Changes to the SBA Disaster Loan Program: Proposed Legislation in the 110th Congress
Changes to the SBA Disaster Loan Program:
Proposed Legislation in the 110 Congress
Updated February 12, 2008
N. Eric Weiss
Analyst in Financial Institutions
Government and Finance Division
Changes to the SBA Disaster Loan Program:
Proposed Legislation in the 110th Congress
Members of the House of Representatives and Senate have introduced bills in
the 110th Congress (H.R. 1361 and S. 163, respectively) to modify the Small Business
Administration’s (SBA) response to major disasters. The bills agree on certain
fundamental questions, but differ in the details.
Both bills address ways to improve SBA’s response to large disasters. There is
some congressional concern that following an exceptionally large disaster SBA staff
may not be large enough to be able to respond as rapidly as Congress might wish.
Both bills would increase disaster staffing and both would augment SBA’s staff by
allowing certain private lenders to either make loans on behalf of SBA or make loans
that SBA would guarantee in a manner similar to SBA’s other loan programs. Other
provisions would allow for closer congressional oversight of SBA disaster responses.
Under both bills, SBA would continue to make disaster loans to households and
businesses. The maximum personal real property limit of $40,000 and the real
personal property limit of $200,000 would not change. The maximum size of
disaster loans to businesses would increase from $1.5 million to $3 million (House)
or $2 million (Senate). Both bills would allow economic impact disaster loans to be
made to nonprofits for the first time.
Under both bills SBA would make smaller, quickly approved loans that could
be folded into a larger permanent loan. The House would set a maximum for the
expedited business loans of $25,000. The Senate leaves the maximum to SBA.
This report will be updated as events warrant.
In troduction ......................................................1
Major Provisions Unique to H.R. 1361.............................3
Major Provisions Unique to S. 163................................4
Analysis of Changes to SBA Planning..................................5
Required Disaster Planning..................................5
Annual Disaster Drill.......................................6
Coordination with FEMA...................................7
Analysis of SBA Response Including Reporting .....................7
Revised Disaster Response..................................7
New or Revised Disaster Loan Programs...............................8
Increased Maximum Business Disaster Loan Size....................9
Disaster Loans for Nonprofits....................................9
Post-Disaster Mitigation Loans..................................10
Quick Decision Business Small Disaster Loans.....................10
Ice Storms and Blizzards...................................12
Private Sector Participation in Disaster Loan Program............12
House Only Provisions.........................................12
Senate Only Provisions........................................13
Special Grants to Small Business Development Centers (SBDCs)...13
Surety Bonding Threshold..................................13
Energy Emergency and Agricultural Producer Loans.............13
Analysis of Additional Issues........................................14
List of Tables
Table 1. SBA Disaster Loan Programs.................................5
Table 2. H.R. 1361 Revised Disbursement Schedule.....................11
Changes to the SBA Disaster Loan
Program: Proposed Legislation in the
Since the disastrous hurricane season of 2005, Congress has continued to
examine legislative options that would enhance the federal response to natural
disasters. Members of both the House of Representatives and the Senate have
introduced separate bills in the 110th Congress to improve the Small Business
Administration’s (SBA) disaster loan programs.1 Witnesses at hearings held by the
House Small Business Committee and the Senate Small Business and
Entrepreneurship Committee reported that SBA was slow to start accepting disaster
loan applications, issued unclear guidance to those applying for loans, did not
adequately coordinate the disaster loan programs with state and other federal
agencies, was slow in processing applications, and lacked loan programs that could
have sped rebuilding after the hurricanes. SBA has responded by making internal
Federal disaster assistance has a long history. In 1906, Congress appropriated
$2.5 million to speed the recovery from the San Francisco earthquake and subsequent
fires. Since its creation in 1953, SBA’s disaster loans have contributed to the
recovery from disasters that have a large impact over a large area. Because SBA
disaster loans are the federal government’s main disaster relief program, they are
available to individuals, businesses regardless of size, and nonprofits. Although SBA
disaster loans are not meant to replace insurance against disasters, evidence shows
that homeowners do consider flood insurance and disaster loans to be substitutes for
1 Rep. Nydia M. Velazquez and 10 cosponsors from both parties introduced H.R. 1361 on
March 6, 2007. Sen. John F. Kerry introduced S. 163 on January 4, 2007, with four
cosponsors from both parties.
