Report 16-18: Early-Defaulted Hurricane Sandy Disaster

OIG’s Audit Report 16-18, Early-Defaulted Hurricane Sandy Disaster Loans, presents the results of our audit of the Small Business Administration’s (SBA) performance in mitigating the risks of Hurricane Sandy disaster loans from defaulting early (within 18 months of disbursement).  SBA’s Office of Disaster Assistance (ODA) provides financial assistance in the form of low-interest Government loans to help homeowners, renters, and businesses throughout the United States affected by natural disasters.  Hurricane Sandy, which struck the East Coast on October 29, 2012, caused approximately $67 billion in damage in the United States.  It was the nation’s most costly storm since Hurricane Katrina, which caused $128 billion in damage.  As of November 2013, SBA had approved and disbursed 19,295 loans, totaling approximately $758 million.  As of April 2015, 501 of these loans had defaulted early.  We selected and reviewed a random, statistically valid sample of 21 early-defaulted Hurricane Sandy loans to determine whether the borrower was eligible, had satisfactory credit history, and had repayment ability.

We found that the overall early default rate on Hurricane Sandy loans was relatively low when compared to loans made for other disasters.  However, we found that in 17 of the 21 loans we reviewed, ODA approved loans without verifying borrowers’ eligibility, or approved loans to borrowers who generally lacked creditworthiness or repayment ability.  Due to the significance of the errors in the areas of creditworthiness and repayment ability, we projected our results to the universe of early-defaulted loans and estimated that at least 361 of the 501 early-defaulted loans, totaling $4.3 million, were not approved in accordance with SBA and/or Federal requirements.  Borrower creditworthiness was the most prevalent area of concern we noted on the early-defaulted loans.  In the majority of loans we reviewed, SBA approved loans to borrowers with unsatisfactory credit histories.  Additionally, we determined that while ODA routinely analyzed disaster loan portfolio risks, improvements could be made to reduce the rate of early defaults.  OIG made five recommendations to improve SBA’s performance in mitigating the risk of disaster loans from defaulting early.  These recommendations include clarifying guidance pertaining to borrower creditworthiness; providing training to employees related to our findings in the areas of creditworthiness, repayment ability, and eligibility; and improving existing portfolio risk analyses.