May 2, 2006

Office of the Chief Operating Officer
Small Business Administration
409 3rd Street, SW
Washington, DC 20416

Dear Sir or Madam:

America’s Community Bankers (ACB) is pleased to respond to the Small Business Administration’s (SBA) Request for Information (RFI) issued on March 16, 2006 on how the private sector can best support the delivery of SBA disaster assistance loans. In the late summer and fall of 2005, Hurricanes Katrina, Rita, and Wilma destroyed portions of Florida, Alabama, Louisiana, Mississippi, and Texas. These hurricanes brought devastation to home and business owners and collectively represent the worst natural disasters in the history of the United States of America. As the SBA’s RFI acknowledges, Hurricanes Katrina, Rita, and Wilma pushed the capabilities of SBA’s program far beyond normal limits.

ACB applauds the SBA’s efforts to engage the public in a policy discussion about the potential role for the private sector to deliver disaster assistance loans and possible alternatives to SBA’s current programs that may improve efficiency.

Background

The Small Business Act authorizes the SBA to make loans to eligible victims of declared disasters. There are two general models for processing applications. The first is the current model where the Federal government makes direct loans (Direct Loan Program). In the immediate area of the disaster, homeowners, renters, nonprofit organizations and non-farm businesses of all sizes are eligible to apply for SBA loans for the repair and replacement of uninsured, physically damaged property. In both the immediate and contiguous areas of the disaster, small businesses with no credit available elsewhere are eligible to apply to loans to cover economic losses.

The second SBA relief model allows the Federal government to guarantee loans issued by banks and other lending institutions (Indirect Loan Program).

The SBA used the Direct Loan Program approach in the areas affected by the hurricanes of late summer and fall 2005. The SBA reports that response time on the loan process has exceeded the averages for previous years. Less than 1% of the small business applications had been processed six weeks after Hurricane Katrina. Five months after the hurricane, less than 60% of the applications had been processed. Even today, a substantial number of “processed” loans have not been disbursed to eligible small businesses.

The SBA’s RFI provides the following overview of the steps involved in the SBA’s program for processing loans in disaster areas under the Direct Loan Program. First, the state and federal governments conduct a preliminary assessment of damage in an affected area. Second, the Federal government declares affected areas as disaster areas. Third, the SBA establishes Disaster Recovery Centers, explains the loan process and delivers loan applications and screens loan applications for assistance. Fourth, the loan applications are forwarded to loss verifiers. Fifth, the SBA reviews loan applications. Finally, the SBA disburses loan funds after the loan applicant obtains hazard insurance.

ACB Suggestions for Partnership with SBA

Community banks have a potentially significant role to play in helping the SBA deliver assistance in Federal disaster areas. In particular, we believe that community banks can play a leading role in assisting the SBA in steps three through six of the current disaster loan process (For details of our proposal, please see Appendix One). Because banks have on the ground facilities and personnel in and around the affected areas, ACB believes that the SBA and community banks can work effectively together to leverage the SBA’s capabilities to provide small businesses with timely disaster assistance loans. In addition, ACB believes a partnership with the private sector will produce cost efficiencies in the SBA loan program.

ACB therefore suggests a comprehensive framework for the SBA to partner with banks in which the banks provide loan service capabilities to the SBA for a fee, underwrite loans for the SBA according to SBA loan guarantee guidelines and disburse the disaster loan funds. We believe that this model should replace the SBA’s current model under which the agency itself makes direct loans to affected businesses in disaster areas. ACB believes that an Indirect Loan model using the SBA’s loan guaranty authority (as is used in the current 7(a) and Express Loan Programs) is the approach that will best succeed in disaster areas.

Currently, only existing SBA-certified lenders can participate in disaster recovery programs. ACB believes that all banks that have commercial lending capabilities and acceptable examination ratings from their federal regulators should be permitted to participate in SBA’s disaster recovery programs. The SBA could recruit, pre-qualify, certify and train interested bank participants from across the United States. Such an approach would not only broaden the scope of partners available to the SBA when disaster strikes in particular geographic areas but also assure a more timely response to the needs of small businesses.