2 See, for example, U.S. Congress, House Committee on Small Business, “SBA Unprepared
to Respond to Future Large-Scale Disasters,” February 14, 2007, available at
[http://www.house.gov/ smbiz/ de mocrats/PressReleas e s / 2007/PR21407DisasterRelief.htm],
and Sen. John F. Kerry et al., “Dear Colleague Letter: Support the Small Business Disaster
Response and Loan Improvements Act of 2007,” May 11, 2007, available at
[http://sbc.senat e.gov/lettersout / 070511-Dear Col l eague-Di s as terResponseandLoanImpro
3 Michael J. Rettger and Richard N. Boisvert, “Flood Insurance or Disaster Loans: An
Economic Evaluation,” American Journal of Agricultural Economics, vol. 61, no. 3 (August
Reduced interest rates to disaster victims amount to a federal grant to those
receiving disaster loans. All disaster loans carry a below-market interest rate, and
borrowers who are unable to obtain credit on similar terms elsewhere pay a lower rate
than borrowers who can obtain loans from other sources.4 For example, SBA disaster
loans to homeowners to repair their houses following Hurricane Katrina in 2005 were
charged interest rates of 2.687% and 5.375%. In comparison, the rates on a private
sector 30-year fixed-rate mortgage in the fourth quarter of 2005 ranged from 5.77%
to 6.33%. On an average SBA homeowner disaster loan of $45,000, this could save
the borrower between $100 and $1,000 over the 30-year life of the loan. According
to the SBA, more than 97% of the disaster loans made for the 2005 hurricanes were
at the lower rate, and very few loans were at the statutory maximum. SBA has more
relaxed underwriting standards than private sector lenders, but it can and does reject
applications when the ability to repay is doubtful.5
Most SBA programs involve technical assistance, grants to nonprofits that
provide technical assistance to small businesses, advocacy, and guaranteeing private
sector disaster loans to small businesses, but the agency does make disaster loans
directly to renters, homeowners, businesses, and nonprofits. These loans are at lower
interest rates than can be obtained from private sector lenders and are made to
borrowers who cannot obtain private sector loans on similar conditions.
Currently, homeowners and renters may borrow up to $40,000 to cover
unreimbursed personal property losses following a disaster declaration, although
there are exclusions for unusually expensive property such as art work. Homeowners
may also borrow up to $200,000 to cover unreimbursed real property losses.
Businesses and nonprofits may borrow up to $1.5 million for unreimbursed real
property losses. In addition, businesses, but not nonprofits, may borrow up to $1.5
million combined with the previously mentioned real property losses for economic
injury, which is the inability to make normal payments for supplies, payroll, etc.
Overview of Congressional Proposals
H.R. 1361 as engrossed and S. 163 as reported seek to speed SBA processing
of disaster loan applications by adding and reallocating staff to the agency’s disaster
loan office, involving the private sector, streamlining processing, and increasing
congressional oversight. Both bills also expand the disaster loan programs. The bills
take different approaches to implementing these goals.
4 13 C.F.R. 123.104 and 13 C.F.R. 123.203.
5 Some Federal Emergency Management Agency programs will accept applications only
from those who have been denied disaster loans by the SBA.
H.R. 1361 and S. 163 take different approaches to modifying the disaster loan
programs, but they also share some common features. Both bills would
!allow selected private lenders to make disaster loans under certain
circumstances that the SBA would guarantee (H.R. 1361 Section
!increase the maximum size of disaster loans to $3 million under the
House bill (Section 212), and to $2 million under the Senate bill
(Sections 102 and 202);6
!provide for quickly-reviewed business disaster loans for up to
$25,000 under the House bill (Section 203), and an unspecified
amount under the Senate bill (Section 204);
!make nonprofits eligible for economic injury disaster loans (H.R.
