who was also unfamiliar with IDAP, said it wouldn’t take long for bankers to learn about the program if it can help the Houston area recover faster.

While most of Houston’s bank branches remain closed indefinitely, bankers seem eager to begin the rebuilding process.

Though the $125 billion-asset Regions Financial had kept its 25 branches in the affected region closed Wednesday, a spokeswoman said customer service teams would soon begin to contact customers and reach out to small businesses.

Likewise, Green Bancorp in Houston will soon start working with customers on recovery plans, said Geoff Greenwade, the $4.2 billion-asset company’s president.

“We will use good old fashioned neighborly common sense and support to make this happen,” Greenwade wrote in an email. “This will include payment deferment, working with [customers’] insurance companies, government-disaster programs, [and offering] new loans to help them get back to some normalcy.”

With Harvey’s toll likely to top $40 billion, Houston and the rest of southern Texas will need all the help they can get, including federal disaster aid.

Faster is better, clearly, so a program like IDAP could have real merit, Ballentine said. But nearly 10 years after Congress authorized the program, it remains unclear whether it will be widely used.

Beyond a lack of name recognition, IDAP’s other challenge could be its terms, industry observers said. Though few bankers commented as IDAP’s rules were being formulated, some raised objections over the potentially long repayment periods.

IDAP loans, in theory, are meant to be paid back quickly, using proceeds from a larger disaster loan or other funds received by the borrower. Absent that, the program’s rules allow for as long as 10 years for repayment.

SBA officials have voiced concerns that bankers’ reservations might make IDAP implementation difficult. At the same time, Chastang highlighted the agency’s “significantly improved” disaster assistance delivery channel, including an increase in the loan limit for unsecured physical damage loans from $14,000 to $25,000.

“These improvements … effectively provide the immediate disaster funds on a permanent basis rather than short and intermediate assistance contemplated in the guaranteed loan programs,” she said.

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