5 mistakes the SBA made on Sandy loans

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  • SBA disaster loans were a key ingredient in the recipe for rebuilding after Super Hurricane Sandy
  • New report shows some disaster loans were approved despite red flags
  • People who could reasonably be considered credit risks received thousands of dollars before they defaulted
  • The program depends on people repaying these taxpayer-funded loans

Superstorm Sandy Disaster Loans were given to people with bad credit, low income and at least one non-US citizen, according to an internal review by the US Small Business Administration.

A total of 19,295 disaster loans, worth $757.9 million, were released after Sandy ransacked the area in October 2012. The money was intended to rebuild homes and restore businesses that were literally under water during the massive storm’s crippling coastal flooding.

After reviewing a sample of these loans, SBA Inspector General estimates that around 500, or 2.6%, had to be written off – meaning the loan was deemed uncollectible – within 18 months. This represents approximately $9.5 million of taxpayers’ money, most of which has not been repaid.

This 2.6% share of bad debt is actually relatively small compared to other natural disasters. Hurricane Isaac, for example, was closer to 7%.

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But the inspector general’s report identifies several shortcomings in the approvals process that could have saved public funds.

“We recognize that borrowers in this program are disaster survivors in need of assistance and that SBA disaster loans are unexpected debt,” the report said. “However, the program is designed in the hope that these loans will eventually be repaid.”

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The SBA, for its part, says in the report that it has already updated its training guidelines and that the sample size examined — 21 loans — is too small to draw broader conclusions about the program.

1. Credit ratings weren’t given enough weight

The review found that borrowers with a credit score below 620 accounted for less than 1 in 10 of loans granted, but accounted for nearly half of loans in default within 18 months.

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A borrower had a credit score of 521 and when asked to explain these delinquencies, she replied that she did not know she had slipped into collections. The SBA decided to approve him for a $238,000 loan. In the end, only $14,000 was disbursed, but not a penny was refunded.

2. Credit defaults have sometimes been questioned

One suggestion from the report is that the SBA create a more uniform standard for determining creditworthiness. This left too many discrepancies on decisions between loan officers.

In one instance, an applicant’s credit history included 14 delinquent accounts, at least one of which had defaulted in the past year.

His explanation? She was “a naïve young person who spent too much and couldn’t afford to pay it back”.

This apparently didn’t scare the SBA off, as they approved her for a $17,600 loan. She made seven payments on the loan before abandoning it.

3. One of his most powerful tools has apparently been ignored

Every loan reviewed by the inspector general for this report would have been rejected by the Disaster Credit Management System, a database used by the SBA to process loan applications and, more importantly, assess creditworthiness.

The Inspector General found no evidence that the DCMS finding was overruled in favor of information that the computer could not quantify.

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According to the report, loans approved despite DCMS objections were more than three times more likely to default.

4. The sources of income were not really examined

The program is designed to prioritize cash flow over collateral, which means applicants can better prove they can repay the loan.

However, the review revealed several instances where reported income was not investigated at all.

A plaintiff said 29% of his income came from rental property and he got an $8,400 loan even though that income was not reflected on his tax return or proven by any other document. It defaulted after four payments.

5. Basic eligibility criteria were sometimes ignored

According to the report, the SBA Disaster Assistance Office was absolutely overwhelmed with applications in late 2012, early 2013.

As a result, the SBA brought in “a significant number of additional staff,” which may have led to a number of errors in determining eligibility.

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On one loan, the applicant indicated that he was not a US citizen, but the loan was approved anyway. Non-US citizens are permitted to obtain a disaster loan, but program rules require additional documentation to be filed. This was not done in this case.

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Russ Zimmer: 732-557-5748, [email protected]

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