1361 Sections 201 and 214), or such loans as the administrator
determines to be appropriate (S. 163 Section 101);
!require SBA to develop a disaster response plan and to keep it up-to-
date (H.R. 1361 Sections 101, 102, 103, 104, 105, 106, 202, 209,
and 301, S. 163 Section 105, 109, 110, 111, 112, 113, 114, 115, and
!increase congressional oversight (H.R. 1361 Section 301, S. 163
!direct SBA to study making economic injury disaster loans due to a
lack of snowfall (H.R. 1361 Section 218, S. 163 Section 116); and
!require SBA to coordinate its activities with FEMA (H.R. 1361
Section 105, S. 163 Section 219).
Implementation details of these common features differ between the two bills.
Major Provisions Unique to H.R. 1361
In addition, the House bill would
!revise repayment and disbursement terms (Sections 205 and 206);
!allow the SBA Administrator to make grants of up to $100,000 to
certain small businesses that were turned down for SBA disaster
6 The House bill would allow the administrator to waive the limit in certain cases
(H.R. 1361 Section 215).
loans and are located in areas affected by Hurricanes Katrina, Rita,
or Wilma of 2005 (Section 210);
!authorize the SBA Administrator to make offsetting grants to
victims of Hurricanes Katrina, Rita, or Wilma who receive other aid
that must be used to repay SBA loans (Section 211);
!allow the SBA Administrator to refinance existing SBA disaster
loans in the Gulf Coast that would allow the borrowers to defer
repayment for up to four years (Section 219);
!create the position of associate administrator for disaster assistance
to be filled by a presidential appointee with the advice and consent
of the Senate (Section 106);
!allow economic injury disaster loans (EIDLs) for ice storms and
blizzards (Sections 217);
!allow the administrator to increase the deferment period for repaying
disaster loans to up to four years (Section 204); and
!direct SBA to create disaster loan processing redundancy (Section
Major Provisions Unique to S. 163
The Senate bill would
!create a small business energy emergency disaster loan and
agricultural producer loans (Sections 401, 402, 403, and 404),
!increase the small business bonding maximum threshold from $2
million to $5 million, which could be increased by the administrator
to $10 million in major disasters (Section 106),7 and
!require SBA to insure consistency between the Code of Federal
Regulations (CFRs) and agency Standard Operating Procedures
(SOPs) (Section 110).
Table 1 summarizes SBA disaster loan programs (as of January 1, 2007) and
changes to borrowing limits under H.R. 1361 and S. 163. In all cases, the amount
that can be borrowed is limited to the lesser of the amount for the disaster loan
program shown in the “Maximum Amount” column and the actual uninsured losses
that are not otherwise compensated.
7 15 U.S.C. 694b.
Table 1. SBA Disaster Loan Programs
LoanEligibilityMaximumH.R. 1361 S. 163
ProgramAmountAs EngrossedAs Reported
PersonalHomeowners$40,000No changeNo change
Real propertyHomeowners$200,000No changeNo change
PhysicalBusiness$1.5 million$3.0 million$2.0 million
disasterregardless ofcombined with
injury disasternot nonprofits)would bewould be
MilitaryBusiness$1.5 million$3.0 million$2.0 million
Source: H.R. 1361, S. 163, and 15 U.S..C. 636(b).
Analysis of Changes to SBA Planning
Following the 2005 hurricane season, congressional oversight hearings
highlighted many shortcomings in the federal government’s response. Among the
issues raised were inadequate disaster planning, inadequate and inexperienced
staffing of SBA disaster loan centers, and a lack of government-wide planning and
coordination. The bills seek to address these concerns.
This section analyzes provisions in the House and Senate bills that are similar,
but not identical.