For example, instead of the SBA hiring resources to establish its own disaster recovery centers and loan information processing centers, the SBA could use existing bank branches and call centers in the disaster areas to explain the SBA loan process, distribute loan applications and screen them. Banks are already set up to do this and the process therefore could get underway more quickly. In addition, banks in the affected communities already have a relationship with the business owners who most likely would be loan applicants and, most importantly, understand which businesses would be credit worthy recipients of government-guaranteed disaster assistance loans.

In addition, banks with a presence in more than one state can use remote call centers and loan processing centers to assist in these processes when bank branches and other facilities inside the disaster area are not available due to either an inability to properly staff the facility or the destruction of the facility by the natural or man-made disaster.

Community banks can also play a role in Step 4 of the SBA process: verifying losses. Onsite bank personnel would be available to verify losses for the SBA and, in some cases, where bank personnel are not available, community banks have access to segments of the local population that can be quickly hired and trained to verify losses for the SBA.

In Steps 5 and 6 of the loan process, bank personnel can review loan applications, approve or reject loans based on SBA underwriting criteria and fund and close the loan. The bank can, also, establish loan closing requirements (subject to the SBA’s loan guarantee requirements).

The terms of the disaster loan guarantee would be set by the SBA, including allowable interest rates, the maximum term of the loan, loan amortization requirements and collateral requirements. In order to further expedite the loan closing process, we would suggest that the SBA develop a “streamlined” set of collateral and loan documentation requirements. Unlike the current Direct Loan Program, we would also suggest that participating banks be able to utilize their own loan documents to close the loan.

We also recommend consideration of interest rate subsidies for disaster assistance loans. The current SBA model of providing a loan guarantee to help “early stage” or marginal small businesses qualify for a loan by providing a government loan guarantee does not apply to “established small businesses” that are affected by either natural or man-made disasters. Established, successful, small businesses are unlikely to respond to disaster loan programs that offer loans at unsubsidized loan rates (e.g., SBA’s GO Loan Program). These small businesses, however, are key to the economic recovery of the affected disaster area.

There are two ways that the SBA could provide banks with the ability to make below market rate loans to established businesses affected by natural or man-made disasters. The SBA (or other government agency) could provide “low cost funds” to banks participating in the program through a revolving disaster loan fund. Experience with the Community Development Block Grant (CDBG) program’s revolving fund used in the disaster areas shows that this is an efficient and effective way to get funds quickly to those in greatest need. Another alternative would be for the bank to utilize its own funds and receive an “interest rate subsidy” from the SBA for each disaster loan that it makes. Both alternatives would provide banks with the ability to provide their small businesses with the needed funds, at rates of interest that would ensure early sign-ups, by those businesses that can have a profound positive impact on helping the disaster area economy quickly rebound.

In addition to the advantages of leveraging the existing bank infrastructure to provide a more timely and cost effective loan approval process, we believe that the Indirect Loan approach will allow the SBA to experience a lower level of loan charge offs. Unlike the current Direct Loan Program that puts 100% of the loan at risk (since there is no private sector lender that assumes any portion of the loss), the Indirect Loan Program would limit the government’s exposure to loss to the amount of the SBA guarantee. The credit expertise and local market knowledge of in-market lenders will also result in a far superior underwriting process as evidenced by the SBA’s historic loss experience. According to the SBA’s 2004 Loss Report, loans made by the SBA under the Direct Loan Program experienced a 10.25% loss ratio while loans made by private sector banks under the SBA’s Indirect Loan Program experienced a 5.23% loss ratio.

Conclusion

ACB believes that there are a number of advantages to using the Indirect Loan approach to provide disaster assistance loans to small businesses affected by either “natural” or “man-made” disasters. By using existing bank infrastructure to accomplish Steps Three through Six in the disaster loan process, the SBA will be able to provide small businesses with disaster loan assistance in a more timely and cost effective manner than under the current Direct Loan Program. The Indirect Loan approach will also result in a better use of taxpayer funds, since it will result in a lower level of loan charge offs.

ACB appreciates the opportunity to provide input in response to the SBA’s RFI. We believe that the SBA’s role in helping small businesses is essential for our economy and look forward to the opportunity of assisting the SBA in structuring a disaster loan program that provides the greatest benefits, at the least cost to the taxpayer. Please contact the undersigned at 202-857-3125, or [email protected] if you have any questions regarding our recommended course of action.

Sincerely,

Robert Seiwert
Senior Vice President
Commercial Banking Practice Manager

Attachment