Required Disaster Planning. The House bill would require the SBA to
develop a disaster response plan for each of the SBA’s 10 regional offices, based on
the types of disasters likely to occur in the region. SBA would determine the
resources (such as staff, telecommunications, computers, and office space) required
to respond to each type of disaster. The report would be completed in 180 days of
enactment of the bill and would be updated at least annually. The plan would be
developed, implemented, and maintained by a person with “substantial knowledge
in the field of disaster readiness and emergency response.”8
The Senate bill would direct SBA to update existing disaster response plans
within three months of enactment and report to Congress on provisions, including an
agency-wide Disaster Oversight Council, ability to respond to different sized
disasters, state and local coordination, surge plans, staffing, training, lessons learned
from the 2005 hurricane season, and coordination with FEMA.9
Annual Disaster Drill. The House bill would require SBA to conduct an10
annual disaster drill and to report to Congress on the exercise. The Senate bill
would require a one-time disaster simulation exercise.11
Senior Management of Disaster Planning and Response. The House
bill would require SBA to have an Associate Administrator for Disaster Assistance
who would be appointed by the President with the advice and consent of the Senate.12
Directors for disaster planning and disaster lending would be selected from SBA staff
and thus would not require a net increase in the number of full-time employees.13
The Senate bill would require the SBA to hire a full-time disaster planning specialist,
but would not establish the level of the job.
Reserve Corps. The House bill would require the SBA to create a disaster
reserve corps of at least 1,000 people not working full-time at the administration, and14
who would be able to respond to disasters. An annual disaster simulation with at
least half of the disaster reserve corps would be required to test the disaster response
plan and the capacity of SBA systems. Members of the corps would receive annual
training and would be distributed around the nation.15
SBA would be required to develop long-term plans to obtain workspace for the
disaster reserve corps to use in times of a disaster. It would be required to have a
8 H.R. 1361 Section 101.
9 S. 163 Section 112.
10 H.R. 1361 Section 102.
11 S. 163 Section 112.
12 H.R. 1361 Section 106. The SBA presently has an associate administrator for disaster
assistance, but this position is not explicitly listed among the five associate administrators
authorized in 15 U.S.C. 633(b). The position does not require Senate confirmation. The
number of associate administrators would not change under the House bill.
13 U.S. Congress, House Committee on Small Business, Relief for Entrepreneurs:
Coordination of Objectives and Values for Effective Recovery Act of 2007 or “The Recoverthst
Act,” report to accompany H.R. 1361, 110 Cong., 1 sess., H.Rept 110-82, p. 25.
14 H.R. 1361 Section 103.
15 H.R. 1361 Section 104.
backup disaster loan processing facility that could be activated within two days if the
primary facility were unusable.16
The Senate’s approach would require SBA to hire a new, full-time disaster
planning specialist.17 At least 800 employees would be assigned to the Office of
Disaster Assistance and 750 employees would be assigned to the Disaster Cadre.18
One employee in each district office would be assigned to be a disaster loan liaison
between the disaster processing center and disaster loan applicants.19
Coordination with FEMA. The House bill would require that SBA establish
regulations to ensure that disaster assistance application procedures are coordinated
with FEMA and other agencies within 270 days of enactment.20
Analysis of SBA Response Including Reporting
This section analyzes how H.R. 1361 and S. 163 would change SBA response
after a disaster occurs.
Revised Disaster Response. Both bills would require SBA to take certain
actions as part of its disaster response and mandate new reports to Congress. This
section discusses the similarities and differences in approaches.
Communications Tracking. The House would require SBA to (1) track all
communications with applicants for disaster loans; (2) keep applicants informed of
any additional information that is needed; (3) notify applicants of the decision to
approve or deny the loan; and (4) alert applicants when the primary contact person
managing the loan application is changed.21 S. 163 has no similar provision.
Required Reporting. The House bill would require SBA to send Congress
an annual report on disaster assistance programs.22 The report would discuss staffing,
operational changes, program effectiveness, and changes to SBA disaster procedures.
In the event of an incident of national significance, SBA would submit a monthly
report detailing (1) the number of disaster assistance applications distributed and
received; (2) the average processing time, the amount of disaster loans approved; (3)
the average time for initial disbursement of disaster loans; and (4) the amount of
disaster loans disbursed.
16 H.R. 1361 Section 209.
17 S. 163 Section 113.
18 S. 163 Section 115. It is not clear if the 750 employees in the Disaster Cadre are included
in the 800 employees in the Office of Disaster Assistance. SBA requested authorization for
19 S. 163 Section 114.
20 H.R. 1361 Section 105.
21 H.R. 1361 Section 202.
22 H.R. 1361 Section 301.
The Senate bill would require SBA to send Congress an annual report plus
monthly reports on disaster loan programs during periods of a declared major
disaster.23 The report would discuss (1) lending volume and changes in lending
volume; (2) the number of disaster loans and dollar amounts; (3) funding spent and
available; (4) how long the available funding is likely to last; and (5) details of
expenses. During a presidentially declared disaster, SBA would be required to make
daily reports to Congress on SBA staffing, applications, processing decisions,
disaster loans disbursed, and the dollar amounts involved. Other reports would be
required on federal contracting and possible improvements to the disaster loan
New or Revised Disaster Loan Programs
Both the House and Senate bills would direct SBA to take extraordinary actions
in response to “super” catastrophes that exceed the “normal” major disaster actions,
but they differ in both what would trigger the extraordinary actions and what the
extraordinary actions would be. Under provisions in the House bill, an incident of
national significance would activate special programs and call for a stepped up
response from the SBA. An incident of national significance is defined in Homeland
Security Presidential Directive 5 (HSPD-5) and the Department of Homeland
Security’s (DHS’) National Response Plan, and it includes both potential and actual
threats as well as actual disasters regardless of cause.24 The conditions are more
general than a major disaster, which is limited to natural catastrophes, fires, floods,
droughts, or explosions that are severe enough for the President to warrant major
disaster assistance under the Robert T. Stafford Disaster Relief and Emergency
Assistance Act (Stafford Act).25
The National Response Plan mentions Stafford Act major disasters and
emergencies as reasons that an incident of national significance might be declared.
Any event requiring coordinated federal and state response, such as a political
convention, presidential inauguration, or large sporting event, could be declared an
incident of national significance. Not every major disaster is an incident of national
significance and conversely not every incident of national significance is a major
disaster. In short, an incident of national significance includes the most devastating
of major disasters along with other events.
An incident of national significance that would activate the mandatory private
sector participation could be an event that is not a disaster, such as the visit of an
international dignitary or a national political convention.
23 S. 163 Section 301.
24 HSPD-5 is available at [http://www.whitehouse.gov/news/releases/2003/02/
25 For the Stafford Act, see 42 U.S.C. 5121 et seq.
The Senate bill would create a category of “catastrophic national disasters.” It
would require the SBA Administrator, the secretary of DHS, and the FEMA
Administrator to establish a threshold for catastrophic national disasters and to
incorporate the threshold into regulations.26 Following a catastrophic national
disaster declaration, disaster loans could be made to small businesses adversely
affected by the disaster throughout in the nation.
Congress might wish to consider the appropriate place for the provisions
establishing and defining the category of “catastrophic national disaster”27 in the
Small Business Act28 or the Stafford Act. In considering the placement, Congress
might consider whether a catastrophic national disaster is more an SBA disaster issue
or if it has broader implications for the nation’s disaster response.
Increased Maximum Business Disaster Loan Size
The House bill would increase the maximum SBA guarantee on a business
disaster loan to $3,000,000 from $1,500,000.29 In the case of direct loans from SBA,
the maximum loan amount would be $3,000,000.
The Senate bill would increase the aggregate business disaster loan limit to
$2,000,000 and authorize SBA to increase the aggregate disaster loan limit “based
on appropriate economic indicators” for the region in which that disaster occurred.30
The bill would authorize SBA to make all types of disaster loans to nonprofits that
are located in a disaster area or are providing services to those evacuated from a
disaster area.31 It would authorize SBA to create a contracting outreach and technical
assistance program for small businesses that had a significant presence in a disaster
Disaster Loans for Nonprofits
Under current law, a business, but not a nonprofit, is eligible for an economic
injury disaster loan (EIDL) if the President, the SBA Administrator, the Secretary of
Agriculture, or a state governor finds that a disaster has hurt small businesses.33
Economic injury is defined as the inability to pay bills and operating expenses as they
26 S. 163 Section 201.
27 S. 163 Section 201.
28 P.L. 85-536 as amended, 15 U.S.C.
29 H.R. 1361 Section 212. Section 215 would allow SBA to waive the new $3,000,000 limit
for loans to major sources of employment, or businesses that would become major sources
of employment, in the area.
30 S. 163 Section 102.
31 H.R. 1361 Section 101.
32 S. 163 Section 105.
33 15 U.S.C. 636(b)(2)(D)(3)(iii). There are also military reservist economic injury disaster
loans that would not be affected by this provision.
become due or the inability to market or conduct normal business activities. Both
bills would authorize economic injury disaster loans to nonprofits.34
Post-Disaster Mitigation Loans
Currently, homeowners and businesses may borrow an additional 20% of the
disaster loan amount for post-disaster mitigation.35 The House bill would authorize
SBA to make or guarantee post-disaster mitigation loans to small businesses that
receive other disaster loans as the result of an incident of national significance.36 The
amount of a mitigation loan could be up to 20% of the damages incurred regardless
of insurance or reimbursement. Nonprofits and businesses in the areas affected by
Hurricanes Katrina, Rita, and Wilma would be eligible also for these mitigation loans
after an incident of national significance.
The Senate bill would modify the existing 20% post-disaster mitigation loan
limit to make the limit 20% of the amount of destruction, not 20% of SBA disaster
Quick Decision Business Small Disaster Loans
The House bill would authorize private lenders to make immediate business38
disaster loans of up to $25,000 to businesses that apply for disaster loans. SBA
would guarantee 85% of the expedited loan amount. SBA would have 36 hours after
receiving an application for an immediate loan to make a determination on whether
or not to grant the loan. The proceeds of a regular business disaster loan could be
used to repay the immediate business disaster loan.
The Senate bill would require SBA to create a program of immediate, short-term
disaster loans within one year after enactment of the bill.39 No loan amount is
specified in the bill. A regular business disaster loan could be used to refinance the
expedited loan, and the maximum interest rate on the expedited loan would be one
percentage point over the prime rate.
The House bill would make several changes to make it easier to repay a disaster
Delayed Repayments. It would prohibit any requirement to start repaying
a disaster loan for the first 12 months after the final loan disbursement is made and
34 H.R. 1361 Sections 201 and 214, S. 163 Section 101.
35 123 C.F.R. 107, and 123 C.F.R. 204.
36 H.R. 1361 Section 201.
37 S. 163 Section 102.
38 H.R. 1361 Section 203.
39 S. 163 Section 204.
authorize the administrator to allow deferments of up to four years.40 Repayment,
presently based on the amount applied for, would become based on the amount
disbursed.41 SBA would be prohibited from imposing a “supplemental payment” on
disaster loans in excess of $1 million during the first five years of repayment.42 The
Senate bill has no similar provisions regarding repayments.
Collateral Requirements. The House bill would prohibit SBA from
requiring a business owner to use his or her home as collateral on disaster loans of43
$100,000 or less.
The Senate bill would raise to $14,000 from $10,000, the amount that could be
borrowed under the disaster loan program without requiring collateral. SBA could44
raise the amount in the event of a catastrophic national disaster.
Disbursement Schedule. The House bill, but not the Senate bill, would
establish new disbursement schedules based on the amount of the loan.45 Table 2
summarizes these provisions. In all cases, the first disbursement could be less if the
borrower and SBA agree.
Table 2. H.R. 1361 Revised Disbursement Schedule
$150,000 remaining amount
$150,001-20%30% of25% ofRemaining
$500,000 remaining remaining amount
More than$100,000Amount and number of disbursements to be
$500,000determined by SBA, but the amount must be at
Source: H.R. 1361 Section 206.
Grants. The House bill would authorize two types of grants. The first SBA
grant would be up for to $100,000 to small businesses in certain counties and
parishes affected by Hurricanes Katrina, Rita, and Wilma.46 To be eligible for the
grant, a business must have been in existence for two years before the hurricane,
40 H.R. 1361 Sections 204 and 205.
41 H.R. 1361 Section 205.
42 H.R. 1361 Section 212.
43 H.R. 1361 Sections 204 and 207.
44 S. 163 Section 201.
45 H.R. 1361 Section 206.
46 H.R. 1361 Section 210.
certify that it intends to reestablish itself in the same or certain other counties or
parishes, and must have been rejected for an SBA disaster loan.
The second type of grant would be to an individual with losses due to
Hurricanes Katrina, Rita, or Wilma who received an SBA disaster loan and is
required to use benefits from other sources (such as Louisiana’s Road Home
program) to pay off the SBA disaster loan.47 The grant would be limited to the
amount of the repayment to SBA. The grant would not be considered a duplication
Ice Storms and Blizzards. The House bill (but not the Senate) would allow
economic injury disaster loans for ice storms and blizzards.48 Both the House and
Senate bills direct SBA to study the possibility of providing disaster loans for the
lack of snow.49
Private Sector Participation in Disaster Loan Program. The House bill
would allow SBA to create a program in which selected private lenders could
process, approve, close, and service disaster loans.50 These would be SBA loans.
SBA would pay private lenders a fee not to exceed 2% of the total loan amount.
Most of the time, private lender participation would be at SBA’s discretion. During
an incident of national significance or when SBA approval time for disaster loans
averages 30 days or more, private sector participation would be activated by statute.
Private lenders with inordinate default rates in the program could be denied
further participation. A high default rate could also be used to exclude a private
lender from SBA’s Preferred Lenders Program.
The Senate bill would permit “qualified private lenders” to make SBA-
guaranteed small business disaster loans.51 On-line disaster loan applications would
be permitted. SBA could not charge the lender a fee for the guarantee. Subject to
available funding, SBA could reduce the interest rate on private disaster loans by up
to 3 percentage points.
House Only Provisions
The following provision in H.R. 1361 has no comparable provision in S. 163.
Military Reservist Economic Disaster Loans Application Period.
Presently, SBA makes military reservist economic injury disaster loans to small
businesses that suffer or are likely to suffer substantial economic injury as the result
of an essential employee being called to active military duty during a period of
47 H.R. 1361 Section 211.
48 H.R. 1361 Section 217.
49 H.R. 1361 Section 218 and S. 163 Section 116.
50 H.R. 1361 Section 208.
51 S. 163 Section 202. SBA would guarantee up to 85% of the loan.
military conflict. The small business can apply for the loan starting on the date that
the essential employee is ordered to activity duty and not later than 90 days after the
essential employee is released from active duty. The House bill would extend the 90
days to one year.52
Senate Only Provisions
Several provisions in S. 163 as ordered reported have no comparable provision
in H.R. 1361.
Special Grants to Small Business Development Centers (SBDCs).
SBDCs are nonprofits that obtain some of their funding from the SBA; they provide
training and advice to small businesses in a specific geographic area. Currently, SBA
can make special grants to SBDCs in areas where small businesses have reduced
employment because of closing of a large business or government facility. The
Senate bill would authorize SBA to make grants of up to $100,000 each to SBDCs
for future closings.53 SBA would be given the authority to make larger grants in
extraordinary situations. SBA could authorize SBDCs to provide assistance outside
of their normal geographic areas when there is a disaster declaration.54
Surety Bonding Threshold. Some contracts, including many government
contracts, require the business doing the work to post a financial guarantee that the
work will be completed as specified in the contract. This guarantee is called a surety
bond and either can be money posted by the business or by a pledge by a surety
bonding company, which charges the business a fee for the service. SBA currently
guarantees surety bonds on contracts of $2 million or less. The Senate bill would
allow SBA to guarantee small business surety bonds on contracts of up to $5 million.
This could be raised to $10 million at the request of the head of another government
Energy Emergency and Agricultural Producer Loans. The Senate bill
would create a new loan program for small businesses that have suffered or are likely
to suffer economic losses as the result of increased heating fuel prices since October
or a governor to make an appropriate declaration of economic impact following an
increase of 40% in heating fuel prices. The maximum loan amount of $1,500,000
could be waived by SBA. A similar program for small agricultural producers would
be created in the Department of Agriculture.57
52 H.R. 1361 Section 216.
53 S. 163 Section 103.
54 S. 163 Section 104.
55 15 U.S.C. 694b.
56 S. 163 Sections 401 and 402.
57 S. 163 Section 403.
Analysis of Additional Issues
Some additional issues that Congress might wish to consider are the impact of
the disaster loan program on participation in other government programs and the
influence that disaster loans might have on the decisions of people and businesses to
locate in disaster-prone areas. Policy analysts frequently examine the relationship
between meeting the legitimate needs for assistance following a disaster, minimizing58
the cost to the government and taxpayers, and encouraging prudent behavior.
People and businesses make decisions about where to locate and to undertake
economic activity by considering the costs and benefits of alternative decisions. A
new or expanded disaster loan program could affect these decisions by providing
low-cost funds for recovery. An enlarged disaster loan program could also affect
decisions to engage in pre- or post-disaster mitigation. As mentioned earlier, some
may view a disaster loan as a good substitute for optional flood insurance.
Analysts view subsidized loan programs as a way to transfer risk from the
private sector to the government. Few would argue against this transfer when it is
because of the failure of federal programs such as a federal levee or dam to perform
according to specifications, or when the private sector has failed to respond as in the
case of flood insurance. Some might argue that the federal government should not
intervene in other cases where alternative resources including local government or
private planning are available.
In considering whether to extend disaster loan coverage to more types of
disasters such as ice storms, blizzards, and the lack of snow, one concern might be
if these are a normal or regular occurrence that should be anticipated and whether the
expansion of the disaster loan program would encourage businesses to undertake
activities with less regard for the risk than they would without the program
expansion. For example, would including the lack of snow shift a ski resort on the
margin from adding snow making equipment or locating in another location to one
that depends on economic injury disaster loans?
Both bills recognize the need for exceptional federal response when the
magnitude of the problem is extremely large by historical standards. Because of the
interrelatedness of decisions to rebuild along the Gulf Coast after the 2005 hurricane
season, extraordinary federal assistance was offered. Congress appears to have
decided to institutionalize this experience by expanding SBA’s disaster response
team and authorizing private sector participation. The two bills differ on what would
trigger this response. The House bill would trigger the private sector’s participation
during an incident of national significance or when the average loan processing time
for a single disaster exceeds 30 days. The Senate bill would trigger the private
sector’s response following a major disaster or catastrophic national disaster.
Congress might wish to consider whether the new category of “catastrophic national
disaster” is more appropriate than the “incident of national significance,” which
58 See, for example, U.S. Congress, Senate Bipartisan Task Force on Funding Disaster
Relief, Federal Disaster Assistance, 104th Cong., 1st sess., S.Doc. 104-4 (Washington: GPO,
includes many other events besides natural disasters. It might wish to consider
whether a catastrophic national disaster should be part of the Stafford Act (which
might imply that it would be used by other disaster response and recovery programs)
or if it should be part of the Small Business Act (which would imply that it would be
used only by SBA).
Both bills would create small, expedited disaster loans. With the rapid approval
there will be less time to review the loan applications, and it is likely that the loss rate
will be higher than on other disaster loans. On the other hand, the loans would be
smaller, which would reduce the dollar amount of losses.
H.R. 1361 was introduced in the House on March 6, 2007. The House Small
Business Committee reported it to the full House on March 30, 2007. The House
approved the bill on April 18, 2007 by a vote of 267 to 158.
S. 163 was introduced in the Senate on January 4, 2007. On May 7, 2007, the
Senate Committee on Small Business and Entrepreneurship reported it out with an
amendment in the nature of a substitute to the Senate where it was placed on the
The Senate amended and passed H.R. 2419, the Food and Energy Security Act
of 2007, on December 14, 2007. Among the amendments approved was one
incorporating the provisions of S. 163. H.R. 2419 uses the term “Small Business Act
national disaster” in the place of “catastrophic national disaster” in S. 163. The
Senate insisted on its amendment and appointed conferees on February 4, 2008. The
Senate sent a message on its action to the House on February 5, 2008